-----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, U6GnEk3TLiw2RiyAX5nwc913wmaxIDjq2KqwwMiuL8tAuqfBbbDvWIXIOuufi07J 9MujHKUAg8oiQNW2KZ98vw== 0000930413-02-001033.txt : 20020415 0000930413-02-001033.hdr.sgml : 20020415 ACCESSION NUMBER: 0000930413-02-001033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10804 FILM NUMBER: 02585550 BUSINESS ADDRESS: STREET 1: XL HOUSE STREET 2: ONE BERMUDIANA ROAD 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 10-K 1 c23420_10k-.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 1-10804 XL CAPITAL LTD (Exact name of registrant as specified in its charter) CAYMAN ISLANDS 98-0191089 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) XL HOUSE, ONE BERMUDIANA ROAD, HM 11 HAMILTON, BERMUDA (Zip Code) (Address of principal executive offices) (441) 292-8515 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Class A Ordinary Shares, Par New York Stock Exchange, Inc. Value $0.01 per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of all classes of voting stock of the registrant held by non-affiliates of the registrant on March 18, 2002 was approximately $12.5 billion computed upon the basis of the closing sales price of the Ordinary Shares on that date. For purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. As of March 18, 2002, there were outstanding 135,496,713 Class A Ordinary Shares, $0.01 par value per share, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A RELATING TO THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 9, 2002 IS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. XL CAPITAL LTD TABLE OF CONTENTS PAGE PART I Item 1. Business ........................................................... 1 Item 2. Properties ......................................................... 17 Item 3. Legal Proceedings .................................................. 17 Item 4. Submission of Matters to a Vote of Security Holders ................ 17 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ........................................ 19 Item 6. Selected Financial Data ............................................ 20 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ................................................ 21 Item 7A. Quantitative and Qualitative Discussion of Market Risk ............. 41 Item 8. Financial Statements and Supplementary Data ........................ 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................... 93 PART III Item 10. Directors and Executive Officers of the Registrant ................. 94 Item 11. Executive Compensation ............................................. 94 Item 12. Security Ownership of Certain Beneficial Owners and Management ..... 94 Item 13. Certain Relationships and Related Transactions ..................... 94 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ... 94 THIS ANNUAL REPORT ON FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. A NON-EXCLUSIVE LIST OF THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS IS SET FORTH HEREIN UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS." PART I ITEM 1. BUSINESS HISTORY XL Capital Ltd (the "Company") is a leading provider of insurance and reinsurance coverages and financial products and services to industrial, commercial, and professional service firms, insurance companies and other enterprises on a worldwide basis. The Company was incorporated with limited liability under the Cayman Islands Companies Act on March 16, 1998, as EXEL Merger Company. The Company was formed as a result of the merger of EXEL Limited and Mid Ocean Limited on August 7, 1998, and was renamed EXEL Limited on that date. EXEL Limited and Mid Ocean are companies that were incorporated in the Cayman Islands in 1986 and 1992, respectively. At a special general meeting held on February 1, 1999, the shareholders of the Company approved a resolution changing the name of the Company to XL Capital Ltd. On June 18, 1999, XL Capital Ltd merged with NAC Re Corp ("NAC"), a Delaware corporation organized in 1985, in a stock merger. This merger was accounted for as a pooling of interests under U.S. generally accepted accounting principles ("GAAP"). Accordingly, all prior period information contained in this document includes the results of NAC as though it had always been a part of the Company. Following the merger, the Company changed its fiscal year end from November 30 to December 31 as a conforming pooling adjustment. On July 25, 2001, the Company completed the acquisition of certain Winterthur International insurance operations ("Winterthur International") to extend its predominantly North American based large corporate insurance business globally. This was an all-cash transaction preliminarily valued at approximately $405.6 million. The preliminary purchase price of the acquisition was based on audited financial statements as at December 31, 2000 for the business being acquired, and is subject to adjustment based on the audited June 30, 2001 financial statements of Winterthur International, which are not expected to be completed until later in 2002. Results of operations of Winterthur International have been included from July 1, 2001, the date from which the economic interest was transferred to the Company. In October 2000, the Company realigned management responsibilities within its three main operating segments: insurance, reinsurance and financial products and services. In connection with this realignment, the Company decided to exit from certain unprofitable lines of business. The Company renamed certain of its business units into a common XL brand identity. XL Mid Ocean Re was renamed XL Re Ltd, and NAC Reinsurance Corporation was renamed XL Reinsurance America Inc. In 2001, XL Brockbank Ltd was renamed XL London Market Ltd. In 1999, the Company signed a joint venture agreement with Les Mutuelles du Mans Assurances Group to form a French reinsurance company, Le Mans Re, in which the Company acquired a 49% shareholding. Le Mans Re underwrites a worldwide portfolio comprising most classes of property and casualty reinsurance business together with a selective portfolio of life reinsurance business. The Company acquired a 67% majority stake in Le Mans Re effective January 1, 2002. For further information, see the Notes to the Consolidated Financial Statements in Item 8. INSURANCE OPERATIONS - EXCLUDING LLOYD'S SYNDICATES GENERAL The Company provides property and casualty insurance on a global basis. The Company generally writes specialty coverages for commercial customers. 1 Specific lines of business written include third party general liability insurance, environmental liability insurance, directors and officers liability insurance, professional liability insurance, aviation and satellite insurance, employment practices liability insurance, surety, marine insurance, property insurance and other insurance covers including program business and political risk insurance. Premiums written vary by jurisdiction principally due to local market conditions and legal requirements. The Company's insurance business is largely excess in nature and is subject to large deductibles, self-insurance or primary insurance obtained from sources other than the Company. The excess nature of many of the Company's insurance products, coupled with historically large policy limits, creates a book of business that may be described as low frequency and high severity. As a result, large losses, though infrequent, can have a significant impact on results of operations, financial condition and liquidity when they occur. The Company attempts to mitigate this risk through a program of strict underwriting guidelines and various reinsurance arrangements, discussed below. Aggregate exposures to potential catastrophic losses are monitored at an entity level and also at the corporate level. In addition to internal controls designed to mitigate the Company's exposure to a specific client, class of business or geographic exposure, the Company maintains various reinsurance programs to protect the Company against foreseeable catastrophic risks. The majority of the Company's insurance loss reserves are long-tailed in nature and the time between receipt of premium for a coverage and settlement of claims may span many years. This is especially true of most liability insurance. Property lines are considered short-tailed in nature as claims tend to be known and paid more promptly. In order to establish adequate reserves for such long-tailed lines, actuarial techniques are used to estimate the Company's ultimate liabilities in excess of reserves established for known losses. These reserves are reviewed regularly by internal and external actuaries. Because the Company's insurance products are primarily specialty coverages, underwriting guidelines and policy forms differ by product offering as well as by legal jurisdiction. Liability insurance is written on both an excess and a primary basis, typically on occurrence-reported or claims-made policy forms. Policies typically cover occurrences causing unexpected and unintended personal injury or property damage to third parties arising from events or conditions which commence at or subsequent to an inception date, or retroactive date, if applicable (but not prior to January 1, 1986), and prior to the expiration of the policy provided that proper notice is given during the term of the policy or the discovery period. Traditional occurrence coverage is also available for restricted classes of risk and is generally written on a follow-form basis where the policy adopts the terms, conditions and exclusions of the underlying policy. The Company does not specifically exclude terrorism coverage on liability coverage, but rather utilizes guidelines to underwrite these risks on a case-by-case basis. Environmental liability is written for both single and multiple years on an excess claims-made basis. Directors and officers coverage is written on both a primary and excess claims-made basis. Professional liability errors and omissions risks are generally written on an excess basis. Employment practices liability risks are written on a claims-reported basis. The policy covers claims brought by an employee against an insured for certain employment practices. Coverage is generally provided on an excess basis or is subject to a significant retention. Insurance for satellite risks is written on a proportional basis to provide coverage for first party physical damage or loss. Coverage includes all phases of operation. Aviation insurance is offered for large aviation risks on a proportional basis, providing for both aviation liability and physical damage. General aviation insurance is also written on a primary basis. Marine and energy risks are written in various classes, often on a proportional basis. Classes written include cargo, marine hull, excess marine liabilities, onshore and offshore energy, oil and petrochemical, specialty chemicals and mining exposures, and builders risk. 2 Property insurance risks are written on a lead or follow-form basis that usually provides coverage for all risks of physical damage and business interruption. Maximum limits are generally subject to sub-limits for coverage in critical earthquake zones. Losses related to acts of terrorism for property coverages are now generally excluded as market conditions permit. Property insurance is written on both a pro-rata and excess basis. Policies written on a pro-rata basis generally have losses attaching at lower levels, resulting in loss experiences that demonstrate higher frequency and lower severity. Surety products written include bid, performance and payment bonds to the construction industry including general contractors, highway and bridge contractors, mechanical and electrical contractors, other trades and manufacturers. The Company also offers customs bonds, license and permit bonds, court bonds, public official bonds and other miscellaneous bonds to a broad spectrum of clients. Political risk insurance written by the Company generally covers risks arising from expropriation, currency inconvertibility and war or political violence. Such insurance is typically provided to financial institutions, equity investors, export credit agencies and multilateral agencies in connection with direct and other types of investments in emerging market countries in Latin America, Asia and Eastern Europe. The Company manages its exposures by type of risk, country and region. Product recall insurance is provided on both a primary and an excess basis. This coverage is designed to protect companies against loss of profits and costs of product or brand rehabilitation following a malicious product tampering or accidental contamination. Following the acquisition of Winterthur International, accident and health insurance is also written by the Company in Europe. Coverage includes group personal accident insurance, workers compensation and medical expense insurance for expatriates and third country nationals. The Company also offers traditional multinational pooling arrangements for accident and health contracts and pension services to financial institutions and pension funds in Germany as well as services for credit life insurance in Europe. The Company offers multi-year combined line policies for traditional liability coverages including general, directors and officers liability, employment practices liability, professional liability and property coverage, in addition to a blended finite coverage for risks which traditionally have been difficult to place through traditional risk transfer mechanisms. PREMIUMS See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Item 8, Note 3 to the Consolidated Financial Statements. REINSURANCE CEDED In certain cases, the risks assumed by the Company are partially reinsured with unrelated reinsurers. Reinsurance ceded varies by location and line of business based on factors including, among others, market conditions. The benefits of ceding risks to other reinsurers include reducing exposure on individual risks, protecting against catastrophic risks and maintaining acceptable capital ratios. Reinsurance ceded does not legally discharge the Company from its liabilities in respect of the risk being reinsured. The Company uses reinsurance to support the underwriting and retention guidelines of each entity as well as to control the aggregate exposure of the Company to a particular risk or class of risks. Reinsurance is purchased at several levels ranging from reinsurance of risks assumed on individual contracts to reinsurance covering the aggregate exposure of groups of companies. Under the Company's reinsurance security policy, reinsurers are generally required to be rated A or better by Standard & Poor's ("S&P") or, in the case of Lloyd's syndicates, S&P "Four Bells" and/or B+ from Moody's Investor Service ("Moody's"). The Company's Chief Credit Officer will consider reinsurers that are not rated or do not fall within the above rating categories on a case-by-case basis. See Item 8, Note 10 to the Consolidated Financial Statements for further information. 3 The Company purchases a quota share treaty to protect both the general liability occurrence-notified and occurrence business written. During 2001, the Company also purchased excess of loss reinsurance and an excess cessions reinsurance treaty to protect the directors and officers, professional liability and employment practices liability business written. A variety of other programs are designed to reduce Company's net exposure to environmental, aviation, satellite and marine and energy single loss events. Facultative reinsurance is utilized to reduce the Company's net retention to satellite risks. In addition, a variable surplus treaty, excess of loss reinsurance and catastrophe reinsurance, is used to protect the property business written with various layers and excess of varying attachment points. COMPETITION The worldwide property and casualty insurance and reinsurance industry is highly competitive. The markets for the Company's insurance and reinsurance products are characterized by strong and, at times, intense price competition, driven largely by the substantial amount of excess capacity. Although most of the property and casualty markets in which the Company operates have seen substantial improvements in pricing and policy terms and conditions in late 2001, the Company believes that competitive forces will continue to be present in the industry, in part due to the significant amount of new or additional capital that entered the industry in late 2001. Some of the Company's competitors possess significantly greater financial and other resources than the Company. The Company generally competes on the basis of financial strength, coverage terms, claims paying rating and reputation, price and customer service. See Industry Overview included in "Management's Discussion and Analysis of Results of Operations and Financial Condition" for further discussion of current market conditions. UNDERWRITING The Company underwrites and prices most risks individually following a review of the exposure and in accordance with the Company's underwriting guidelines. Most of the Company's insurance operations have underwriting guidelines that are industry-specific. The Company seeks to control its exposure on an individual insurance contract through terms and conditions, policy limits and sub-limits, attachment points, and facultative reinsurance arrangements on certain types of risks. The Company's rating methodology seeks to set premiums in accordance with claims potential as measured by past experience and future expectations, the attachment point and amount of underlying insurance, the nature and scope of the insured's operations including the industry group in which the insured operates, exposures to loss, and other specific risk factors relevant in the judgment of the Company's underwriters to the type of business being written. Underwriters generally evaluate each industry category and sub-groups within each category. Premiums are then set and adjusted for an insured based, in large part, on the industry group in which the insured is placed and the insured's perceived risk relative to the other risks in that group. Rates may vary significantly according to the industry group of the insured as well as the insured's risk relative to the group. The Company's rating methodology for large property risks is based on a global rating tool that establishes premium rates in accordance with claims potential as measured by past experience and future expectations. Other factors typically include the attachment point and amount of underlying insurance, the nature and scope of insured operations including the industry group in which the insured operates, natural hazard exposures, risk management quality, as well as other specific risk factors deemed relevant in the judgment of the underwriters. Underwriting and loss experience is reviewed regularly for loss trends, emerging exposures, changes in the regulatory or legal environment as well as the efficacy of policy terms and conditions. MARKETING AND DISTRIBUTION Clients are referred to the Company through a large number of brokers and captive managers who receive from the insured or ceding company a set fee or brokerage commission usually equal to a percentage of gross premiums. 4 In general, the Company is not committed to accept business from any particular broker, and brokers do not have the authority to bind the Company, except in the case where underwriting authority may be delegated to selected administrators. These administrators are subject to a financial and operational review prior to any delegation of authority and ongoing reviews are carried out as deemed necessary. See Item 8, Note 15(c) to the Consolidated Financial Statements for information on major brokers. CLAIMS ADMINISTRATION Claims management for the insurance operations includes the review of initial loss reports, administration of a claims database, generation of appropriate responses to claims reports, identification and handling of coverage issues, determination of whether further investigation is required and, where appropriate, retention of claims counsel, establishment of case reserves, payment of claims, and notification to reinsurers. INSURANCE OPERATIONS - LLOYD'S SYNDICATES GENERAL The Company's ongoing Lloyd's operations are conducted by XL London Market Ltd. XL London Market, formerly XL Brockbank which comprised both Brockbank and Denham Syndicate Management Limited, is organized under the laws of the U.K. and is a leading Lloyd's managing agency that provides underwriting and similar services to four Lloyd's syndicates. Syndicates 1209 and 990 are dedicated corporate syndicates whose capital is provided solely by the Company. Prior to January 1, 2002, Syndicate 1209 wrote in parallel with two other syndicates managed by XL London Market, Syndicates 588 and 861 whose capital was provided by third parties. In November 2001, the Company announced that XL London Market would be realigned effective January 1, 2002 and that the Company would be providing 100% of the capacity for Syndicates 1209 and 990. Syndicates 588 and 861, backed entirely by third-party capital providers for the 2001 underwriting year of account, no longer write business as of January 1, 2002. Effective 2002, Syndicate 1209 is focusing on its core specialty marine and energy lines, war and political risks, aviation, professional indemnity, property programs, specie and bloodstock and no longer participates in the excess of loss treaty, accident and health, and property accounts. Syndicate 990 will continue to write a general non-marine account with an emphasis on long-tail business throughout 2002. Insurance for marine hull and machinery provides protection against physical damage, collision liability and loss of earnings principally for blue water ship operators and owners. Energy risks provide physical damage and liability cover for offshore risks including oil and gas exploration, extraction and transportation. A broad international cargo account is written, specializing in technology sector and in large plant and project equipment. Marine liability risks include pollution insurance, financiers' exposures and certificates of financial responsibility reinsurance, as well as the more traditional liability cover, such as charters' liabilities. Political violence risks cover assets against physical damage arising from terrorism, war on land, strikes, riots and civil commotion. Political risk business written protects owners or financiers of overseas assets against arbitrary acts of foreign government. Financial and credit risks written cover exporters or importers of goods and services against the inability to enjoy their contractual right to a wide range of commercial perils. War cover is also written for ships and aircraft. Aviation risks provide cover for airline hull, spares and liability risks, as well as a number of associated lines. Specie risks provide cover for fine art, cash in transit, financial institutions and jewlery. Bloodstock risks include cover for risks of mortality to horses and livestock, in addition to illness or accident. 5 PREMIUMS See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Item 8, Note 3 to the Consolidated Financial Statements. REINSURANCE CEDED The Company's Lloyd's operations purchase reinsurance to protect the syndicates against extraordinary loss or loss involving one or more underwriting classes. The amount purchased is determined with reference to the syndicates' aggregate exposure and potential loss scenarios. Prior to January 1, 2002, each reinsurer was required to be approved by a reinsurance security committee. The syndicates purchased separate whole account non-proportional reinsurance programs on an excess and proportional basis. The classes of business included in the main program were hull, cargo, specie, war, political risks, energy, property and marine liability. Stand-alone programs were purchased for aviation, bloodstock, casualty, personal accident, space and excess of loss treaty. Under the Company's reinsurance security policy, reinsurers are generally required to be rated A or better by S&P or, in the case of Lloyd's syndicates, S&P "Four Bells" and/or B+ from Moody's. The Company's Chief Credit Officer will consider reinsurers that are not rated or do not fall within the above rating categories on a case-by-case basis. See further information in Item 8, Note 10 to the Consolidated Financial Statements. Since January 1, 2002, the Company's Lloyd's operations have followed the same reinsurance practices as the Company's other insurance operations. The syndicates purchase a range of reinsurance, including proportional, non-proportional and facultative cover. COMPETITION XL London Market competes with other Lloyd's operations as well as international and domestic insurers. Markets for business written by the Company's Lloyd's operations are characterized by strong competition driven largely by substantial amounts of excess capacity. Premium rates began to increase during 2000, and following the terrorist loss events at the World Trade Center in New York City, in Washington, D.C., and in Pennsylvania on September 11, 2001 (collectively "the September 11 event"), pricing and terms and conditions have improved significantly. However, the Company believes that competitive forces will continue to be present in these markets. UNDERWRITING The Lloyd's syndicates underwrite a broad range of risks, and the factors taken into consideration in the underwriting process vary between classes of business. The underwriters may use actuaries to assist in the review and rating of risks. The daily acceptance of risk is performed by the active underwriter, the class underwriters and individuals with specific delegated authority. Underwriting authority limits are agreed between the active underwriter, the class underwriter and the managing agency's board of directors. Underwriters may delegate underwriting authority on a contractual basis to individuals who are approved and monitored. Syndicates also participate on market facilities where underwriting authority is delegated to the lead insurer. MARKETING AND DISTRIBUTION The Company's Lloyd's syndicates deal largely with Lloyd's accredited brokers, who in turn source business from a large international network of wholesale and retail brokers. The syndicates also deal directly with insureds and non-Lloyd's accredited brokers through a service company wholly owned by the Company. In certain circumstances, the Company's Lloyd's syndicates may delegate underwriting authority on a contractual basis either to selected brokers, or to lead insurers under market facilities. See Item 8, Note 15(c) to the Consolidated Financial Statements for further information on major brokers. CLAIMS ADMINISTRATION Claims in respect of business written by the Lloyd's syndicates are primarily notified by various central market bureaus. Where a syndicate is a "leading" syndicate on a Lloyd's policy, its underwriters and claims adjusters will 6 deal with the broker or insured on behalf of itself and the following market for any particular claim. This may involve appointing attorneys or loss adjusters. The claims bureaus and the leading syndicate advise movement in loss reserves to all syndicates participating on the risk. A claims department may adjust the case reserves it records from those advised by the bureaus as deemed necessary. REINSURANCE OPERATIONS GENERAL The Company provides property, casualty and life reinsurance products on a global basis with business being written on both a proportional and excess of loss basis. The Company's casualty reinsurance includes general liability, professional liability, automobile and workers' compensation, and commercial and personal property risks and specialty risks, including fidelity and surety and ocean marine. Business written on an excess of loss basis generally indemnifies an insurer for a portion of the losses on insurance policies in excess of a specified loss amount. Business written on a proportional basis provides for the Company to receive an agreed percentage of the premium and to be liable for the same percentage of the incurred losses of the primary insurer as specified in the treaty of each risk of the reinsured class. The Company's property business is primarily short-tail in nature and includes property catastrophe, property excess of loss, property proportional, marine and energy, aviation and satellite and various other reinsurance to insurers and reinsurers on a worldwide basis. A significant portion of business underwritten consists of large aggregate exposures to man-made and natural disasters, and generally, loss experience is characterized as low frequency and high severity. This may result in volatility in the Company's results of operations and financial condition. The Company seeks to manage its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide, requiring that its property catastrophe contracts provide for aggregate limits and including varying attachment points. The Company protects its aggregate exposures by peril and zone through the purchase of reinsurance programs. The Company's property catastrophe reinsurance account is generally "all risk" in nature. As a result, the Company is exposed to losses from sources as diverse as windstorms, earthquakes, freezing, riots, floods, industrial explosions, fires, and many other potential disasters. In accordance with market practice, the Company's policies generally exclude certain risks such as war, nuclear contamination or radiation and, following the September 11 event, terrorism cover is also excluded in certain classes. The Company's predominant exposure under such coverage is to property damage. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expenses from a single occurrence of a covered event exceed the attachment point specified in the policy. Some of the Company's property catastrophe contracts limit coverage to one occurrence in any single policy year, but most contracts generally enable one reinstatement to be purchased by the reinsured. The Company also writes property risk excess of loss reinsurance. Risk excess of loss reinsurance covers a loss of the reinsured on a single risk of the type reinsured rather than to aggregate losses for all covered risks as is the case with catastrophe reinsurance. The Company's property proportional account includes reinsurance of direct property insurance. The Company considers this business to be related to its catastrophe and other property exposures. In proportional reinsurance, the Company assumes a specified proportion of the risk on the specified coverage and receives an equal proportion of the premium. The ceding insurer receives a commission, based upon the premiums ceded to the Company, and the ceding insurer may also be entitled to receive a profit commission based upon the ratio of losses, loss adjustment expenses and the Company's expenses to premium for a given exposure that is intended to be commensurate with achieving adequate compensation for the amount of capital it anticipates placing at risk. 7 PREMIUMS See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Item 8, Note 3 to the Consolidated Financial Statements. REINSURANCE CEDED A corporate multi-year program is purchased for global property exposures. This protection gives total limits in various layers and excess of varying attachment points according to territorial exposure. The Company has co-reinsurance retentions within this program. The Company's casualty reinsurance program covers multiple claims arising from two or more risks from a single occurrence or event. In addition, the Company had coverage from 1997 through 2002 in the event that the accident year loss and loss expense ratio exceeded a pre-determined amount, with coverage up to specified limits. See Item 8, Note 10 to the Consolidated Financial Statements for further information. COMPETITION See "Competition" under Insurance Operations - Excluding Lloyd's Syndicates. UNDERWRITING Underwriting opportunities are evaluated using a number of factors including the type and layer of risk to be assumed, the actuarial evaluation of premium adequacy, the cedent's underwriting and claims experience, the cedent's financial condition and claims paying rating, the exposure and or experience with the cedent, and the line of business to be underwritten. In addition, the Company assesses a variety of other circumstances including: the reputation of the proposed cedent and the likelihood of establishing a long-term relationship with the cedent; the geographic area in which the cedent does business and its market share; detailed assessment of catastrophe and risk exposures; and historical loss data for the cedent and, where available, for the industry as a whole in the relevant regions, in order to compare the cedent's historical loss experience to industry averages. On-site underwriting reviews are performed where it is deemed necessary to determine the quality of a current or prospective cedent's underwriting operation. For the property catastrophe reinsurance business, the Company has developed underwriting guidelines under which it generally limits the amount of exposure it will directly underwrite for any one reinsured and the amount of the aggregate exposure to catastrophic losses in any one geographic zone. The Company believes it has defined zones such that a single occurrence, for example an earthquake or hurricane, generally should not affect more than one zone. The definition of the Company's zones is subject to periodic review and change. The Company also generally seeks an attachment point for its property catastrophe reinsurance at a level that is high enough to produce a low frequency of loss. The Company seeks to limit its aggregate exposure in the proportional business because it is sometimes difficult to allocate risks associated with such business to specific geographic areas. MARKETING AND DISTRIBUTION See "Marketing and Distribution" under Insurance Operations - Excluding Lloyd's Syndicates and Item 8, Note 15(c) to the Consolidated Financial Statements. CLAIMS ADMINISTRATION Claims management for the reinsurance operations includes the receipt of loss notifications, the establishment of loss reserves and approval of loss payments. Additionally, claims audits are conducted for specific claims and claims procedures at the offices of selected ceding companies. 8 FINANCIAL PRODUCTS AND SERVICES OPERATIONS GENERAL The Company provides insurance and reinsurance solutions for complex financial risks. These include financial guaranty insurance and reinsurance, credit default swaps and other collateralized transactions. While each of these transactions is unique and tailored to the specific needs of the insured, they are typically multi-year transactions. Obligations guaranteed or enhanced by the Company range in duration and premiums are received either on an installment basis or up front. In 2001, the Company also began to write weather risk management products and to trade in weather related derivatives. Financial guaranty insurance and reinsurance, through two AAA-rated S&P companies, generally guarantees payments of interest and principal on an issuer's obligations when due. Credit default swaps provide coverage for losses upon the occurrence of specified credit events set forth in the swap documentation. Asset-backed obligations insured or reinsured by the Company are generally issued in structured transactions backed by pools of assets of specified types, such as residential mortgages, auto loans and other consumer receivables, equipment leases and corporate debt obligations having an ascertainable cash flow or market value. Municipal obligations insured or reinsured consist mainly of general or special obligations of state and local governments, supported by the issuers' ability to charge fees for specified services or projects. Corporate risk-based obligations underwritten by the Company include essential infrastructure projects and obligations backed by receivables from the future sales of commodities and other specified services. The Company also offers weather risk management products to end users while hedging the risks within the capital markets. As of December 31, 2001, a majority of these contracts were due to expire on or before December 31, 2002. During 2001, the Company implemented a strategic plan with early activities centered on establishing a life company platform. In 2002, the Company expects to begin underwriting business owned life insurance and funding agreements as well as issuing municipal guaranteed investment contracts. In support of these products, the Company is in the process of developing and implementing credit and control procedures. PREMIUMS See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Item 8, Note 3 to the Consolidated Financial Statements. REINSURANCE CEDED Similar to the Company as a whole, effective use of outwards reinsurance for the financial products and services operations is critical for capital management purposes. For single risk and portfolio management purposes, the Company has retroceded risks on a facultative basis. These facultative cessions to third-party reinsurers provide the Company greater flexibility to manage large single risks and reduce concentrations in specific bond sectors or geographic regions. See Item 8, Note 10 to the Consolidated Financial Statements for further information. COMPETITION The principal competitors in the municipal and asset-backed insured markets include other AAA/Aaa-rated monoline financial guarantors and AAA/Aaa-rated multiline insurance companies and banks. There are also many means by which issuers may borrow money without using third party credit enhancement. For example, structured financings may be executed by issuing a subordinated tranche of debt that effectively substitutes for third party enhancement. Additionally, issuers may raise debt financing by issuing corporate debt or by borrowing from banks. Such borrowing alternatives effectively constitute a form of competition for financial guarantor insurance companies. 9 With respect to the Company's weather risk management business, the Company competes directly in the U.S. and on a worldwide basis, encountering competition from companies within the energy, insurance and, to an increasing extent, the financial sectors. Among the principal competitive factors affecting the Company's business are its financial strength ratings, its products and services and relative pricing, its capability in originating and marketing innovative products and services and its reputation. UNDERWRITING The Company has underwriting guidelines for the various products and asset classes comprising the credit enhancement business, which include single and aggregate risk limitations on specified exposures. A credit committee provides final underwriting approval. The Company's underwriting policy is to credit enhance obligations and exposures that would otherwise be lower investment grades, although on a very limited exception basis, the Company will consider underwriting high non-investment grade risks. The Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures, its market, credit, operational and legal risks. The Company's senior management takes an active role in the risk management process and has developed and implemented policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. Due to the changing nature of the global marketplace, the Company's risk management policies, procedures and methodologies are evolving and are subject to ongoing review and modification. See Item 7A. "Quantitative and Qualitative Disclosure of Market Risk" for further discussion. MARKETING AND DISTRIBUTION With respect to Company's financial guaranty business, marketing is targeted, depending on the type and stage of completion of the transaction. These parties include investment bankers, issuers of and investors in credit-enhanced transactions and concessionaires in certain transactions. Other financial guaranty insurers or reinsurers or other counterparties may also be a source of new business. With respect to the Company's weather risk management business, clients are predominantly referred to the Company through a number of brokers who receive a fee that is a function of the size of the transaction and, to a lesser extent, as a result of direct marketing. Utility companies have been the Company's main clients. See Item 8, Note 15(c) to the Consolidated Financial Statements for further information on major brokers. CLAIMS ADMINISTRATION Claims management for the financial guaranty and credit default swap business includes the identification of potential claims through systematic surveillance of the insured portfolio, the establishment of reserves for losses that are both probable and estimable, the accounting for loss adjustment expenses, the receipt of claims, the approval of claim payments and the notification to reinsurers. Surveillance also involves proactive efforts to prevent or mitigate potential claims once they are identified. If a claim is paid, recoveries will be sought based on the security pledged under the policy. External attorneys and consultants are often enlisted to assist in loss mitigation and recovery. Claims administration for weather insurance contracts is generally handled as in the insurance segment. See "Claims Administration" under Insurance Operations - Excluding Lloyd's Syndicates for further information. UNPAID LOSSES AND LOSS EXPENSES Certain aspects of the Company's business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's results of operations and financial condition and liquidity. 10 Loss reserves are established due to the significant periods of time that may lapse between the occurrence, reporting and payment of a loss. To recognize liabilities for unpaid losses, the Company estimates future amounts needed to pay claims and related expenses with respect to insured events. The Company's reserving practices and the establishment of any particular reserve reflect management's judgment concerning sound financial practice and do not represent any admission of liability with respect to any claim made against the Company. The method of establishing case reserves for reported claims differs between the Company's operations. For the insurance operations, excluding Lloyd's syndicates as discussed below, claims personnel determine whether to establish a case reserve for the estimated amount of the ultimate settlement, if any. The estimate reflects the judgment of claims personnel based on general corporate reserving practices, and on the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. Reserves are also established to provide for the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. A similar process is followed in the reinsurance and Lloyd's operations when the Company is a lead underwriter. Other reinsurance and Lloyd's business case reserves are established based upon reports received from insureds and reinsureds, supplemented by the Company's own assessment process. Periodically, adjustments to the case reserves may be made as additional information regarding the claims is reported or payments are made. Most of the Company's incurred but not reported ("IBNR") loss reserves are derived from casualty business. Casualty business generally has a longer tail than the Company's other lines of business. IBNR is calculated using several standard actuarial methodologies including paid and incurred loss development, Bornhuetter-Ferguson and frequency and severity approaches. The Company believes the methods presently adopted provide a reasonably objective result as it is based upon the Company's loss data rather than more theoretical models often used in the low frequency, high layer business the Company writes. Even such actuarially sound methods can lead to subsequent adjustments to reserves that are both significant and irregular due to the nature of the risks written. Several aspects of the Company's casualty insurance operations complicate the actuarial reserving techniques for loss reserves as compared to other companies. These complications include policy forms that differ from more traditional forms, the lack of historical loss data for losses of the type intended to be covered by the policies, and the fact that losses in excess of the attachment level of the Company's policies are characterized by low frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. While management believes it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance operations, and there can be no assurance that ultimate losses and loss expenses will not exceed the total reserves. Claims relating to property catastrophe and property risk excess treaties are generally reported within approximately eighteen to twenty four months from the date of occurrence. Conversely, claims on the casualty business are reported on average five to eight years from the date of occurrence. Claims arising from business written by the Lloyd's syndicates are generally reported within thirty six months of the date of the occurrence. Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the accumulation of case reserves, loss expense reserves and IBNR. During the loss settlement period, additional facts regarding individual claims and trends may be reported. As these are reported, it may be necessary to adjust the reserves upward or downward. The final liability may be significantly less or greater than the prior estimates. The tables below present the development of loss and loss expense reserves on both a net and gross basis. The cumulative redundancy (deficiency) calculated on a net basis differs from that calculated on a gross basis. As different reinsurance programs are applied to their respective underwriting years, net and gross loss experience will not develop proportionately. The top line of the tables show the estimated liability, net of reinsurance recoveries, as at the balance sheet date for each of the indicated years. This represents the estimated amounts of losses and loss expenses, including IBNR, arising in the current and all prior years that are unpaid at the balance sheet date of the indicated year. The tables show the re-estimated amount of the previously recorded reserve liability based on expe- 11 rience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The cumulative redundancy (deficiency) represents the aggregate change to date with respect to that liability originally estimated. The lower portion of the first table also reflects the cumulative paid losses relating to these reserves. Conditions and trends that have affected development of liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the tables below. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Note Regarding Forward-Looking Statements." ANALYSIS OF CONSOLIDATED LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT NET OF REINSURANCE RECOVERIES (U.S. dollars in millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 - ------------------------------------------------------------------------------------------------------------------------------------ ESTIMATED LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES, NET OF REINSURANCE RECOVERABLES ........................... $1,486 $1,795 $2,057 $2,482 $2,899 $3,166 $3,609 $4,303 $4,537 $4,332 $6,792 LIABILITY RE-ESTIMATED AS OF: One year later ......................... 1,468 1,800 2,089 2,455 2,885 2,843 3,354 4,016 4,142 4,507 Two years later ........................ 1,388 1,830 2,089 2,383 2,546 2,704 3,038 3,564 4,085 Three years later ...................... 1,299 1,819 2,115 2,190 2,445 2,407 2,737 3,580 Four years later ....................... 1,303 1,891 1,972 2,085 2,214 2,227 2,658 Five years later ....................... 1,384 1,856 1,950 1,927 2,050 2,144 Six years later ........................ 1,384 1,820 1,752 1,819 2,010 Seven years later ...................... 1,392 1,644 1,739 1,823 Eight years later ...................... 1,245 1,660 1,752 Nine years later ....................... 1,294 1,689 Ten years later ........................ 1,256 CUMULATIVE REDUNDANCY (DEFICIENCY) (1) 230 106 305 659 889 1,022 951 723 452 (175) CUMULATIVE PAID LOSSES, NET OF REINSURANCE RECOVERIES, AS OF: One year later ......................... $ 194 $ 267 $ 256 $ 317 $ 445 $ 234 $ 458 $ 812 $1,252 $1,184 Two years later ........................ 393 468 521 709 667 576 932 1,594 1,828 Three years later ...................... 499 689 865 921 934 932 1,404 1,928 Four years later ....................... 632 937 1,033 1,110 1,143 1,235 1,525 Five years later ....................... 831 1,102 1,198 1,199 1,356 1,313 Six years later ........................ 924 1,253 1,273 1,328 1,408 Seven years later ...................... 974 1,319 1,360 1,365 Eight years later ...................... 1,020 1,391 1,387 Nine years later ....................... 1,083 1,414 Ten years later ........................ 1,103
(1) See "Management's Discussion and Analysis of Results of Operations and Financial Condition" for further discussion. 12 ANALYSIS OF CONSOLIDATED LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT GROSS OF REINSURANCE RECOVERABLES (U.S. dollars in millions)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 - --------------------------------------------------------------------------------------------------------------------- ESTIMATED GROSS LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES: $1,977 $2,269 $2,760 $3,238 $3,623 $3,972 $4,897 $5,369 $5,672 $11,826 LIABILITY RE-ESTIMATED AS OF: One year later .................. 1,996 2,309 2,764 3,244 3,221 3,763 4,735 5,266 6,122 Two years later ................. 2,037 2,323 2,721 2,872 3,164 3,496 4,352 5,147 Three years later ............... 2,043 2,373 2,494 2,793 2,902 3,243 4,316 Four years later ................ 2,134 2,198 2,414 2,572 2,753 3,139 Five years later ................ 2,067 2,208 2,268 2,415 2,663 Six years later ................. 2,065 2,022 2,165 2,379 Seven years later ............... 1,903 2,010 2,177 Eight years later ............... 1,921 2,033 Nine years later ................ 1,951 CUMULATIVE REDUNDANCY (DEFICIENCY) . 26 236 583 859 960 833 581 222 (450)
The following table presents an analysis of paid, unpaid and incurred losses and loss expenses and a reconciliation of beginning and ending unpaid losses and loss expenses for the years indicated: RECONCILIATION OF UNPAID LOSSES AND LOSS EXPENSES (U.S. dollars in thousands)
2001 2000 1999 =============================================== Unpaid losses and loss expenses at beginning of year ....... $ 5,672,062 $5,369,402 $4,896,643 Unpaid losses and loss expenses recoverable ................ (1,339,767) (831,864) (593,960) ----------------------------------------------- Net unpaid losses and loss expenses at beginning of year ... 4,332,295 4,537,538 4,302,683 Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in: Current year ........................................... 2,743,094 1,827,443 1,591,414 Prior years ............................................ 175,804 (394,884) (287,110) ----------------------------------------------- Total net incurred losses and loss expenses ......... 2,918,898 1,432,559 1,304,304 Exchange rate effects ...................................... 61,598 (27,064) (5,950) Net loss reserves acquired ................................. 1,296,362 52,932 30,003 Less net losses and loss expenses paid in respect of losses occurring in : Current year ........................................... 633,141 411,685 281,806 Prior year ............................................. 1,184,284 1,251,985 811,696 ----------------------------------------------- Total net paid losses ............................... 1,817,425 1,663,670 1,093,502 Net unpaid losses and loss expenses at end of year ......... 6,791,728 4,332,295 4,537,538 Unpaid losses and loss expenses recoverable ................ 5,033,952 1,339,767 831,864 ----------------------------------------------- Unpaid losses and loss expenses at end of year ............. $11,825,680 $5,672,062 $5,369,402 ===============================================
Current year net losses incurred in 2001 increased significantly over 2000 mainly due to losses related to the September 11 event, where the Company has estimated and recorded losses incurred of approximately $760.0 million, net of reinsurance recoveries, based upon preliminary reports and estimates of loss and damage. This preliminary estimate could change as more information becomes available. Current year net losses incurred in 2001 also include: (i) Winterthur International from July 1, 2001, which had net incurred losses of $241.2 million; (ii) cat- 13 astrophic and other loss events, including the bankruptcy of Enron Corp., several satellite losses, the Toulouse, France petrochemical plant explosion, Tropical Storm Allison, the Petrobras oil rig loss in Brazil, the Seattle earthquake and several other European property losses; and (iii) other growth of the Company's operations related to new business assumed. Prior year loss development in 2001 related primarily to continued adverse loss development in the Company's casualty reinsurance business written for the 1997 to 1999 underwriting years. This deterioration occurred industry-wide primarily as a result of competitive pressures on pricing. The Company recorded adverse development for this business of approximately $180.0 million in the fourth quarter of 2001. In 2000, current year development reflected the growth in business assumed over 1999, an increase in loss ratios applied due to a competitive market environment which reduced premium rates, and also the early development of certain losses on the Company's large account business within its insurance operations. Historically, the Company had not experienced the reporting of such losses at an early stage and the Company's reserving methodology for these lines of business extrapolates these losses into the projections of future development. If future development is eventually determined to be less than the estimated ultimate losses recorded, loss reserves will be reduced at that time. This occurred for the 1993 through 1996 underwriting years, resulting in a reduction in prior year losses in 2000 and 1999. Net losses incurred for 2000 also reflected reserve adjustments to several unprofitable lines of business that the Company exited, including trucking, inland energy and certain classes of aviation. A net reserve charge of $114.0 million was recorded for these lines. The decrease in prior year incurred losses in 2000 and 1999 was driven primarily by the Company's insurance liability excess of loss reserves. The basis for establishing IBNR for these lines is relatively judgmental due to the lack of industry data available. Consequently, the Company estimates loss reserves through actuarial models based upon its own experience. When the Company commenced writing this type of business in 1986, limited data was available and the Company has made its best estimate of loss reserves for each underwriting year since that time. Over time, the amount of data has increased, providing a larger statistical base for estimating reserves. Redundancies in prior year loss reserves have occurred where loss experience has developed more favorably than expected. This trend did not continue in 2001 where the competitive effect of pricing has necessitated an increase to prior year loss reserves, particularly in the casualty lines as discussed above. In 1999, the Lloyd's operations experienced loss deterioration on the U.K. motor business principally from the 1998 and 1999 underwriting years of approximately $20.0 million. Partially offsetting the increase in net incurred losses in 2000 compared to 1999 was a reduction in the number and magnitude of catastrophe losses that occurred. Catastrophe losses in 2000 included an oil refinery loss in Kuwait, several satellite losses, and the Singapore Airlines loss, and totaled approximately $95.0 million. By comparison, 1999 generated approximately $185.0 million of catastrophe losses to the Company, including the European storms in December, hailstorms in Sydney, tornadoes in Oklahoma and satellite losses. 1999 incurred losses also included an increase to casualty reinsurance loss reserves of $95.0 million related to an alignment of reserving methodologies at the time of the merger with NAC in June 1999. Net loss reserves acquired in 2001 related primarily to the acquisition of Winterthur International. The Company has contractual post-closing protection with respect to adverse development of reserves, including unearned premium reserves, resulting from Winterthur International business written prior to July 1, 2001. Business in force at June 30, 2001 carries a maximum exposure to a combined ratio of 105%. Exchange rate effects on net loss reserves in 2001 also related primarily to Winterthur International which has several operations where the functional currency is not the U.S dollar. Translation of loss reserves into U.S. dollars and movements in the exchange rates, particularly the Swiss franc, have given rise to the increase in the exchange rate effects in 2001. The amount of paid losses increased in 2001 over 2000 due mainly to an increase in current year loss events. However, the majority of net losses incurred related to the September 11 event and other loss events in the fourth 14 quarter of 2001 had not been reported to the Company as paid losses by December 31, 2001. Consequently, the Company expects a higher level of paid losses in 2002 related to these 2001 loss events. Higher paid losses in 2000 as compared to 1999 was due to the settlement of previously established reserves, particularly catastrophe losses as noted above. The Company's net incurred losses and loss expenses included a charge of $21.5 million, $2.8 million and $10.6 million in 2001, 2000 and 1999, respectively, for estimates of actual and potential non-recoveries from reinsurers. Such charges for non-recoveries relate mainly to the September 11 event and reinsurance ceded for casualty business written prior to 1986. As at December 31, 2001 and 2000, the reserve for potential non-recoveries from reinsurers was $49.7 million and $25.6 million, respectively. Except for certain workers compensation liabilities, the Company does not discount its unpaid losses and loss expenses. The Company utilizes tabular reserving for workers compensation unpaid losses that are considered fixed and determinable, and discounts such losses using an interest rate of 7%. The tabular reserving methodology results in applying uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. Tabular unpaid losses and loss expenses, net of reinsurance, at December 31, 2001 and 2000 were $231.0 million and $168.8 million, respectively. The related discounted unpaid losses and loss expenses were $98.0 million and $63.4 million as of December 31, 2001 and 2000, respectively. The nature of the Company's high excess of loss liability and catastrophe business can result in loss payments that are both irregular and significant. Similarly, adjustments to reserves for individual years can be irregular and significant. Such adjustments are part of the normal course of business for the Company. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it is inappropriate to extrapolate future redundancies or deficiencies based upon historical experience. See generally "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Note Regarding Forward-Looking Statements". INVESTMENTS Management oversees the Company's investment strategy, establishes guidelines for the various external managers and implements investment decisions with the assistance of such managers. The current investment strategy seeks to maximize investment income through a high-quality, diversified portfolio while focusing on preserving principal and maintaining liquidity. In this regard, at December 31, 2001, the Company's fixed income investment portfolio included U.S. and non-U.S. sovereign government obligations, corporate bonds and other securities, 63% of which were rated Aa or AA or better by a nationally recognized rating agency. The Company also maintains a portfolio of equity securities. Under current investment guidelines, up to 30% of the Company's investment portfolio may be invested in equity securities. Insurance laws and regulations may impose restrictions on the Company's investments whereby certain types of investments such as unquoted equity securities, investments in affiliates, real estate and collateral loans may not qualify as admitted assets. The Company did not have an aggregate investment in a single entity, other than the U.S. government, in excess of 10% of shareholders' equity at December 31, 2001 or 2000. For additional information concerning the Company's investments, see "Management's Discussion and Analysis of Results of Operations and Financial Condition - Investment Operations". 15 The following table reflects investment results for the Company for each of the five years in the period ended December 31, 2001: NET PRE-TAX ANNUALIZED AVERAGE INVESTMENT EFFECTIVE YEAR ENDED DECEMBER 31 INVESTMENTS (1) INCOME (2) YIELD - ---- ----------- -------- ---- (U.S. DOLLARS IN THOUSANDS) 2001 ................................ $11,053,110 $562,606 5.09% 2000 ................................ $ 9,058,811 $542,500 5.99% 1999 ................................ $ 8,981,833 $525,318 5.85% 1998 ................................ $ 7,762,931 $417,290 5.38% 1997 ................................ $ 6,274,946 $345,115 5.50% (1) Average of the beginning and ending amounts of investments and cash and cash equivalents net of pending trades for the period. Investment securities are carried at market value. (2) After applicable investment expenses, excluding net realized gains and losses on investments and net realized and unrealized gains and losses on derivative instruments. The Company continues to build a diversified program of ownership positions in specialty investment managers and the investment funds they manage across the full spectrum of the capital markets. The Company's strategy is to build relationships with selected smaller firms that typically will include the Company taking a minority equity position in the investment management organization and in the funds they manage. The Company will continue to develop additional opportunities in this area. The Company also has an asset accumulation strategy whereby it assumes loss portfolios recorded as deposit liabilities that are matched by an equivalent amount of investments. RATINGS The Company's ability to underwrite business is largely dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent agencies. The Company's principal insurance and reinsurance subsidiaries and pools have claims paying ratings of AA from S&P, Aa from Moody's and A+ from A.M. Best Company, Inc ("A.M. Best"). The Company's financial guaranty insurance and reinsurance companies each have AAA or Aaa ratings from S&P, Moody's, and Fitch Ratings ("Fitch"). An insurer rated AA by S&P has very strong financial security characteristics, differing only slightly from those rated higher. An insurer rated AAA or equivalent by S&P, Moody's and Fitch has extremely strong financial security characteristics. An insurer rated A+ by A.M. Best has superior financial strength, operating performance and market profile when compared to standards established by A.M. Best, and have a very strong ability to meet their ongoing obligations to policyholders. TAX MATTERS See Item 8, Note 21 to the Consolidated Financial Statements. REGULATION See Item 8, Note 22 to the Consolidated Financial Statements. EMPLOYEES At December 31, 2001, the Company employed approximately 2,700 employees. At that date, approximately 130 of the Company's employees were represented by unions or workers' councils and approximately 40 of the Company's employees were subject to collective bargaining agreements. The Company believes that it has a good relationship with its employees. 16 ITEM 2. PROPERTIES In 1997, the Company acquired commercial real estate in Bermuda for the purpose of securing long-term office space for its worldwide headquarters. The development was completed in April 2001. The total cost of this development, including the land, was approximately $125.0 million. The Company also rents space at its other worldwide locations. Total rent expense for the years ended December 31, 2001, 2000 and 1999 was approximately $18.9 million, $18.3 million and $13.0 million, respectively. See Item 8, Note 15(e) to the Consolidated Financial Statements for discussion of the Company's lease commitments. ITEM 3. LEGAL PROCEEDINGS The Company, in common with the insurance and reinsurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of December 31, 2001, the Company was not a party to any material litigation or arbitration other than as part of the ordinary course of business in relation to claims activity, none of which is expected by management to have a significant adverse effect on the Company's results of operation and financial condition and liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE COMPANY The table below sets forth the names, ages and titles of the persons who were the executive officers of the Company for the year ended December 31, 2001: NAME AGE POSITION - -------------------------------------------------------------------------------- Brian M. O'Hara ........... 53 President, Chief Executive Officer and Director Fiona E. Luck ............. 44 Executive Vice President, Group Operations and Assistant Secretary Jerry M. de St. Paer ...... 60 Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Paul S. Giordano .......... 39 Executive Vice President, General Counsel and Secretary Christopher V. Greetham ... 57 Executive Vice President and Chief Investment Officer K. Bruce Connell .......... 49 Executive Vice President and Group Underwriting Officer Nicholas M. Brown, Jr ..... 47 Executive Vice President of the Company and Chief Executive of Insurance Operations Henry C.V. Keeling ........ 46 Executive Vice President of the Company and Chief Executive of Reinsurance Operations Robert R. Lusardi ......... 45 Executive Vice President of the Company and Chief Executive of Financial Products and Services Operations Brian M. O'Hara has been President and Chief Executive Officer of the Company since 1994 and a Director of the Company since 1986, having previously served as Vice Chairman of the Company from 1987. He is Chairman of XL Insurance (Bermuda) Ltd and XL Re Ltd and was Chief Executive Officer of XL Insurance (Bermuda) Ltd until 1998, having previously served as Chairman, President and Chief Executive Officer from 1994, President and Chief Executive Officer from 1992, and as President and Chief Operating Officer from 1986. Fiona E. Luck has been Executive Vice President of Group Operations of the Company since July 1999 and Assistant Secretary since January 2002. Ms. Luck was previously employed at ACE Bermuda as Executive Vice President from 1998, and Senior Vice President 17 from 1997. From 1992 to 1997, Ms. Luck was the Managing Director of the Marsh & McLennan Global Broking office in Bermuda. Jerry M. de St. Paer was appointed to the position of Executive Vice President and Chief Financial Officer of the Company on February 14, 2001, succeeding Robert R. Lusardi. Mr. de St. Paer was appointed Treasurer and Assistant Secretary of the Company in January 2002. Mr. de St. Paer was previously Managing Director of Hudson International Advisors in New York. Prior to forming Hudson International in 1998, he served as Managing Director, Insurance at J.P. Morgan & Company, Inc. Mr. de St. Paer was previously employed at The Equitable (now AXA Financial Advisors), from 1986 until 1997, serving most recently as Senior Executive Vice President and Chief Financial Officer of The Equitable and as Executive Vice President of Strategic Studies and Development of the AXA Groupe. Paul S. Giordano has been Executive Vice President and General Counsel of the Company since June 1999. Mr. Giordano served as Senior Vice President since January 1997 and was appointed Secretary of the Company on December 31, 1997. Mr. Giordano was associated with Cleary, Gottlieb, Steen & Hamilton and Clifford Chance in New York and London prior to joining the Company. Christopher V. Greetham has been Executive Vice President of the Company since December 1998 and has served as Chief Investment Officer of the Company since 1996. Prior to joining the Company, Mr. Greetham served as Senior Vice President and Chief Financial Officer of OIL Insurance Ltd from 1982 to 1996 and as Vice President of Bankers Trust Company from 1975 to 1982. K. Bruce Connell has been Executive Vice President of the Company since March 1998 and Group Underwriting Officer since July 2000. Mr. Connell previously served as President and Chief Operating Officer of XL Global Re from November 1997 to August 1998, President of XL Global Re since December 1995 and Senior Vice President of XL Insurance (Bermuda) Ltd from 1990 to 1995. Nicholas M. Brown, Jr. has been Executive Vice President of the Company since July 1999 and Chief Executive of Insurance operations since July 2000. He was President and Chief Executive Officer of NAC Re Corp, (now known as XL America) from January 1999, having previously served as President and Chief Operating Officer of NAC Re Corp and President and Chief Executive Officer of NAC Re (now known as XL Re America) from 1996. Prior to joining XL Re America, Mr. Brown served as Executive Vice President and Chief Operating Officer of St. Paul Fire and Marine Insurance Company from 1994 to 1996 and as President of St. Paul Specialty from 1993 to 1994. From 1976 through 1993, he served in various positions at Aetna Life and Casualty Companies. Henry C.V. Keeling has been Executive Vice President of the Company and Chief Executive of XL Re since August 1998. He was appointed Chief Executive Officer of Reinsurance operations in July 2000. Mr. Keeling was President and Chief Operating and Underwriting Officer of Mid Ocean Re (now known as XL Re Ltd) from 1992 to 1998. He previously served as a director of Taylor Clayton (Underwriting Agencies) Ltd and deputy underwriter for syndicate 51 at Lloyd's from 1984 through 1992. Robert R. Lusardi has been Executive Vice President of the Company since February 1998, and Chief Executive Officer of Financial Products and Services Operations since July 2000. Mr. Lusardi served as Chief Financial Officer of the Company from 1998 through February 2001. Prior to joining the Company, Mr. Lusardi was Managing Director at Lehman Brothers from 1980 to 1998. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The Company's Class A ordinary shares, $0.01 par value, are listed on the New York Stock Exchange under the symbol XL. The following table sets forth the high, low and closing sales prices per share of the Company's Class A ordinary shares per fiscal quarter, as reported on the New York Stock Exchange Composite Tape. HIGH LOW CLOSE ----------------------------- 2001: 1st Quarter ............ $87.500 $67.600 $76.070 2nd Quarter ............ 83.600 67.180 82.100 3rd Quarter ............ 83.000 62.000 79.000 4th Quarter ............ 96.120 79.500 91.360 2000: 1st Quarter ............ $55.375 $39.563 $55.375 2nd Quarter ............ 61.000 45.750 54.125 3rd Quarter ............ 78.188 54.938 74.000 4th Quarter ............ 88.563 69.375 87.375 Each Class A ordinary share has one vote, except that if, and so long as, the Controlled Shares (defined below) of any person constitute ten percent (10%) or more of the issued Class A ordinary shares, the voting rights with respect to the Controlled Shares owned by such person are limited, in the aggregate, to a voting power of approximately 10%, pursuant to a formula specified in the Articles of Association. "Controlled Shares" includes, among other things, all Class A ordinary shares for which such person is deemed to beneficially own directly, indirectly or constructively (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934). (b) The number of record holders of ordinary shares as of December 31, 2001 was 614. (c) In 2001, four regular quarterly dividends were paid at $0.46 per share to all shareholders of record on February 15, May 25, August 15 and November 30. In 2000, four regular quarterly dividends were paid at $0.45 per share to all shareholders of record on February 15, May 25, August 15 and November 15. The declaration and payment of future dividends by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, financial condition, business needs, capital and surplus requirements of the Company's operating subsidiaries and regulatory restrictions. As a holding company, the Company's principal source of income is dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries that the Company operates in, including Bermuda, the United States, and the U.K., and those of the Society of Lloyd's. See Item 8, Note 22 to the Consolidated Financial Statements for further discussion. (d) Rights to purchase Class A ordinary shares ("the Rights") were distributed as a dividend at the rate of one Right for each Class A ordinary share held of record as of the close of business on October 31, 1998. Each Right entitles holders of Class A ordinary shares to buy one ordinary share at an exercise price of $350. The Rights would be exercisable, and would detach from the Class A ordinary shares, only if a person or group were to acquire 20% or more of the Company's outstanding Class A ordinary shares, or were to announce a tender or exchange offer that, if consummated, would result in a person or group beneficially owning 20% or more of Class A ordinary shares. Upon a person or group without prior approval of the Board acquiring 20% or more of Class A ordinary shares, each Right would entitle the holder (other than such an acquiring person or group) to purchase Class A ordinary shares (or, in certain circumstances, Class A ordinary shares of the acquiring person) with a value of twice the Rights 19 exercise price upon payment of the Rights exercise price. The Company will be entitled to redeem the Rights at $0.01 per Right at any time until the close of business on the tenth day after the Rights become exercisable. The Rights will expire at the close of business on September 30, 2008, and do not initially have a fair value. The Company has initially reserved 119,073,878 Class A ordinary shares being authorized and unissued for issue upon exercise of Rights. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data below is based upon the Company's fiscal year end of December 31. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto presented under Item 8.
2001 2000 1999 1998 1997 ------------------------------------------------------------------ (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) INCOME STATEMENT DATA: Net premiums earned - general operations ................. $ 2,779,927 $ 2,035,240 $ 1,750,006 $ 1,324,291 $1,114,758 Net premiums earned - life operations .................... 695,595 -- -- -- -- Net investment income .................. 562,606 542,500 525,318 417,290 345,115 Net realized (losses) gains on investments ..................... (93,237) 45,090 66,800 212,910 309,817 Net realized and unrealized (losses) gains on derivative instruments .... (12,176) 5,481 27,566 (1,706) 100,841 Equity in net income of investment affiliates .............. 80,580 70,032 43,865 811 1,283 Fee income and other ................... 43,464 14,793 100,400 22,325 -- Net losses and loss expenses incurred - general operations ................. 2,918,898 1,432,559 1,304,304 841,517 738,849 Claims and policy benefit reserves - life operations .................... 698,675 -- -- -- -- Acquisition costs, operating expenses and exchange gains and losses ....... 1,073,903 743,067 689,005 436,598 318,107 Interest expense ....................... 65,350 32,147 37,378 33,444 29,622 Amortization of intangible assets ...... 58,569 58,597 49,141 26,881 7,403 (Loss) income before minority interest, equity in net income of insurance affiliates and income tax expense .. (758,636) 446,766 434,117 637,481 777,833 Net (loss) income ...................... (576,135) 506,352 470,509 656,330 809,029 PER SHARE DATA: Net income per share - basic (2) ....... $ (4.55) $ 4.07 $ 3.69 $ 5.86 $ 7.95 Net income per share - diluted (2) ..... $ (4.55) $ 4.03 $ 3.62 $ 5.68 $ 7.74 Weighted average shares Outstanding - basic (2) ................ 126,676 124,503 127,601 112,034 101,708 Weighted average shares Outstanding - diluted (2) .............. 126,676 125,697 130,304 116,206 105,005 Cash dividends per share (3) ........... $ 1.84 $ 1.80 $ 1.76 $ 1.64 $ 1.36
20
2001 2000 1999 1998 1997 ------------------------------------------------------------------ (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) BALANCE SHEET DATA: Total investments available for sale ... $12,429,845 $ 9,501,548 $ 9,122,591 $ 9,057,892 $6,562,609 Cash and cash equivalents .............. 1,863,861 930,469 557,749 480,874 383,594 Investments in affiliates .............. 1,037,344 792,723 479,911 154,668 524,866 Unpaid losses and loss expenses recoverable ........................ 5,033,952 1,339,767 831,864 593,960 363,716 Total assets ........................... 27,963,075 16,941,952 15,090,912 13,581,140 9,070,031 Unpaid losses and loss expenses ........ 11,825,680 5,672,062 5,369,402 4,896,643 3,972,376 Notes payable and debt ................. 1,604,877 450,032 410,726 613,873 453,866 Shareholders' equity ................... 5,437,184 5,573,668 5,577,078 5,612,603 3,195,749 Book value per share ................... $ 40.35 $ 44.58 $ 43.64 $ 43.59 $ 31.55 Fully diluted book value per share ..... $ 40.35 $ 44.58 $ 43.13 $ 43.20 $ 31.42 OPERATING RATIOS: Loss and loss expense ratio (4) ........ 105.0% 70.4% 74.5% 63.5% 66.3% Underwriting expense ratio (5) ......... 34.9% 36.4% 34.3% 30.3% 27.9% Combined ratio (6) ..................... 139.9% 106.8% 108.8% 93.8% 94.2%
(1) All information for 1999 and prior years includes the results of NAC as though it had always been a part of the Company. (2) Net income per share is based on the basic and diluted weighted average number of ordinary shares and ordinary share equivalents outstanding for each period. Net loss per share is based on the basic weighted average number of ordinary shares outstanding. (3) Cash dividends per share for 1999 and prior years have not been adjusted for the pooling effect of NAC. (4) The loss and loss expense ratio is calculated by dividing the losses and loss expenses incurred by the net premiums earned for general operations. (5) The underwriting expense ratio is the sum of acquisition expenses and operating expenses divided by net premiums earned on general operations. Operating expenses relating to the corporate segment and foreign exchange gains and losses have not been included for purposes of calculating the underwriting expense ratio. See Item 8, Note 3 to the Consolidated Financial Statements for further information. (6) The combined ratio is the sum of the loss and loss expense ratio and the underwriting expense ratio. A combined ratio under 100% represents an underwriting profit and over 100% represents an underwriting loss. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The following is a discussion of the Company's results of operations and financial condition. Certain aspects of the Company's business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's results of operations and financial condition. The Company's results for the year ended December 31, 2001 include the results of Winterthur International with effect from July 1, 2001. The audited financial statements of Winterthur International as at June 30, 2001, on which the final purchase price will be based, are not expected to be completed until later in 2002, at which time any final adjustments will be made. See Item 8, Note 5 to the Consolidated Financial Statements for further information. The Company's results for 2001 also include the effects of terrorist attacks at the World Trade Center in New York City, in Washington, D.C. and in Pennsylvania on September 11, 2001 (collectively, the "September 11 event"). See Item 8, Note 4 to the Consolidated Financial Statements for further information. 21 Information presented for 1999 is the combination of the results formerly presented by the Company and NAC, as required for a business combination accounted for by the pooling of interests method, which assumes NAC had always been a part of the Company. See Item 8, Note 5 to the Consolidated Financial Statements for further information. As part of the Company's strategy to expand its life business, the Company assumed a large portfolio of long duration annuity reserves in the fourth quarter of 2001. Life premiums earned are presented separately in the Company's segment results. Life business currently includes life and annuity business that transfers significant mortality and morbidity risks. As a result of the above, period to period comparisons may not be meaningful. This "Management's Discussion and Analysis of Results of Operations and Financial Condition" contains forward-looking statements which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward looking-statements. These statements are based upon current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements, and therefore undue reliance should not be placed on them. See " - Cautionary Note Regarding Forward-Looking Statements" for a list of additional factors that could cause actual results to differ materially from those contained in any forward-looking statement. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto presented under Item 8. CRITICAL ACCOUNTING POLICIES The following are considered to be the Company's critical accounting policies due to the judgments and uncertainties affecting the application of these policies and/or the likelihood that materially different amounts would be reported under different conditions or using different assumptions. If actual events differ significantly from the underlying assumptions or estimates applied for any or all of the accounting policies (either individually or in the aggregate), there could be a material adverse effect on the Company's results of operations and financial condition and liquidity. Other significant accounting policies are nevertheless important to an understanding of the Company's Consolidated Financial Statements. Policies such as those related to revenue recognition, financial instruments and consolidation require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standard setters and regulators. See Item 8, Note 2 to the Consolidated Financial Statements. LOSSES AND LOSS EXPENSES Unpaid losses and loss expenses includes reserves for unpaid reported losses and loss expenses and for losses incurred but not reported. The reserve for unpaid reported losses and loss expenses is established by management based on amounts reported from insureds or ceding companies and consultation with independent legal counsel, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. The reserve for losses incurred but not reported has been estimated by management and reviewed by independent actuaries, based on loss development patterns determined by reference to the Company's underwriting practices, the policy form, type of insurance program and the experience of the relevant industries. Specifically, several aspects of the Company's casualty insurance operations complicate the actuarial reserving techniques for loss reserves as compared to other companies. These complications include policy forms that differ from more traditional forms, the lack of historical loss data for losses of the type intended to be covered by the policies, and the fact that losses in excess of the attachment level of the Company's policies are characterized by low 22 frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. While management believes the reserves for unpaid losses and loss expenses are sufficient to cover losses that fall within coverages assumed by the Company, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance operations, and there can be no assurance that ultimate losses and loss expenses will not exceed the total reserves. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate and any adjustments resulting therefrom are reflected in income of the year in which the adjustments are made. The establishment of unpaid loss and loss expense reserves also includes reinsurance recoveries. Due to the size of the gross losses arising from the September 11 event and the related reinsurance recoveries and the magnitude of the September 11 event on the reinsurance industry, the Company, in addition to its normal review process, further analyzed the recoverability of these assets. Approximately 96% of the relevant reinsurers currently fall into Standard & Poor's financial strength rating categories or equivalent of A or better, with approximately 65% rated AA or better. Accordingly, the Company believes that substantially all insurance will be recoverable. An allowance has been established for estimated uncollectible recoverables. DERIVATIVE INSTRUMENTS AND WEATHER RISK MANAGEMENT PRODUCTS The Financial Accounting Standards Board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. FAS 133 establishes accounting and reporting standards for derivative instruments including those embedded in other contracts (collectively referred to as derivatives), and for hedging activity. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Non-exchange traded weather products are not covered by FAS 133, however are also recorded at fair value. The Company adopted FAS 133, as amended, as of January 1, 2001. The Company conducts activities in three main types of instruments: credit default swap derivatives, weather risk management products and investment related derivative instruments. There was no significant impact from the adoption of FAS 133. See Item 8, Note 14 for further information on these derivative instruments. CREDIT DEFAULT SWAPS The Company considers credit default swaps to be, in substance, financial guaranty contracts as the Company intends to hold them to maturity. Fair value is determined using a model developed by the Company and is dependent upon a number of factors, including changes in interest rates, credit spreads, changes in credit quality and other market factors. The change in fair value in a period is split between premiums, net losses and loss expenses, and net realized and unrealized gains and losses on derivative instruments. The change resulting from movements in credit spreads is unrealized as the credit default swaps are not traded to realize this value and is included in net realized and unrealized gains and losses on derivative instruments. Other elements of the change in fair value are based upon pricing established at the inception of the contract. Prior to the adoption of FAS 133, the net premiums earned and loss and loss expenses were included in fee income and other. WEATHER RISK MANAGEMENT PRODUCTS Weather risk management products are recorded at fair value with the changes in fair value included in fee income and other. Fair value is determined using a quantitative analytical model developed by the Company and is dependent upon a number of factors including, among others, realized weather results, forecasted weather conditions, changes in interest rates and other market factors. INVESTMENT RELATED DERIVATIVE INSTRUMENTS The Company uses investment derivatives to manage duration and currency exposure for its investment portfolio. None of these investment derivatives are designated hedges, and accordingly, financial futures, options and forward currency contracts are carried at fair value, with the corresponding realized and unrealized gains and losses included in net realized gains and losses on derivative instruments. 23 OTHER THAN TEMPORARY DECLINES IN INVESTMENTS AND OTHER INVESTMENTS Investments are reviewed periodically to determine if they have sustained an impairment of value that is considered to be other than temporary. The identification of potentially impaired investments involves significant management judgment, which includes the determination of their fair value and the assessment of whether any decline in value is other than temporary. If investments are determined to be impaired, a realized loss is recognized. The current economic environment and recent volatility of securities markets increase the difficulty in determining impairment. For other investments that are not quoted, fair value is determined using the financial information received and other economic and market knowledge as appropriate. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferral of tax losses is evaluated based upon management's estimates of the future profitability of the Company's taxable entities based on current forecasts. A valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Should the taxable income of these entities fall below expectations, a further valuation allowance would have to be established, which could be significant. In addition, if any further losses are generated by these entities, these losses may not be tax effected. INTANGIBLE ASSETS Intangible assets are carried at estimated fair value, which is typically less than the value based on undiscounted operating earnings. There are many assumptions and estimates underlying fair value. Other assumptions could produce a significantly different result. RESULTS OF OPERATIONS The following table presents an after-tax analysis of the Company's net income for the years ended December 31, 2001, 2000 and 1999 (U.S. dollars in thousands, except per share amounts): 2001 2000 1999 ------------------------------ Net operating (loss) income (1) ............... $(465,186) $442,932 $370,809 Net realized (losses) gains on investments .... (98,773) 57,939 72,144 Net realized and unrealized (losses) and gains on derivative instruments ............ (12,176) 5,481 27,556 ------------------------------ Net (loss) income ............................. $(576,135) $506,352 $470,509 ============================== (Loss) Earnings per share - basic ............. $ (4.55) $ 4.07 $ 3.69 (Loss) Earnings per share - diluted (2) ....... $ (4.55) $ 4.03 $ 3.62 Weighted average number of ordinary shares and ordinary share equivalents - Basic ..... 126,676 124,503 127,601 Weighted average number of ordinary shares and ordinary share equivalents - Diluted (2) ................................ 126,676 125,697 130,304 (1) Net operating (loss) income excludes after-tax net realized gains and losses on investments and net realized and unrealized gains and losses on derivative instruments. (2) Average stock options outstanding have been excluded where anti-dilutive to earnings per share. Net operating income decreased significantly in 2001 primarily due to net losses arising from the September 11 event. Losses were mainly incurred on the property, aviation, personal accident and business interruption lines. Both the insurance and reinsurance segments were affected by this event. The Company's results for 2001 also 24 include the effects of terrorist attacks at the World Trade Center in New York City, in Washington, D.C. and in Pennsylvania on September 11, 2001 (collectively, the "September 11 event"). While this loss has been provided for, it is management's best estimate at this time and could change significantly as more information becomes available. See Item 8, Note 4 to the Consolidated Financial Statements. The following is an analysis of the underwriting profit or loss by segment for the year ended December 31, 2001, first including the effects of the September 11 event and then excluding the effect of the September 11 event (U.S. dollars in thousands): YEAR ENDED DECEMBER 31, 2001 INCLUDING THE EFFECTS OF THE SEPTEMBER 11 EVENT:
FINANCIAL LLOYD'S PRODUCTS AND GENERAL OPERATIONS: INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL -------------------------------------------------------------------- Net premiums earned .......................... $1,222,196 $ 481,307 $1,029,618 $46,806 $ 2,779,927 Fee income and other ......................... 22,065 (3,707) (7,180) 32,286 43,464 Net losses and loss expenses ................. 859,812 610,823 1,428,772 19,491 2,918,898 Acquisition costs ............................ 187,443 155,804 292,069 3,730 639,046 Operating expenses ........................... 178,530 22,215 87,169 42,404 330,318 Exchange losses .............................. 4,924 3,198 4,062 -- 12,184 LIFE OPERATIONS: Life premiums earned ......................... -- -- 695,595 -- 695,595 Claims and policy benefit reserves ........... -- -- 698,675 -- 698,675 --------------------------------------------------------------------- Underwriting profit (loss) ................... $ 13,552 $(314,440) $ (792,714) $13,467 $(1,080,135) Loss and loss expense ratio .................. 70.4% 126.9% 138.8% 41.6% 105.0% Underwriting expense ratio ................... 29.9% 37.0% 36.8% 98.6% 34.9% --------------------------------------------------------------------- Combined ratio ............................... 100.3% 163.9% 175.6% 140.2% 139.9% ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001 EXCLUDING THE EFFECTS OF THE SEPTEMBER 11 EVENT:
FINANCIAL LLOYD'S PRODUCTS AND GENERAL OPERATIONS: INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL -------------------------------------------------------------------- Net premiums earned .......................... $1,226,096 $ 502,707 $1,150,018 $46,806 $ 2,925,627 Fee income and other ......................... 22,065 (3,707) (7,180) 32,286 43,464 Net losses and loss expenses ................. 757,762 395,023 986,622 19,491 2,158,898 Acquisition costs ............................ 187,443 155,804 292,069 3,730 639,046 Operating expenses ........................... 178,530 22,215 87,169 42,404 330,318 Exchange (gains) losses ...................... 4,924 3,198 4,062 -- 12,184 LIFE OPERATIONS: Life premiums earned ......................... -- -- 695,595 -- 695,595 Claims and policy benefit reserves ........... -- -- 698,675 -- 698,675 --------------------------------------------------------------------- Underwriting profit (loss) ................... $ 119,502 $ (77,240) $ (230,164) $13,467 $ (174,435) Loss and loss expense ratio .................. 61.8% 78.6% 85.8% 41.6% 73.8% Underwriting expense ratio ................... 29.8% 35.4% 33.0% 98.6% 33.1% -------------------------------------------------------------------- Combined ratio ............................... 91.6% 114.0% 118.8% 140.2% 106.9%
25 In addition, net losses incurred in the year ended December 31, 2001 included adverse prior period loss development on the 1997 through 1999 underwriting years of the reinsurance casualty book, the bankruptcy of Enron Corp. and related matters of approximately $75.0 million, and other large losses including the Sri Lanka airport loss, satellite losses, the Toulouse, France petrochemical plant explosion, the Petrobras oil rig in Brazil and Tropical Storm Allison. The components of these loss events are discussed within each segment. In the year ended December 31, 2000, total losses incurred from all catastrophic events were not as large as those experienced in 2001 or 1999. Net loss in 2001 was also affected by significant amount of investment and derivative losses. This is discussed further under " - Investment Activities". Net income increased in 2000 compared to 1999 due to an increase in net investment income, equity in net income of affiliates and exchange gains and losses. This increase was partially offset by an increase in the underwriting loss. In 2000, the Company incurred after-tax charges of $124.6 million, or $0.98 per share, which included certain reserve adjustments together with employee severance charges and other costs associated with the realignment of the Company's operations and the discontinuation of certain business lines. These charges affected the underwriting results across the Company's insurance and reinsurance segments. In 1999, the Company incurred losses of $125.0 million after-tax, or $0.97 per share, as a result of two major European windstorms in December 1999. In addition, 1999 included an increase to reserves of $95.0 million associated with the merger with NAC. The Company issued 9.2 million common shares on November 7, 2001, which did not significantly dilute the weighted average shares outstanding for 2001. During 2002, the weighted average shares will increase significantly as the 9.2 million shares will be weighted for the full year. Basic and diluted earnings per share increased in 2000 as compared to 1999 due to both an increase in net income and a reduction in the weighted average number of shares outstanding. The decrease in the weighted average number of shares outstanding in 2000 is a result of the Company repurchasing 5.1 million shares during the year. SEGMENTS The Company is organized into three underwriting segments - insurance, reinsurance, and financial products and services - and a corporate segment, which includes the investment operations of the Company. Lloyd's syndicates are included in the insurance segment but are shown separately. See Item 1 and Item 8, Note 3 to the Consolidated Financial Statements for further information. INSURANCE OPERATIONS - EXCLUDING LLOYD'S SYNDICATES The following table summarizes the underwriting profit for this segment (U.S. dollars in thousands):
% CHANGE % CHANGE GENERAL: 2001 01 VS 00 2000 00 VS 99 1999 ------------------------------------------------------------- Net premiums earned ................................ $1,222,196 68.2% $726,506 56.9% $463,069 Fee income and other ............................... 22,065 186.9% 7,692 1.4% 7,584 Losses and loss expenses ........................... 859,812 71.0% 502,898 62.7% 309,079 Acquisition costs .................................. 187,443 60.0% 117,251 79.5% 65,318 Operating expenses ................................. 178,530 90.0% 94,129 32.4% 71,094 Exchange losses (gains) ............................ 4,924 NM (2,344) NM (165) -------------------------------------------------------------- Underwriting profit ................................ $ 13,552 (39.1)% $ 22,264 (12.1)% $ 25,327 ============================================================== Net unrealized gains on credit default swaps ....... $ 14,738 NM -- NM -- ==============================================================
NM= Not Meaningful Effective July 1, 2001, the insurance segment included the results of Winterthur International. Each of the above line items experienced growth primarily as a result of the inclusion of business written and earned by Winterthur International. Consequently, period to period comparisons may not be meaningful. 26 Excluding Winterthur International, net premiums earned increased in the year ended December 31, 2001 over 2000 due to new business written and price increases. This resulted in an increase in net premiums earned from environmental business of $85.0 million, professional lines of $50.0 million and aviation and satellite business of $60.0 million. This was partially offset by decreases in net premiums earned from business discontinued in 2000. Net premiums earned by Winterthur International totaled $353.1 million. Net premiums earned are expected to increase on all lines in 2002 mainly due to the growth in gross premiums written subsequent to September 11 and a full year's results of Winterthur International. Growth in net premiums earned in 2000 over 1999 is mainly due to new business, primarily environmental business, written by ECS. ECS contributed approximately $110.0 million in net premiums earned in 2000. No premiums were earned by ECS in 1999 as ECS only commenced writing business on behalf of the Company with effect from January 1, 2000. Prior to this date, ECS had agency agreements in place with other companies. In addition, the Company wrote aviation and satellite business totaling $60.0 million in net premiums earned. In 1999, this business was written on behalf of the Lloyd's syndicates, of which the Company's share was approximately $11.5 million in net premiums earned. 2000 also included approximately $25.0 million in net premiums earned of new professional liability business written. Fee income and other for the year ended December 31, 2001 includes $9.1 million related to Winterthur International for the provision of consulting and administration services for employee benefit plans of unrelated companies. In 2000, fee income and other related primarily to the provision of risk management and other consulting services provided by ECS. The decrease in the underwriting profit in each year in this segment is due to higher loss and loss expense ratios as shown below. The following table presents the ratios for this segment for each of the three years ended December 31: 2001 2000 1999 --------------------------- Loss and loss expense ratio ............. 70.4% 69.2% 66.7% Underwriting expense ratio .............. 29.9% 29.1% 29.5% --------------------------- Combined ratio .......................... 100.3% 98.3% 96.2% ============================ The loss ratio was higher in the year ended December 31, 2001 compared to 2000 due primarily to net losses of $102.0 million incurred related to the September 11 event. This loss was partially offset by favorable loss development from prior accident years. There were no significant catastrophic loss events for this segment in the year ended December 31, 2000. In addition, the 2001 loss ratio increased primarily as a result of the inclusion of losses related to the inclusion of Winterthur International effective July 1, 2001. Business in force at June 30, 2001 for Winterthur International carries a maximum exposure to a combined ratio of 105%. As described in Note 5 to the Consolidated Financial Statements, the accounting for the purchase of Winterthur International required the Company to fair value the acquired assets and liabilities on June 30, 2001. The fair value adjustment to the loss reserves resulted in an accretion of discount for the year ended December 31, 2001 of $1.4 million. The loss and loss expense ratio in 2000 and 1999 includes the effects of an intercompany stop loss arrangement with a subsidiary in the reinsurance segment. There was no such arrangement in place in 2001. Losses incurred related to this arrangement were $33.5 million and $100.0 million in 2000 and 1999, respectively. Had this arrangement not been in place, the loss and loss expense ratio would have been 64.6% and 45.2% in 2000 and 1999, respectively. The increase in the loss ratio in 2000 over 1999 is due to several factors. In 2000, the Company applied higher loss ratios to certain of its casualty lines written in 2000. These loss ratios have been actuarially estimated and reflect the continued negative impact that competitive market conditions have had on rates for these lines of business written in 2000. There was a reduction of loss reserves in 1999 established on the Company's liability lines due to updated actuarially determined reserve estimates that reflected the favorable development of these lines relating to prior years. Loss reserve adjustments were made in 2000 as discussed previously. Partially offsetting the increases in 2000 were additional reductions in loss reserves related to liability lines written in prior years. 27 The underwriting expense ratio increased slightly in the year ended December 31, 2001 compared to 2000 due to the reallocation of certain operating expenses from the reinsurance segment to insurance segment and a general expansion of operations. Winterthur International acquisition costs and operating expenses were $47.8 million and $69.8 million, respectively, representing an expense ratio of 33.3%. The expense ratio was reduced by the effect of purchase accounting treatment on the acquisition costs of Winterthur International. Had an historical level of deferred acquisition costs been amortized, the expense ratio for the segment would have been 31.4% in the year ended December 31, 2001. The expense ratio will continue to be affected by this purchase accounting adjustment through the second quarter of 2002. The net decrease in the underwriting expense ratio in 2000 compared to 1999 was mainly due to the significant increase in net premiums earned year over year and, unlike acquisition costs, operational expenses do not change as a direct cost of net premiums earned. Partially offsetting this decrease is the inclusion of expense charges of $13.9 million related to employee severance and other costs in 2000 associated with the realignment of operations and the discontinuation of certain business lines. Excluding these costs, the underwriting expense ratio in 2000 would have been 27.2%. The Company also began to write credit default swaps at primary layers in 2001 in this segment. See Item 8, Note 14(a) to the Consolidated Financial Statements. INSURANCE OPERATIONS - LLOYD'S SYNDICATES The following table summarizes the underwriting results for the Lloyd's syndicates (U.S. dollars in thousands):
% CHANGE % CHANGE GENERAL: 2001 01 VS 00 2000 00 VS 99 1999 ----------------------------------------------------------- Net premiums earned ........................ $ 481,307 34.5% $357,824 0.6% $355,769 Fee income and other ....................... (3,707) 44.1% (6,626) NM 65,892 Losses and loss expenses ................... 610,823 134.6% 260,372 (12.5)% 297,595 Acquisition costs .......................... 155,804 30.0% 119,870 34.4% 89,195 Operating expenses ......................... 22,215 (22.7)% 28,727 (2.0)% 29,305 Exchange losses (gains) .................... 3,198 NM (5,986) NM (1,180) ----------------------------------------------------------- Underwriting (loss) profit ................. $(314,440) NM $ (51,785) NM $ 6,746 ============================================================
Net premiums earned for the year ended December 31, 2001 increased over 2000 primarily as a result of additional syndicate capacity provided by the Company, currently at 63% compared to 53% in the prior year. In addition, net premiums earned increased due to greater premiums written in the prior year than originally estimated. The increase in net premiums earned was partially offset by the net reinstatement premiums of $21.4 million as a result of losses incurred from the September 11 event. In November 2001, the Company realigned its Lloyd's operations effective January 1, 2002 and from that time, provides 100% of the capacity for Syndicates 1209 and 990. The Company believes that the expected increase in premiums generated from higher ownership will be reduced by premiums on discontinued lines such as excess of loss treaty, accident and health and certain property accounts. The small increase in net premiums earned in 2000 over 1999 reflected the growth in business written due principally to an increase in syndicate capacity provided by the Company from approximately 43% to 53%. Partially offsetting this increase is the reduction in net premiums earned related to the motor business that was sold effective December 31, 1999. The Company retains the residual liability on this business. In the years ended December 31, 2000 and 1999, net premiums earned on the motor business were $82.8 million and $135.9 million respectively. In addition, net premiums earned were reduced in 2000 as a result of additional reinsurance costs related to an outwards stop loss reinsurance policy as losses developed for certain lines of business. Coverage provided by this stop loss reinsurance policy was significantly reduced for 2001. 28 Fee income was generated by the Company's Lloyd's managing agencies and may, depending upon underwriting results, earn profit commissions from third party capital providers for syndicates they manage. This income was offset by managing agency operating expenses allocated to these capital providers. Although nominal commissions were received in the year ended December 31, 2001, managing agency expenses exceeded fee income and commissions for 2001 and 2000 due to loss deterioration, consistent with the Lloyd's market. As a result of the change in capacity as previously noted, less expense will be allocated to the third party capital providers in 2002. In 1999, fee income and other primarily related to the sale of the Company's two motor insurance businesses, resulting in a gain of $40.2 million. In addition, 1999 also included $42.1 million of fees generated from the motor business prior to the sale. No such income was earned in 2001 or 2000. The exchange loss in 2001 was due to the decrease in the U.K. sterling exchange rate against the U.S. dollar applied to net monetary assets denominated in U.K. sterling. Conversely, in 2000 and 1999, the exchange rate moved in the opposite direction. The following table presents the underwriting ratios: 2001 2000 1999 ----------------------------- Loss and loss expense ratio ........... 126.9% 72.8% 83.6% Underwriting expense ratio ............ 37.0% 41.5% 33.3% ----------------------------- Combined ratio ........................ 163.9% 114.3% 116.9% ============================= The loss and loss expense ratio increased in the year ended December 31, 2001 compared to 2000 primarily due to net losses incurred for the September 11 event of approximately $215.8 million and other significant losses including the Toulouse petrochemical plant explosion and the airport loss event in Sri Lanka, totaling approximately $19.0 million. In addition, the Company experienced loss deterioration on business written in previous underwriting years of approximately $23.0 million. The underwriting expense ratio was lower in 2001 compared to 2000 primarily due to savings generated from merging the managing agency operations against a higher net premiums earned base. The decrease in the loss ratio and increase in the expense ratio in 2000 over 1999 primarily reflected the effect of the sale of the motor business. In 1999, the motor business had a loss ratio of approximately 101.1% and an expense ratio of approximately 21.8%. Non-motor business written typically has lower loss ratios and higher commissions than the motor business. The increase in the expense ratio in 2000 was also principally due to additional reinsurance costs and a charge of $7.5 million for employee severance and other costs associated with the realignment of the Company's operations. REINSURANCE OPERATIONS The following table summarizes the underwriting results for this segment (U.S. dollars in thousands):
% CHANGE % CHANGE GENERAL: 2001 01 VS 00 2000 00 VS 99 1999 --------------------------------------------------------------- Net premiums earned ........................... $1,029,618 11.0% $927,195 1.9% $ 909,915 Fee income and other .......................... (7,180) NM (2,197) NM -- Losses and loss expenses ...................... 1,428,772 115.4% 663,173 (4.2)% 692,269 Acquisition costs ............................. 292,069 18.1% 247,352 10.2% 224,359 Operating expenses ............................ 87,169 (14.7)% 102,132 0.1% 101,978 Exchange losses ............................... 4,062 5.0% 3,868 NM 1,286 LIFE: Life premiums earned .......................... 695,595 NM -- -- -- Claims and policy benefit reserves ............ 698,675 NM -- -- -- ---------------------------------------------------------- Underwriting loss ............................ $ (792,714) NM $ (91,527) 16.8% $(109,977) ==========================================================
29 Underwriting results for the year ended December 31, 2001 were significantly affected by the September 11 event. Net premiums earned in 2001 increased over 2000 due to additional premiums earned in 2001, primarily on property lines, from increased premium rates and new business written. This was partially offset by approximately $120.4 million of net reinstatement premiums resulting from the September 11 event. Net premiums earned are expected to grow in 2002 due to continuing premium rate increases and the consolidation of the results of Le Mans Re, in which the Company increased its ownership to 67% effective January 1, 2002. The increase in net premiums earned in 2000 as compared to 1999 was mainly a result of an increase in net premiums written across most lines of business. In 2000, the Company had experienced some premium rate increases in the other property, marine, aviation and satellite lines of business. Pricing remained generally unchanged in the international property, excluding property catastrophe, and liability lines of business written by the Company. Partially offsetting this increase in net premiums earned was an increase in reinsurance costs incurred in 2000 over 1999, primarily relating to stop loss reinsurance policies where additional premiums became due once losses exceed certain levels. Life premiums earned included $549.3 million related to a large contract consisting of long duration annuity reserves assumed in the fourth quarter of 2001. While the Company expects to write more of these contracts, the frequency of these transactions will likely be irregular. The remaining life premiums earned related to smaller contracts of a similar nature. Fee income and other in 2001 and 2000 related primarily to non-underwriting costs for an outward reinsurance contract that did not exist in 1999. The following table presents the underwriting ratios for this segment: 2001 2000 1999 ------------------------------- Loss and loss expense ratio .......... 138.8% 71.5% 76.1% Underwriting expense ratio ........... 36.8% 37.7% 35.9% ------------------------------- Combined ratio ....................... 175.6% 109.2% 112.0% =============================== Property catastrophe business has loss experience that is generally categorized as low frequency but high severity in nature. This may result in volatility in the Company's financial results for any fiscal year or quarter. Property catastrophe losses generally are notified and paid within a short period of time from the covered event. Net losses and loss expenses in 2001 included $442.1 million related to the September 11 event, primarily on the property and aviation reinsurance lines of business. The combined ratio also increased in 2001 over 2000 due to the effects of the reinstatement premium expense noted above. In addition, net losses and loss expenses in 2001 included losses incurred related to continued adverse development in the casualty book of approximately $180.0 million in the 1997 through 1999 accident years. Actuarial assumptions are used to establish initial expected loss ratios employed in the actuarial methodologies from which the reserve for losses and loss expenses is derived. Such loss ratios are periodically adjusted to reflect comparisons with actual claims development, inflation and other considerations. In addition, other large losses in 2001 totaled approximately $93.0 million, including the Sri Lanka airport loss, Tropical Storm Allison, the Petrobras loss in Brazil and the Seattle earthquake. Loss events in 2000, which included an oil refinery loss in Kuwait, several satellite losses and the Singapore Airlines loss, totaled approximately $95.0 million. Barring any significant catastrophes, the Company expects the combined ratio to improve significantly in 2002 due to business anticipated to be written at higher rates and at improved terms and conditions. In 2000 and 1999, net losses and loss expenses incurred in the segment reflected a recovery of $33.5 million and $100.0 million respectively, under an intercompany stop loss arrangement. The loss and loss expense ratio in 2000 and 1999 would have been 75.1% and 87.1% respectively, had this arrangement not been in place. Included in net losses incurred in 2000 are loss reserve adjustments as discussed previously. Excluding the effects of the inter- 30 company stop loss agreement, the loss ratio was higher in 1999 compared to 2000 due to a higher amount of catastrophe losses and a reserve adjustment of $95.0 million related to the merger with NAC. Catastrophe losses in 1999 included European windstorms, hailstorms in Sydney, tornadoes in Oklahoma and satellite losses totaling approximately $185.0 million. In addition, there was an increase in the loss ratio in 2000 and 1999 in the casualty reinsurance business related primarily to deterioration in premium rates as described above. The underwriting expense ratio decreased in the year ended December 31, 2001 compared to the same period in 2000 primarily due to a reduction in operating expenses related to certain compensation expenses of approximately $7.0 million accrued in previous years. The increase in the underwriting expense ratio in 2000 compared to 1999 is primarily due to lower net earned premiums in 2000 related to the additional stop loss reinsurance costs incurred. Excluding the effect of these costs, the underwriting expense ratio would have been 34.7% and 35.1% for 2000 and 1999, respectively. The Company's casualty business included a minimal element of asbestos and environmental claims on business written prior to 1986. The Company's reserving process includes a supplemental evaluation of claims liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. However, the Company's loss and loss expense reserves for such exposures, net of reinsurance, as of December 31, 2001, 2000 and 1999 is less than 1% of its total reserves. A reconciliation of the Company's gross and net liabilities for such exposures for the three years ending December 31, 2001 is set forth in Item 8, Note 9 to the Consolidated Financial Statements. FINANCIAL PRODUCTS AND SERVICES OPERATIONS The following table summarizes the underwriting profit for this segment (U.S. dollars in thousands):
% CHANGE % CHANGE GENERAL: 2001 01 VS 00 2000 00 VS 99 1999 -------------------------------------------------------- Net premiums earned ............................. $ 46,806 97.4% $23,715 11.6% $21,253 Fee income and other ............................ 32,286 102.8% 15,924 (40.9)% 26,924 Losses and loss expenses ........................ 19,491 NM 6,116 14.1% 5,361 Acquisition costs ............................... 3,730 NM 1,323 (37.2)% 2,108 Operating expenses .............................. 42,404 41.5% 29,969 79.8% 16,670 -------------------------------------------------------- Underwriting profit ............................. $ 13,467 NM $ 2,231 (90.7)% $24,038 ======================================================== Net unrealized losses on credit default swaps ... $(41,552) NM -- NM -- ========================================================
Net premiums earned in 2001 increased compared to 2000 due to significantly greater net premiums written in 2001 in the financial guaranty business. This translated into an increase in net premiums earned of approximately $8.8 million as such premiums are earned over a relatively long time period. In 2001, financial guaranty business included primary and secondary municipal portfolios, asset-backed securities, structured finance transactions and reinsurance assumed. In 2000, most of the business was treaty business assumed from one financial guaranty company. Net premiums earned in 2001 also included weather related risk management transactions. The increase in net premiums earned in 2001 also included approximately $9.8 million of installment premiums from credit default swaps The increase in fee income for 2001 related to trading gains and the change in the fair value of weather risk management products, reflecting the continued growth in this business. An analysis of the Company's risk management, controls and methodologies is provided within Item 7A, "Quantitative and Qualitative Disclosure of Market Risk." The vast majority of financial guaranty coverage that is written in swap form pertains to tranches of collateralized debt obligations and asset backed securities, particularly the higher rated tranches with 91% covering A to AAA 31 tranches. As at December 31, 2001, the financial guaranty operations executed credit default swaps with a par insured of $7.9 billion. Since most of the transactions tend to be unique and there is no traded market or any intention to sell such exposures, the Company marks such transactions to market by modeling its exposures and creating indices by using proxies of the spreads on similar categories of exposures. In the third and fourth quarters of 2001, spreads widened considerably causing a mark to market net unrealized loss of $41.6 million, included in net realized and unrealized gains and losses on derivative instruments. Credit downgrades or upgrades are included in the calculation of fair value. The model requires significant judgments to be made by management and is sensitive to changes in market conditions, particularly credit spreads. The following table presents the underwriting ratios for the financial products and services segment: 2001 2000 1999 ------------------------------ Loss and loss expense ratio .............. 41.6% 25.8% 25.2% Underwriting expense ratio ............... 98.6% 131.9% 88.4% ------------------------------ Combined ratio ........................... 140.2% 157.7% 113.6% ============================== The Company's financial guaranty operations write business with an expected loss ratio of approximately 25%. The increase in the loss ratio in 2001 related to a loss on a weather related risk management contract. The corresponding hedge of this contract realized a weather related derivative gain that is recorded in fee income and other. In 2001, there were no credit events that resulted in incurred losses for credit default swaps in this segment. The underwriting expense ratio decreased due to the increase in net premiums earned as a result of the change in presentation noted above. The high expense ratio reflects operating expenses incurred in the generation of fee income and other that is not included in the ratio calculation. In 2002, the Company expects to begin underwriting business-owned life insurance and funding agreements as well as issuing municipal guaranteed investment contracts as part of the Company's strategy to expand its life business. INVESTMENT ACTIVITIES The following table illustrates the change in net investment income and net realized gains and losses for each of the three years ended December 31, 2001 (U.S. dollars in thousands):
% CHANGE % CHANGE 2001 01 VS 00 2000 00 VS 99 1999 ------------------------------------------------------ Net investment income ................................ $562,606 3.7% $542,500 3.3% $525,318 Net realized (losses) gains on investments ........... $(93,237) NM $ 45,090 NM $ 66,800 Net realized and unrealized gains on investment derivative instruments(1) ......................... $ 14,638 NM $ 5,481 NM $ 27,556 Annualized effective yield ........................... 5.09% -- 5.99% -- 5.85%
(1) Excludes unrealized losses from changes in fair value of credit default swaps, discussed in the insurance operations excluding Lloyd's syndicates and financial products and services segments. For a summary of realized and unrealized gains and losses on derivative instruments and weather risk management products, see Item 8, Note 14 to the Consolidated Financial Statements. External investment professionals manage the Company's portfolio under the direction of the Company's management in accordance with detailed investment guidelines provided by the Company. Net investment income increased in the year ended December 31, 2001 compared to 2000 due primarily to a higher investment base in 2001. The investment base in 2001 included the receipt of net funds of $1.1 billion related to new debt issued by the Company during the second and third quarters of 2001. As previously noted, the 32 Company also acquired the net assets of Winterthur International from July 1, 2001, increasing the Company's investment assets by $1.4 billion. In addition, in November 2001, the Company issued 9.2 million shares for net proceeds of $787.7 million. The effect of the higher investment base was offset by decreases in the general interest rate levels as a result of the lowering of rates by the Federal Reserve Bank through 2001. Investment income is not expected to increase significantly in 2002 from the increased premium flows, due to payments expected to be made with respect to the September 11 event and to the continued low level of investment rates. See further discussion in " - Financial Condition and Liquidity". Assets related to deposit liabilities are included in investments available for sale. Interest earned on deposit liability assets is reduced by the investment expense related to the accretion of deposit liabilities. See further discussion in Item 8, Note 6 and Note 11 to the Consolidated Financial Statements. The investment base for 2000 declined as compared to 1999 as a result of claims payments, the repurchase of the Company's shares and the reallocation of assets to other strategic investments. The balance at December 31, 2000 included the reinvestment of investment income and realized gains, and the receipt of assets related to the loss portfolio transfers. These receipts were also offset by the transfer of assets to limited partnerships and affiliate investments. However, investment yields were higher in 2000 compared to 1999, which together with additional income derived from the asset accumulation business, resulted in higher net investment income. Net realized losses on investments in 2001 included losses related to a write-down of certain of the Company's fixed income and equity securities available for sale of $66.4 million and certain other investments of $49.1 million, in circumstances where the Company believed there was an other than temporary decline in the value of those investments. To determine whether an investment has experienced an other than temporary decline, the Company applies the methodology as described in Item 8, Note 2(f) to the Consolidated Financial Statements. As at December 31, 2001 and 2000, total investments available for sale and cash, net of the payable for investments purchased, were $13.0 billion and $9.1 billion, respectively. Net realized gains in 2000 include a $54.1 million gain on the sale of the Company's investment in FSA Holdings, Inc. However, offsetting this gain, the Company incurred realized capital losses of approximately $66.2 million in certain other investments where the Company determined there to be an other than temporary decline in value of such investments. Net realized investment gains in 1999 reflected the strong performance of the equity market. However, 1999 equity gains were offset by declining fixed income markets. Net realized and unrealized gains on investment derivatives result from the Company's investment strategy to economically hedge against interest and foreign exchange risk within the investment portfolio. See Item 7A. "Quantitative and Qualitative Disclosure of Market Risk," and " - Financial Condition and Liquidity" for a more detailed analysis. OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses of the Company for each of the three years ended December 31, 2001 (U.S. dollars in thousands):
% CHANGE % CHANGE 2001 01 VS 00 2000 00 VS 99 1999 ------------------------------------------------------ Equity in net income of investment affiliates ......... $ 80,580 15.1% $ 70,032 59.7% $ 43,865 Equity in net (loss) income of insurance affiliates ... (5,300) NM 4,323 NM (2,958) Other foreign exchange gains .......................... -- NM 55,159 NM -- Amortization of intangible assets ..................... 58,569 NM 58,597 19.2% 49,141 Corporate operating expenses .......................... 92,355 49.1% 61,935 (30.4)% 89,037 Interest expense ...................................... 65,350 103.3% 32,147 (14.0)% 37,378 Minority interest ..................................... 2,113 93.3% 1,093 NM 220 Income tax ............................................ (189,914) NM (56,356) 42.4% (39,570)
33 Equity in net income of investment affiliates includes returns from the Company's investments in closed-end investment funds. The increase in 2001 compared to 2000 and 2000 compared to 1999 is primarily due to increased returns and additional investment in these funds. Equity in net income of insurance affiliates included a loss attributable to the Company's share of the loss in Le Mans Re, mainly related to the September 11 event in 2001, and in Annuity & Life Re. This loss was partially offset by income related to the Company's share of income from FSA International. 1999 included a loss of $3.6 million related to Arch Capital (formerly Risk Capital), which was sold in 2000. Other foreign exchange gains in 2000 related to the revaluation of a deposit liability denominated in U.K. sterling. The exchange rate movement on the assets matching this deposit liability was included in accumulated other comprehensive loss as those assets are designated as available for sale, and in net realized gains on sales of investments. Effective January 1, 2001, the Company reorganized its corporate and operational structure for U.K. sterling asset accumulation business such that exchange translation adjustments of this nature were largely matched against corresponding investment portfolio movements with minimal exchange rate effect on net income. Amortization expense did not change significantly in 2001 from 2000. The increase in the amortization of intangible assets in 2000 compared to 1999 primarily related to a full year's charge for ECS and XL Specialty acquired in the second quarter of 1999. In 2002, following the adoption of Financial Accounting Standard 142, "Goodwill and Other Intangible Assets," goodwill and intangible assets with indefinite lives will not be amortized. The Company has commenced an initial assessment of the effect of the adoption of FAS 142 for goodwill, excluding Winterthur International, and will continue this assessment in accordance with the standard. Amortization expense may decrease in 2002 and future periods, however the assessment of any required impairment charge under the new standard has not yet been completed. See Item 8, Note 2(t) to the Consolidated Financial Statements for further discussion. Corporate operating expenses in 2001 included a charge of $14.0 million related to Winterthur International integration costs. Corporate operating expenses in 2000 included $5.7 million relating to charges for employee severance and other costs relating to the realignment of Company's operations. 1999 included $45.3 million of charges related to the merger with NAC. Excluding these charges, the net increase in corporate operating expenses in each of the years presented is due to the increase in the corporate infrastructure necessary to support the growing worldwide operations of the Company. The increase in interest expense in 2001 over 2000 reflects the effect of $1.1 billion of new debt raised by the Company in the second and third quarters of 2001. The Company raised a further $600.0 million in Guaranteed Senior Notes in January 2002. $350.0 million of the amount raised was used to pay down outstanding revolving credit in February 2002 that would have expired in June 2002. Interest expense is expected to increase in 2002 as a result of a full year's charge for this incremental debt. The continuing existence of the debt at existing interest rates is dependent upon the Company's continued compliance with its debt covenants. For further discussion see the Company's financing structure as outlined in "-Financial Condition and Liquidity." Decreases in interest expense in 2000 compared to 1999 reflect a reduction in debt carried by the Company through 2000 compared to 1999. The Company extinguished convertible debt assumed in connection with the NAC merger in 1999. In addition, the Company pooled capital with its existing operations as a result of acquisitions in the U.S. in 1999, which facilitated repayment of debt in the third quarter of 1999. This decrease was partially offset by interest expense related to interim borrowings used to finance the repurchase of shares in the year ended December 31, 2000. The change in the Company's income taxes principally reflects the effects of losses arising from the September 11 event and the decline in the profitability of the U.S. operations for each year. Deterioration of the casualty book in 2001, 2000 and 1999 resulted in pre-tax net losses for U.S. operations, generating an income tax benefit for both years. The deferral of tax losses is evaluated based upon the future profitability of the Company's taxable entities and under current projections, the Company anticipates using this asset by 2007. The Company's net deferred tax asset 34 at December 31, 2001 is $419.2 million, which consists principally of net operating losses generated by subsidiaries in the U.S. and U.K. Should the taxable income of these entities fall below expectations, a further valuation allowance may have to be established which could be significant. In addition, if any further losses are generated by these entities, these losses may not be tax effected. See Item 8, Note 21 to the Consolidated Financial Statements. FINANCIAL CONDITION AND LIQUIDITY As a holding company, the Company's assets consist primarily of its investments in subsidiaries and the Company's future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries the Company operates in, including, among others, Bermuda, the United States, Ireland, Switzerland and the United Kingdom, and those of the Society of Lloyd's. No assurance can be given that the Company or its subsidiaries will be permitted to pay dividends in the future. The Company's ability to underwrite business is largely dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent agencies. The Company regularly provides financial information to these agencies to both maintain and enhance existing ratings. The Company's shareholders' equity at December 31, 2001 was $5.4 billion, of which $2.3 billion was retained earnings. Shareholders' equity included the issue of 9.2 million ordinary shares for net proceeds of $787.7 million during the year ended December 31, 2001 to support capital requirements following the September 11 event. These shares were issued under the Company's $1.5 billion universal shelf registration statement filed with the SEC in November 2001. Subsequently, this shelf was replaced by a substantially identical shelf. The Company's balance sheet changed significantly since December 31, 2000. The assets and liabilities increased as a result of the purchase of Winterthur International and the effects of the September 11 event. The purchase of Winterthur International increased assets by $4.8 billion and liabilities by $4.6 billion at July 1, 2001. The September 11 event resulted in an increase in loss reserves and reinsurance recoverables of $1.8 billion and $1.1 billion, respectively. The Company's exposure to the September 11 event from Winterthur International is protected through a loss reserve seasoning mechanism. Both loss reserves and reinsurance recoverables increased by $321.0 million. See Item 8, Notes 4 and 5 to the Consolidated Financial Statements. The Company establishes reserves to provide for estimated claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are calculated using actuarial and other reserving techniques to project the estimated ultimate net liability for losses and loss expenses. The Company's reserving practices and the establishment of any particular reserve reflect management's judgment concerning sound financial practice and does not represent any admission of liability with respect to any claims made against the Company's subsidiaries. No assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. The establishment of unpaid losses and loss expense reserves also includes reinsurance recoveries. Due to the size of the gross losses arising from the September 11 event and the related reinsurance recoveries and the magnitude of the September 11 event on the reinsurance industry, the Company, in addition to its normal review process, further analyzed the recoverability of these assets. Approximately 96% of the relevant reinsurers currently fall into Standard & Poor's financial strength rating categories or equivalent of A or better, with approximately 65% rated AA or better. Accordingly, the Company believes that substantially all insurance will be recoverable. An allowance has been established for estimated uncollectible recoverables. See Item 8, Note 10 for further information on the Company's reinsurance. As at December 31, 2001, currency translation adjustments were $37.3 million. This is shown as part of accumulated other comprehensive loss and primarily related to unrealized losses on foreign currency exchange rate movements at Winterthur International where some operations have a functional currency that is not the U.S. dollar. 35 Inflation can have an effect on the Company in that inflationary factors can increase damage awards and potentially result in larger claims. The Company's underwriting philosophy is to adjust premiums in response to inflation, although this may not always be possible due to competitive pressure. Inflationary factors are considered in determining the premium level on any multi-year policies at the time contracts are written. The Company's liquidity depends on operating, investing and financing cash flows, discussed below. Certain business written by the Company has loss experience generally characterized as having low frequency and high severity. This may result in volatility in both the Company's results and operational cash flows. Operational cash flows during 2001 improved compared to 2000 primarily due to growth in premiums written, including life premiums. Cash flow has not yet been negatively affected by the September 11 event as the majority of losses are in unpaid loss and loss reserves at December 31, 2001. Settlement of these claims is expected to occur mostly throughout 2002. Due to their nature, recoveries are expected to lag. This cash outflow is expected to be partially offset by an anticipated increased flow of premiums in 2002. The Company has reviewed the anticipated cash flow from the September 11 event and believes it has sufficient liquidity to meet its obligations due to the additional capital raised and debt issued in 2001. In 2001, 2000 and 1999, the total amount of net losses paid by the Company was $1.8 billion, $1.7 billion and, $1.1 billion respectively. The increase in 2001 compared to 2000 is due to growth in operations and the acquisition of Winterthur International. The increase in 2000 compared to 1999 is due to an increase in the amount of net premiums written by the Company, together with losses paid for the settlement of previously established reserves, particularly catastrophe losses. The higher amount of paid claims in 2000 compared to 1999 contributed to lower operational cash flow in 2000 as compared to 1999. In 2001, the Company made the following significant investments: (1) On July 25, 2001, the Company completed the acquisition of Winterthur International. This was an all-cash transaction preliminarily valued at approximately $405.6 million at that date. The preliminary purchase price of the acquisition was based on audited financial statements as at December 31, 2000 for the business acquired, and is subject to adjustment based on the audited June 30, 2001 financial statements of Winterthur International. These audited financial statements are not expected to be completed until later in 2002. The Company does not anticipate any significant income statement impact related to the completion of these audited statements. See Item 8, Note 5 to the Consolidated Financial Statements for further information. (2) The Company acquired The London Assurance Company of America, Inc., a shell company licensed in forty five U.S. states, for the purpose of obtaining licenses for the financial guaranty operations of the Company. The cost of the acquisition less cash acquired was $16.5 million. (3) The Company invested a further $185.1 million in affiliates, the majority of which related to investment fund affiliates, and a further $109.0 million in limited partnerships and other investments. The Company has had several share repurchase programs in the past as part of its capital management strategy. On January 9, 2000, the Board of Directors authorized a program for the repurchase of shares up to $500.0 million. The repurchase of shares was announced in conjunction with a small dividend increase of $0.04 per share per annum. Under this plan, the Company has purchased 6.6 million shares at an aggregate cost of $364.6 million or an average cost of $55.24 per share. The Company has $135.4 million remaining in its share repurchase authorization. As at December 31, 2001, the Company had bank, letter of credit and loan facilities available from a variety of sources, including commercial banks, totaling $4.4 billion of which $1.6 billion in debt was outstanding. In addition, $2.0 billion of letters of credit were outstanding as at December 31, 2001, 5% of which were collateralized by the Company's investment portfolio supporting U.S. non-admitted business and the Company's Lloyd's capital requirements. 36 During 2001 and 2000, borrowings under these facilities were $1.2 billion and $250.3 million, respectively, and repayments under the facilities were $50.0 million and $211.0 million, respectively. Borrowings in 2001 were used to repurchase $66.4 million of the Company's shares and for general corporate purposes. The borrowings in 2000 were used as interim funding of share buybacks and were repaid using funds from the equity portfolio. The total pre-tax interest expense on notes and debt outstanding during the years ended December 31, 2001 and 2000 was $65.4 million and $32.1 million, respectively. Associated with the Company's bank and loan commitments are various loan covenants with which the Company was in compliance throughout the year ended December 31, 2001. The Company amended its facilities following the September 11 event in order to modify certain covenants going forward, although as stated above, the Company was in compliance throughout 2001. These facilities contain various cross default provisions and covenants, including a minimum rating requirement, as further described below under "Cross Defaults and Other Provisions In Debt Documents". In connection with the weather risk management business, the Company issues guaranties to counterparties in most of its transactions. As of December 31, 2001, a majority of the Company's outstanding weather contracts were due to mature on or before December 31, 2002, at which time the Company may terminate any associated guaranties or continue to enter into new transactions which would extend the obligations under such associated guaranties. The following tables present the Company's indebtedness under outstanding securities and lenders' commitments as at December 31, 2001 (U.S. dollars in thousands):
PAYMENTS DUE BY PERIOD ---------------------------------------------- YEAR OF LESS THAN 1 TO 3 4 TO 5 AFTER 6 NOTES PAYABLE AND DEBT COMMITMENT IN USE EXPIRY 1 YEAR YEARS YEARS YEARS - ---------------------- ----------------------------------------------------------------------------------- 364-day revolver ............ $ 500,000 $ -- 2002 $ -- $ -- $ -- $ -- 5-year revolver (1) ......... 250,000 250,000 2002 250,000 -- -- -- 5-year revolver (1) ......... 100,000 100,000 2002 100,000 -- -- -- 7.15% Senior Notes .......... 100,000 99,970 2005 -- -- 100,000 -- 6.58% Guaranteed Senior Notes ............. 255,000 255,000 2011 -- -- -- 255,000 Zero Coupon Convertible Debentures (2) ........... 609,692 609,692 2021 -- -- -- 1,010,833 Liquid Yield Option Notes(TM)2) .............. 290,147 290,147 2021 -- -- -- 508,842 Other operating debt ........ 68 68 2002 68 -- -- -- ----------------------------------------------------------------------------------- Total $2,104,907 $1,604,877 $350,068 $ -- $100,000 $1,774,675 ====================================================================================
(1) These revolvers were repaid in full on February 19, 2002 and have been terminated. (2) "Commitment" and "In Use" data represent December 31, 2001 accreted values. "After 6 years" data represents ultimate redemption values for 2021. The convertibles may be "put" or converted by the bondholders at various times prior to the 2021 redemption date. The Company may also choose to "call" the debt from May and September 2004 onwards.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD -------------------------------------------- OTHER COMMERCIAL YEAR OF LESS THAN 1 TO 3 4 TO 5 AFTER 6 COMMITMENTS COMMITMENT IN USE EXPIRY 1 YEAR YEARS YEARS YEARS - ------------------------------------------------------------------------------------------------------------------ Letter of Credit Facilities (1) ... $2,274,000 $2,029,000 2002 $2,274,000 -- -- --
(1) The Company entered into a new secured letter of credit facility in January 2002. The $150.0 million facility is unutilized and will expire at the end of 2002. 37 The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks and, in the case of the Winterthur International operations, from the previous owner of those operations. These facilities are utilized to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd's. All of the commercial facilities are scheduled for renewal during 2002, and the Winterthur International arrangement will also terminate during 2002. In addition to letters of credit, the Company has established insurance trusts in the U.S. that provide cedents with statutory relief required under state insurance regulation in the U.S. It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to the availability of credit from banks utilized by the Company. In the event that such credit support is insufficient, the Company could be required to provide alternative security to cedents. This could take the form of additional insurance trusts supported by the Company's investment portfolio or funds withheld using the Company's cash resources. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by the Company and the loss experience of such business. In January 2002, the Company issued $600.0 million par value 6.5% Guaranteed Senior Notes due January 2012 under the Company's universal shelf registration statement referred to above. The Company has approximately $900.0 million remaining in capacity under this shelf registration statement. The issue price was $99.469 with gross proceeds of $596.8 million. The notes were issued through a finance vehicle referred to under "Special Purpose Vehicles and Other Off-Balance Sheet Arrangements" below and were guaranteed by XL Capital Ltd. CONVERTIBLE DEBT SECURITIES In 2001, the Company consummated two convertible debt securities as further described below and in the indentures relating to such bonds. These bonds carry a zero coupon, meaning that, under normal circumstances, the Company is not required to pay cash interest at any time during the life of the bonds or at maturity. In May 2001, the Company issued $1,010.8 million principal amount at maturity (subject to adjustment in the event there is an upward interest adjustment) of Zero Coupon Convertible Debentures ("CARZ") at $593.57 per bond and, unless converted or repaid before their due date of May 2021, they will be repaid in May 2021 at $1,000 per bond, at a total cost of $1.01 billion. The accretion rate is 2.625% per annum on a semi-annual basis or 2.6422% per annum on an annual basis. In September 2001, the Company also issued $508.8 million principal amount at maturity (subject to adjustment in the event there is an upward interest adjustment) of Liquid Yield Option Notes(TM) ("LYONs") at an initial price of $565.01 per bond. The LYONs will also be repaid at $1,000 each, unless converted or repaid before their due date of September 2021, at a total cost of $508.8 million. The accretion rate on the LYONs is 2.875% per annum on a semi-annual basis or 2.89566% per annum on an annual basis. Although both the CARZ and LYONs are due to be repaid in 2021, there are several features that may result in the bonds being repaid or converted into the Company's Class A Ordinary Shares before the redemption date. As these features include market-driven features and options available to the Company and bondholders, it is not possible to determine if the bonds will remain outstanding until their scheduled maturity in 2021. Each of the CARZ and LYONs provide the bondholders the right to require the Company to repurchase the bonds on predetermined dates ("put" dates) at predetermined values as set forth in the relevant indenture. The put dates for the CARZ occur on May 23 of 2002, 2004, 2006, 2008, 2011 and 2016. The put dates for the LYONs occur on September 7 of 2002, 2003, 2004, 2006, 2008, 2011 and 2016. The Company may, at its option, pay the repurchase price in cash or Class A ordinary shares or a combination thereof. In addition, each of the CARZ and LYONs provide for a contingent conversion feature that gives the bondholders the right to convert the bonds into the Company's shares at other times during the life of the bonds should the market price of the Company's shares trade at certain levels. Accordingly, if the Company's share price is at least 110% of the accreted conversion price for at least twenty of the thirty days during the relevant conversion period, the bondholders would have the right to convert the bonds into Class A Ordinary Shares. If converted for shares, each CARZ would be converted into 5.9467 shares and each holder of a LYONs would receive 5.277 shares. The 38 accreted values would be determined by applying the accretion rate to the initial issue price. In the example of CARZ, the accreted price on May 23, 2002 will be $609.25 determined by adding one year's accretion of 2.6422% per annum on an annual basis to the original issue price of $593.57. The holders of each of the CARZ and LYONs also have the right to convert the bonds for shares in the event that the trading price of the bonds for a predetermined period falls below 95% of the value of the equivalent number of shares, provided however, if the shares are trading at a predetermined premium to the accreted price of the bonds, holders may receive cash, shares or a combination thereof in lieu of shares upon conversion. These bonds also provide for interest rates to be adjusted in the event that the Company's stock price falls below levels specified in the relevant indenture relative to the conversion price. In addition, in the event that the credit ratings assigned to the bonds by Standard & Poor's fall below the specified level of BBB+, the bonds would be convertible into shares at 5.9467 shares per CARZ and 5.277 per LYON. The rating assigned to the bonds at the time of issue was A+. Some corporate transactions, such as a change of control of the Company, would give the bondholders the right to require the Company to repurchase the bonds at the accreted value of the bonds at that time. The bonds become immediately due if an event of default occurs and 25% or more of the bondholders demand repayment of the accreted value at the time of such event. Such an event of default would include failure to pay amounts due on the notes, an event of default occurring under the Company's other credit facilities, or certain other events such as bankruptcy or insolvency of the Company. A further description of the events of default are contained in the indentures and consequences to the Company are described under "Cross Default and Other Provisions in Debt Documents". The bonds are also callable as the Company has the right to redeem the bonds for cash, in full or in part, at their accreted value at any time after May 23, 2004, in the case of the CARZ, and September 7, 2004, in the case of the LYONs. The puts and the interest rate adjustment features embedded in the CARZ and LYONs are considered derivatives and are subject to fair value. There is currently minimal value ascribed to the puts, as the contingent events of these features are considered unlikely to occur or to the interest rate adjustment feature due to the current trading value of the bonds. Due to the contingent nature of the conversion features of these debt securities, there is no impact on fully diluted earnings (loss) per share at this time. CROSS-DEFAULT AND OTHER PROVISIONS IN DEBT DOCUMENTS The following describes certain terms of the documents referred to below. All documents referred to below have been filed with the SEC and should be referred to for an assessment of the complete contractual obligations of the Company. In general, all of the Company's bank facilities, indentures and other documents relating to the Company's outstanding indebtedness (collectively, the "Company's Debt Documents"), as described above, contain cross default provisions to each other and the Company's Debt Documents (other than the LYONs, CARZ and 6.5% Guaranteed Senior Notes indentures) contain affirmative covenants. These covenants provide for, among other things, minimum required ratings of the Company's insurance and reinsurance operating subsidiaries (other than its AAA financial guaranty companies) and the level of secured indebtedness in the future. In addition, generally each of the Company's Debt Documents provide for an event of default in the event of a change of control of the Company or some events involving bankruptcy, insolvency or reorganization of the Company. The Company's credit facilities and the 6.58% Guaranteed Senior Notes also contain minimum consolidated net worth covenants. Under the Company's 364-day facility, five-year credit facilities and ten-year private placement notes described above, in the event that the Company fails to maintain a claims paying rating of at least A from A.M. Best or the Company's insurance and reinsurance rated operating subsidiaries (other than its AAA financial guaranty companies) fail to maintain a rating of at least A from S&P, an event of default would occur. 39 Each of the LYONs, CARZ and 6.5% Guaranteed Senior Notes indentures contains a cross default provision. In general, in the event that the Company defaults in the payment of indebtedness in the amount of $50.0 million or more, an event of default would be triggered under both the LYONs and 6.5% Guaranteed Senior Notes indentures. Under the CARZ indenture, in the event that the Company defaults in the payment of indebtedness in the amount of $100 million or more, an event of default would be triggered. Given that all of the Company's Debt Documents contain cross default provisions, this may result in all holders declaring such debt due and payable and an acceleration of all debt due under those documents. If this were to occur, the Company may not have funds sufficient at that time to repay any or all of such indebtedness. In addition, the Company's unsecured Lloyd's letter of credit facility provides that, in the event that the Company's insurance and reinsurance rated operating subsidiaries fall below A (as generally measured by the lower of the financial strength rating from A.M. Best or S&P at any time), the facility would then be required to be fully secured by the Company, at which time the Company would be required to either (i) provide an amount in cash to cover an amount equal to the aggregate letters of credit outstanding at that time or (ii) deposit assets in trust securing 105% of the aggregate letters of credit outstanding at that time. If this were to occur, the Company may not be able to provide the collateral required in order to maintain this facility. SPECIAL PURPOSE VEHICLES AND OTHER OFF-BALANCE SHEET ARRANGEMENTS The Company utilizes special purpose vehicles to a limited extent both indirectly and directly in the ordinary course of the Company's business. At the transactional level, the Company provides various forms of credit enhancement including financial guaranty insurance and reinsurance of structured transactions backed by pools of assets of specified types, municipal obligations supported by the issuers' ability to charge fees for specified services or projects, and corporate risk based obligations including essential infrastructure projects and obligations backed by receivables from future sales of commodities and other specified services. The obligations related to these transactions are often securitized through off-balance sheet vehicles. In synthetic transactions, the Company guarantees payment obligations of counterparties, including special purpose vehicles, under credit default swaps referencing asset portfolios. The Company only provides financial guaranty insurance, or indirectly reinsurance, of these vehicles for fixed premiums at market rates but does not hold any equity positions or subordinated debt in these off-balance sheet arrangements. Accordingly, these vehicles are not consolidated. The Company has a 38% direct investment in an asset-backed commercial paper company that invests funds provided through a commercial paper and a Euro Medium Term Note program. The assets of this company are guaranteed by an unrelated third party. The Company has a further indirect investment that does not provide any additional control. The Company accounts for this investment on an equity basis. The Company has loaned a $30.0 million note to this investment company. The investment company has assets and liabilities of $950.0 million at December 31, 2001 and generated income net of start-up costs totaling $1.2 million. The Company believes its investment in this company and note receivable are realizable The Company created XL Capital Finance (Europe) plc to facilitate the January 2002 issue of 6.5% Guaranteed Senior Notes referred to above. This finance vehicle is wholly-owned and controlled by the Company and, therefore, will be consolidated in the Company's consolidated financial statements. RECENT ACCOUNTING PRONOUNCEMENTS See Item 8, Note 2(t) to the Consolidated Financial Statements for a discussion on recent accounting pronouncements. CURRENT OUTLOOK Prior to the September 11 event, premium rates in 2001 across the majority of the Company's property and casualty lines of business had begun to increase after several years of intense competition. Since the September 11 event, the largest ever man-made insured loss in recent history, premium rates, terms and conditions have significantly improved. The favorable changes have also had the effect of attracting new entrants to the industry, which to 40 date has only affected the Company to a limited extent. The Company believes that, given its global presence with the acquisition of Winterthur International, it is well positioned to participate in a strong recovery in the property and casualty insurance and reinsurance markets. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK The Company is exposed to potential loss from various market risks, including changes in interest rates, foreign currency exchange rates, equity prices and commodity values, as it relates to the Company's participation in the weather risk management market. The Company manages its market risks based on guidelines established by senior management. The Company enters into derivatives and other financial instruments for trading and risk management purposes. These derivative instruments are carried at fair market value with the resulting gains and losses recognized in income in the period in which they occur. This risk management discussion and the estimated amounts generated from the sensitivity and value-at-risk ("VaR") analyses presented in this document are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to, among other things, actual developments in the global financial markets. The results of analysis used by the Company to assess and mitigate risk should not be considered projections of future events of losses. See generally "Cautionary Note Regarding Forward-Looking Statements." COMMODITY RISK The Company offers weather risk management products in insurance or derivative form to end-users, while hedging the risks in the over-the-counter and exchange traded derivatives markets. In addition to entering into transactions with end-users, the Company also maintains a weather derivatives trading portfolio. As of the year ended December 31, 2001, a majority of the Company's outstanding weather contracts were due to mature on or before December 31, 2002. The fair values of these transactions are determined using quantitative analysis. The models used to determine these fair values are consistent with the models used to estimate the Company's VaR exposure to weather risk. MARKET RISK Market risk for the Company's commodity portfolio relates to changes in underlying weather conditions (i.e., changes in climatic variables such as temperature and precipitation). The Company has underwritten risks in Asia, Europe, and North America, with its primary market risk related to temperature changes within the United States. The Company manages its weather portfolio by employing a variety of strategies. These strategies include geographical and directional diversification of risk exposures, direct hedging within the capital markets, and reinsurance. Portfolio risk management is undertaken on a Company-wide basis, rather than on an individual product basis, to maintain a portfolio that the Company believes is well diversified and which remains within the aggregate risk tolerance as established by the Company's senior management. VALUE-AT-RISK A statistical technique known as VaR is one of the tools used by management to measure, monitor and review the market risk exposures of the Company's weather risk portfolio. VaR, as it relates to commodity risk, is calculated on a daily basis by the Company's risk management professionals and distributed daily to the appropriate members of management. The Company estimates VaR based on the historical simulation of each of the seasonal books into which weather transactions are segregated. The Company's high, low and average aggregate seasonal VaR amounts during 2001 were $48.6 million, $4.7 million and $30.1 million, respectively, calculated at a 99% confidence level. The Company calculates its aggregate VaR by summing the VaR amounts for each of its seasonal portfolio. Since VaR statistics are estimates based on historical position and market data, VaR should not be viewed as an absolute, predictive gauge of future financial performance or as a way for the Company to predict risk. There can be no assurance that the Company's actual future losses will not exceed its VaR amounts. 41 CREDIT RISK The Company is exposed to credit risk, or the risk that counterparties to weather transactions will fail to perform their contractual payment or other obligations leading to possible losses. In order to control its risk exposures, the Company has implemented a credit risk control framework centered on a management credit committee, credit policies and credit limits. All credit-sensitive transactions are reviewed and approved by the Company's risk management personnel and/or management credit committee and exposures are accommodated under authorized credit limits before the Company enters into weather derivative transactions. To address counterparty risk concerns and to support credit exposures in certain cases, the Company may require counterparties to provide a guaranty or a letter of credit or to post margin or collateral. The Company monitors its credit exposures on a continual basis to ensure adherence to all policies and limits. The following table summarizes the movement in the fair value of contracts outstanding during the year ended December, 31, 2001 (U.S. dollars in thousands): Fair value of contacts outstanding, beginning of the year ..... $ -- Contracts realized or otherwise settled ....................... (22,626) Fair value of new contracts ................................... 38,072 Other changes in fair value ................................... (16,550) -------- Fair value of contracts outstanding, end of year .............. $ (1,104) ======== The following table summarizes the maturity of contracts outstanding at December 31, 2001 (U.S. dollars in thousands):
GREATER LESS THAN 1 1-3 4-5 THAN 5 TOTAL FAIR SOURCE OF FAIR VALUE YEAR YEARS YEARS YEARS VALUE ---------------------------------------------------------- Prices actively quoted ................................ $ 39 $ -- $ -- $ -- $ 39 Prices based on models and other valuation methods .... (2,369) 1,226 -- -- (1,443) ---------------------------------------------------------- Total fair value of contracts outstanding ............. $(2,330) $1,226 $ -- $ -- $(1,104) ==========================================================
The Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures its market, credit, operational and legal risks. The Company's senior management takes an active role in the risk management process and has developed and implemented policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. Due to the changing nature of the global marketplace, the Company's risk management policies, procedures and methodologies are evolving and are subject to ongoing review and modification. Market, credit, operational, legal and other risks are inherent in the Company's weather risk management business and cannot be wholly eliminated or reduced despite the Company's risk management policies, procedures and methodologies, which are subject to limitations and assumptions. Beginning in 2002, the Company anticipates entering the energy risk management market, particularly in respect of natural gas and electricity, and applying methodologies for determining fair value and VaR generally consistent with those used in relation to its weather based business. OPERATIONAL RISK Operational risk refers generally to the risk of loss resulting from the Company's weather risk trading operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in the Company's operating systems, and inadequacies or breaches in the Company's control procedures and processes. The Company relies on the ability of its employees and systems to process its transactions, because weather transactions may cross multiple markets and involve different currencies. In the event of a breakdown or 42 improper operation of systems or improper action by employees, the Company could suffer, among other things, financial loss, regulatory sanctions, reputation damage or other material adverse consequences. In order to mitigate and control operational risk, the Company has developed and continues to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels. For example, the Company's weather risk management business has implemented procedures that require that all transactions are accurately recorded and properly reflected in the Company's books and records and are confirmed with counterparties at least annually. Critical systems are backed up on a daily basis, and redundancies are built into the systems as deemed appropriate. The Company also uses periodic self-assessments and internal audit reviews as a further check on operational risk. Moreover, trading position valuations are subject to periodic independent review and audit. LEGAL RISK Legal risk, generally, is the risk that a derivative transaction will not be properly documented. Proper documentation is critical to assure not only that a counterparty has the authority to enter into the transaction, but also that derivative transactions are enforceable as negotiated between parties and excluded from preferential transfer provisions in the event of counterparty insolvency. As a result, the Company obtains an executed International Swap Dealers Association, Inc. ("ISDA") Master Agreement or a form of confirmation which incorporates by reference the ISDA Master Agreement and Schedule. The ISDA Master Agreement Schedule adopted and periodically enhanced by the Company incorporates, among other provisions, the following contractual protections: the netting of transactions between the Company and the counterparty; a right of set-off for the Company; a representations and warranties provision; and a customized event of default and termination section (typically based upon credit ratings downgrades identified by the Company's risk management department). Further, legal documentation may be required when the Company enters into a weather derivative transaction with a non-U.S. counterparty. The Company anticipates that further regulation of weather and energy derivative contracts is reasonably likely to occur based upon recent events and failures in the energy market. Based upon the evolving regulatory developments in energy trading, the Company will continue to monitor and enhance its credit, operational and legal procedures and processes to comply with future regulation. INVESTMENT MARKET RISK The Company's investment portfolio consists of fixed income and equity securities, denominated in both U.S. and foreign currencies. Accordingly, earnings will be affected by, among other things, changes in interest rates, equity prices and foreign currency exchange rates. External investment professionals manage the Company's portfolio under the direction of the Company's management in accordance with detailed investment guidelines provided by the Company. These guidelines encompass investments in derivatives. Derivatives can only be utilized for purposes of managing interest rate risk, foreign exchange risk and credit risk, provided the use of such instruments are incorporated in the overall portfolio duration, spread, convexity and other relevant portfolio metrics. The use of derivatives is not permitted to economically leverage the portfolio outside of the stated guidelines. VALUE-AT-RISK VaR is one of the tools used by management to measure potential losses in fair values using historical rates, market movements, credit spreads and default rates to estimate the volatility and correlation of these factors to calculate the maximum loss that could occur over a defined period of time given a certain probability. The VaR of the investment portfolio and all investment related derivatives at December 31, 2001 was approximately $351.0 million and $18.0 million, respectively. VAR METHODOLOGY, ASSUMPTIONS AND LIMITATIONS The Company's investment VaR is computed by an affiliate that uses a technique called "Monte Carlo simulation." The Monte Carlo simulation projects thousands of possible different prices of equity securities, fixed income 43 securities, derivatives and currencies, taking into account the volatility of each security and the historical correlation between security price changes in a one-month forecast horizon. VaR is calculated based on a 95% confidence level and the result is presented as an absolute VaR. INTEREST RATE AND EQUITY PRICE RISK An immediate 100 basis point adverse shift in the treasury yield curve would result in a decrease in total return of 5.0% or $542.0 million on the Company's fixed income portfolio as of December 31, 2001. In evaluating the impact of price changes of the equity portfolio, a 10% change in equity prices would affect total return by approximately $55.0 million at December 31, 2001. The Company has short-term debt and long-term debt outstanding. Interest rates on short-term debt are LIBOR based. Accordingly, any changes in interest rates will affect interest expense. The Company also uses derivative investments to add value to the investment portfolio where market inefficiencies are believed to exist, to equitize cash holdings of equity managers and to adjust the duration of a portfolio of fixed income securities to match the duration of related deposit liabilities. At December 31, 2001, bond and stock index futures outstanding were $695.6 million with underlying investments having a market value of $9.7 billion. Losses of $1.0 million were realized on these contracts for the year ended December 31, 2001. A 10% appreciation or depreciation of these derivative instruments would have resulted in realized gains and realized losses of $82.4 million, respectively. The Company reduces its exposure to these futures through offsetting transactions, including options and forwards. FOREIGN CURRENCY EXCHANGE RISK The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of certain of its foreign currency fixed maturities and equity investments. These contracts are not designated as specific hedges for financial reporting purposes and therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. These contracts generally have maturities of three months or less. In addition, where the Company's investment managers believe potential gains exist in a particular currency, a forward contract may not be entered into. At December 31, 2001, forward foreign exchange contracts with notional principal amounts totaling $45.6 million were outstanding. The fair value of these contracts as at December 31, 2001 was $45.7 million with unrealized gains of $0.1 million. For the year ended December 31, 2001, realized gains of $5.3 million and unrealized gains of $2.3 million were recorded in net realized and unrealized gains and losses on derivative instruments. Based on this value, a 10% appreciation or depreciation of the U.S. dollar as compared to the level of other currencies under contract at December 31, 2001 would have resulted in approximately $23.5 million of unrealized losses and $18.4 million in unrealized gains, respectively. CREDIT RISK The Company is exposed to credit risk in the event of non-performance by the other parties to the forward contracts, however the Company does not anticipate non-performance. The difference between the notional principal amounts and the associated market value is the Company's maximum credit exposure. EMBEDDED DEBT DERIVATIVES The puts and the interest rate adjustment features embedded in the CARZ and LYONs are considered derivatives and are subject to fair value. There is currently minimal fair value ascribed to (i) the puts, as the contingent events of these features are considered unlikely to occur or (ii) the interest rate adjustment feature due to the current trading value of the bonds. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a "safe harbor" for forward-looking statements. Any prospectus, prospectus supplement, the Company's Annual Report to Shareholders, any proxy state- 44 ment, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and the insurance, reinsurance and financial products and services sectors in particular (both as to underwriting and investment matters). Statements which include the words "expect", "intend", "plan", "believe", "project", "anticipate", "will", and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, the following: (i) rate increases and improvements in terms and conditions may not be as large or significant as the Company is currently projecting; (ii) the size of the Company's claims may change due to the preliminary nature of reports and estimates of loss and damage, particularly in relation to the attacks in the United States on September 11, 2001; (iii) the timely and full recoverability of reinsurance placed by the Company with third parties; (iv) the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers may change; (v) the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; (vi) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (vii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (viii) greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than the Company's underwriting, reserving or investment practices anticipate based on historical experience or industry data; (ix) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments and the Company's access to such markets; (x) the potential impact of U.S. solutions to make available insurance coverage for acts of terrorism; (xi) developments in the Enron Corp. bankruptcy proceedings or other developments related to Enron Corp. insofar as they affect property and casualty insurance and reinsurance coverages; (xii) availability of borrowings and letters of credit under the Company's credit facilities; (xiii) changes in regulation or tax laws applicable to the Company and its subsidiaries, brokers or customers; (xiv) acceptance of the Company's products and services, including new products and services; (xv) changes in the availability, cost or quality of reinsurance; (xvi) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (xvii) loss of key personnel; (xviii) the effects of mergers, acquisitions and divestitures, including, without limitation, the Winterthur International acquisition; (xix) changes in rating agency policies or practices; (xx) changes in accounting policies or practices; (xxi) legislative or regulatory developments; (xxii) changes in general economic conditions, including inflation, foreign currency exchange rates and other factors; (xxiii) the effects of business disruption or economic contraction due to terrorism or other hostilities; and (xxiv) the other factors set forth in the Company's other documents on file with the SEC. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES PAGE Consolidated Balance Sheets as at December 31, 2001 and 2000 ................ 46 Consolidated Statements of Income and Comprehensive income for the years ended December 31, 2001, 2000 and 1999 ..................... 47 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 ......................................... 48 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ......................................... 49 Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999 ......................................... 50 45 XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2001 AND 2000 (U.S. dollars in thousands, except share amounts) A S S E T S 2001 2000 ------------------------ Investments: Fixed maturities at fair value (amortized cost: 2001, $10,945,568; 2000, $8,714,196) ........... $10,831,927 $8,605,081 Equity securities, at fair value (cost: 2001, $575,090; 2000, $515,440) ......... 547,805 557,460 Short-term investments, at fair value (amortized cost: 2001, $1,050,015; 2000, $347,147) ............................... 1,050,113 339,007 ------------------------ Total investments available for sale ....... 12,429,845 9,501,548 Investments in affiliates ......................... 1,037,344 792,723 Other investments ................................. 273,528 177,651 ------------------------ Total investments .......................... 13,740,717 10,471,922 Cash and cash equivalents ............................ 1,863,861 930,469 Accrued investment income ............................ 180,305 143,235 Deferred acquisition costs ........................... 394,258 309,268 Prepaid reinsurance premiums ......................... 846,081 391,789 Premiums receivable .................................. 2,182,348 1,119,723 Reinsurance balances receivable ...................... 1,246,106 196,002 Unpaid losses and loss expenses recoverable .......... 5,033,952 1,339,767 Intangible assets (accumulated amortization: 2001, $194,045; 2000, $135,476) ................... 1,616,943 1,591,108 Deferred tax asset, net .............................. 419,222 152,168 Other assets ......................................... 439,282 296,501 ------------ ----------- Total assets ............................... $27,963,075 $16,941,952 =========== =========== L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Liabilities: Unpaid losses and loss expenses ...................... $11,825,680 $5,672,062 Deposit liabilities and policy benefit reserves ...... 2,374,164 1,209,926 Unearned premiums .................................... 2,682,089 1,741,393 Notes payable and debt ............................... 1,604,877 450,032 Reinsurance balances payable ......................... 1,672,122 441,900 Net payable for investments purchased ................ 1,247,027 1,372,476 Other liabilities .................................... 1,071,402 439,433 Minority interest .................................... 48,530 41,062 ------------ ----------- Total liabilities .......................... $22,525,891 $11,368,284 ============ =========== Commitments and Contingencies Shareholders' Equity: Authorized, 999,990,000 Class A ordinary shares, par value $0.01 Issued and outstanding: (2001, 134,734,491; 2000, 125,020,676) ............................. $ 1,347 $ 1,250 Contributed surplus .................................. 3,378,549 2,497,416 Accumulated other comprehensive loss ................. (213,013) (104,712) Deferred compensation ................................ (27,177) (17,727) Retained earnings .................................... 2,297,478 3,197,441 ------------ ----------- Total shareholders' equity ..................... $5,437,184 $5,573,668 ------------ ----------- Total liabilities and shareholders' equity ..... $27,963,075 $16,941,952 ============ =========== See accompanying Notes to Consolidated Financial Statements 46 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. dollars in thousands, except per share amounts)
2001 2000 1999 ------------------------------------ REVENUES: Net premiums earned - general operations ..................... $2,779,927 $2,035,240 $1,750,006 Net premiums earned - life operations ........................ 695,595 -- -- Net investment income ........................................ 562,606 542,500 525,318 Net realized (losses) gains on investments ................... (93,237) 45,090 66,800 Net realized and unrealized (losses) gains on derivative instruments .................................... (12,176) 5,481 27,556 Equity in net income of investment affiliates ................ 80,580 70,032 43,865 Fee income and other ......................................... 43,464 14,793 100,400 ------------------------------------ Total revenues ........................................... 4,056,759 2,713,136 2,513,945 ------------------------------------ EXPENSES: Net losses and loss expenses incurred - general operations ... 2,918,898 1,432,559 1,304,304 Claims and policy benefit reserves - life operations ......... 698,675 -- -- Acquisition costs ............................................ 639,046 485,796 380,980 Operating expenses ........................................... 422,673 316,892 308,083 Exchange losses (gains) ...................................... 12,184 (59,621) (58) Interest expense ............................................. 65,350 32,147 37,378 Amortization of intangible assets ............................ 58,569 58,597 49,141 ------------------------------------ Total expenses ........................................... 4,815,395 2,266,370 2,079,828 ------------------------------------ (Loss) income before minority interest, income tax expense and equity in net income of insurance affiliates .......... (758,636) 446,766 434,117 Minority interest in net income of subsidiary ................ 2,113 1,093 220 Income tax benefit ........................................... (189,914) (56,356) (39,570) Equity in net loss (income) of insurance affiliates .......... 5,300 (4,323) 2,958 ------------------------------------ Net (loss) income ............................................... $ (576,135) $ 506,352 $ 470,509 ------------------------------------ Change in net unrealized appreciation of investments ............ (71,004) (118,321) (211,842) Foreign currency translation adjustments ........................ (37,297) (5,702) (4,032) ------------------------------------ Comprehensive (loss) income ..................................... $ (684,436) $ 382,329 $ 254,635 ==================================== Weighted average ordinary shares and ordinary share equivalents outstanding - basic .............................. 126,676 124,503 127,601 ==================================== Weighted average ordinary shares and ordinary share equivalents outstanding - diluted ............................ 126,676 125,697 130,304 ==================================== (Loss) earnings per ordinary share and ordinary share equivalent - basic ........................................... $ (4.55) $ 4.07 $ 3.69 ==================================== (Loss) earnings per ordinary share and ordinary share equivalent - diluted ......................................... $ (4.55) $ 4.03 $ 3.62 ====================================
See accompanying Notes to Consolidated Financial Statements 47 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. dollars in thousands) 2001 2000 1999 ------------------------------------ ORDINARY SHARES: Balance - beginning of year ............ $ 1,250 $ 1,278 $ 1,287 Issue of shares ........................ 94 -- 1 Exercise of stock options .............. 18 23 5 Repurchase of shares ................... (15) (51) (15) ------------------------------------ Balance - end of year .............. 1,347 1,250 1,278 ------------------------------------ CONTRIBUTED SURPLUS: Balance - beginning of year ............ 2,497,416 2,520,136 2,508,062 Issue of shares ........................ 808,916 2,652 15,951 Exercise of stock options .............. 103,135 74,538 11,711 Repurchase of shares ................... (30,918) (99,910) (15,588) ------------------------------------ Balance - end of year .............. 3,378,549 2,497,416 2,520,136 ------------------------------------ ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Balance - beginning of year ............ (104,712) 19,311 235,185 Net change in unrealized gains on investment portfolio, net of tax ..... (72,272) (112,031) (213,482) Net change in unrealized gains on investment portfolio of affiliate .... 1,268 (6,290) 1,640 Currency translation adjustments ....... (37,297) (5,702) (4,032) ------------------------------------ Balance - end of year .............. (213,013) (104,712) 19,311 ------------------------------------ DEFERRED COMPENSATION: Balance - beginning of year ............ (17,727) (28,797) (22,954) (Issue) forfeit of restricted shares ... (19,802) 1,555 (13,603) Amortization ........................... 10,352 9,515 7,760 ------------------------------------ Balance - end of year .............. (27,177) (17,727) (28,797) ------------------------------------ RETAINED EARNINGS: Balance - beginning of year ............ 3,197,441 3,065,150 2,891,023 Net (loss) income ...................... (576,135) 506,352 470,509 Cash dividends paid .................... (237,628) (225,572) (212,659) Repurchase of shares ................... (86,200) (148,489) (83,723) ------------------------------------ Balance - end of year .............. 2,297,478 3,197,441 3,065,150 ------------------------------------ Total shareholders' equity ............... $5,437,184 $5,573,668 $5,577,078 ==================================== See accompanying Notes to Consolidated Financial Statements 48 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. dollars in thousands)
2001 2000 1999 ======================================= CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net (loss) income ...................................................... $ (576,135) $ 506,352 $ 470,509 --------------------------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized losses (gains) on sales of investments .................... 93,237 (45,090) (66,800) Net realized and unrealized losses (gains) on derivative instruments ... 12,176 (5,481) (27,556) Amortization of discounts on fixed maturities .......................... (38,589) (47,099) (14,429) Equity in net income of investment and insurance affiliates ............ (75,280) (74,355) (40,907) Amortization of deferred compensation .................................. 10,352 8,861 7,657 Amortization of intangible assets ...................................... 58,569 58,597 49,141 Unpaid losses and loss expenses ........................................ 3,555,484 259,728 411,396 Unearned premiums ...................................................... 427,613 244,017 131,767 Premiums receivable .................................................... 76,076 6,674 (166,027) Unpaid losses and loss expenses recoverable ............................ (2,360,127) (506,242) (212,928) Policy benefit reserves ................................................ 623,298 -- -- Prepaid reinsurance premiums ........................................... (277,053) (174,475) (1,848) Reinsurance balances receivable ........................................ (1,025,413) (46,122) (25,109) Reinsurance balances payable ........................................... 831,364 46,076 204,256 Deferred tax asset ..................................................... (267,054) (54,240) (55,924) Other .................................................................. 369,084 85,250 (173,964) --------------------------------------- Total adjustments .................................................. 2,013,737 (243,901) 18,725 --------------------------------------- Net cash provided by operating activities .............................. 1,437,602 262,451 489,234 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Proceeds from sale of fixed maturities and short-term investments ...... 28,396,278 22,287,287 15,664,591 Proceeds from redemption of fixed maturities and short-term investments ............................................. 1,543,550 460,733 134,565 Proceeds from sale of equity securities ................................ 882,501 1,480,853 1,017,177 Purchases of fixed maturities and short-term investments ............... (31,975,544) (22,798,463) (16,075,719) Purchases of equity securities ......................................... (739,872) (1,071,351) (803,728) Investments in affiliates, net of dividends received ................... (185,106) (180,818) (342,142) Acquisition of subsidiaries, net of cash acquired ...................... (262,001) (3,094) (173,206) Other investments ...................................................... (108,993) (55,917) (120,717) Fixed assets and other ................................................. (21,898) (31,176) (35,642) --------------------------------------- Net cash (used in) provided by investing activities ...................... (2,471,085) 88,054 (734,821) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issue of shares ........................................................ 787,678 -- -- Proceeds from exercise of stock options ................................ 105,233 74,561 14,083 Repurchase of shares ................................................... (117,133) (248,450) (99,344) Dividends paid ......................................................... (237,628) (225,572) (212,659) Proceeds from notes payable and debt ................................... 1,172,533 250,300 328,700 Repayment of notes payable and debt .................................... (50,000) (211,000) (541,472) Deposit liabilities .................................................... 306,664 372,033 837,893 Minority interest ...................................................... (24) 10,892 (4,900) --------------------------------------- Net cash provided by financing activities ................................ 1,967,323 22,764 322,301 Effects of exchange rate changes on foreign currency cash ................ (448) (549) 161 Increase in cash and cash equivalents .................................... 933,392 372,720 76,875 Cash and cash equivalents - beginning of year ............................ $ 930,469 $ 557,749 $ 480,874 ======================================= Cash and cash equivalents - end of year .................................. $ 1,863,861 $ 930,469 $ 557,749 ======================================= Net taxes received (paid) ................................................ $ 10,025 $ 13,347 $ (30,246) ======================================= Interest paid ............................................................ $ (36,509) $ (30,505) $ (28,268) =======================================
See accompanying Notes to Consolidated Financial Statements 49 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31 2001, 2000 AND 1999 (U.S. dollars in thousands, except per share amounts) 1. HISTORY XL Capital Ltd (the "Company") is a holding company organized under the laws of the Cayman Islands. The Company was incorporated on March 16, 1998, as the successor to EXEL Limited, a Cayman Islands corporation organized in 1986, in connection with EXEL Limited's merger with Mid Ocean Limited, a Cayman Islands corporation. The Company operated under the name EXEL Limited from completion of the merger until February 1, 1999, when its current name was approved by the requisite vote of the Company's shareholders. The Company is a leading provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. On July 25, 2001, the Company completed the acquisition of certain Winterthur International insurance operations ("Winterthur International") to extend its predominantly North American based large corporate business globally. Effective July 1, 2001, the Company's results include Winterthur International. See Note 5 for additional information. In 1999, XL Capital Ltd merged with NAC Re Corp ("NAC"), a Delaware corporation. NAC was organized in 1985 and writes property and casualty insurance and reinsurance in the U.S., Canada and Europe. Subsequent to the merger, the Company amended its financial year from November 30 to December 31. XL Re Ltd, formerly XL Mid Ocean Re, was organized under the laws of Bermuda in 1992 initially to write property catastrophe reinsurance following a reduction in market capacity due to the effects of severe hurricanes that struck the southeastern United States in the late 1980s and early 1990s. The Company further expanded into the U.S. in 1999 by completing the acquisition of both Intercargo Corporation and ECS, Inc. Intercargo, renamed XL Specialty, underwrites specialty insurance products for companies engaged in international trade, including customs bonds and marine cargo insurance. ECS is an underwriting manager, which specializes in environmental insurance coverages and risk management services. XL London Market, formerly XL Brockbank which comprised both Brockbank and Denham Syndicate Management Limited, is organized under the laws of the U.K. and is a leading Lloyd's managing agency that provides underwriting and similar services to four Lloyd's syndicates. The Company provides 100% of the capacity for two of these syndicates. These syndicates underwrite property, marine and energy, aviation, satellite, professional indemnity and other specialty lines of insurance and reinsurance to a global client base. In July 1999, the Company entered into a venture with Les Mutuelles du Mans Assurances Group to form a new French reinsurance company, Le Mans Re. Le Mans Re underwrites a worldwide portfolio comprising most classes of property and casualty reinsurance business together with a selective portfolio of life reinsurance business. In 1999, the Company made strategic minority investments in two investment management firms. The Company acquired minority investments in Highfields Capital Management LP, a global equity investment firm, and MKP Capital Management, a New York based fixed income investment manager specializing in mortgage-backed securities. 50 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 2. SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PREPARATION AND CONSOLIDATION These consolidated financial statements include the accounts of the Company and all of its subsidiaries and have been prepared in accordance with U.S. GAAP ("GAAP"). Effective July 1, 2001, they include the acquired Winterthur International operations under the purchase method of accounting, described in Note 5. The consolidated financial statements also include the merger with NAC, which occurred in June 1999, and which has been accounted for as a pooling of interests. Results of operations, statements of position and cash flows include NAC as though it had always been a part of the Company. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions include the loss events of September 11, 2001, described in Note 4. Actual results could differ from these estimates. Certain reclassifications have been made to prior year consolidated financial statement amounts to conform to current year presentation. (B) PREMIUMS AND ACQUISITION COSTS Premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums written are recorded at the inception of the policy and are estimated based upon information received from ceding companies and any subsequent differences arising on such estimates are recorded in the period they are determined. Financial guaranty installment premiums are recorded as premiums written when reported. Premiums are earned on a monthly pro-rata basis over the period the coverage is provided. Financial guaranty insurance premiums are earned over the life of the exposure. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. Net premiums earned are presented after deductions for reinsurance ceded to other insurance companies. Reinstatement premiums are written at the time a loss event occurs where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms and are earned over the remaining risk period. Premiums from long duration contracts that transfer significant mortality or morbidity risks are recognized as revenue and earned when due from policyholders. Premiums from long duration contracts that do not subject the Company to risks arising from policyholder mortality or morbidity are accounted for as deposit liabilities, discussed further in Note 2(m). Acquisition costs, which vary with and are related to the acquisition of policies, primarily commissions paid to brokers, are deferred and amortized over the period the premiums are earned. Future earned premiums, the anticipated losses and other costs, together with investment income related to those premiums are also considered in determining the level of acquisition costs to be deferred. (C) REINSURANCE In the normal course of business, the Company seeks to reduce the loss that may arise from events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurers or reinsurers. Reinsurance premiums ceded are expensed and any commissions recorded thereon are earned on a monthly pro-rata basis over the period the reinsurance coverage is provided. Prepaid reinsurance premiums 51 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) represent the portion of premiums ceded applicable to the unexpired term of policies in force. Reinstatement premiums ceded are recognized at the time a loss event occurs where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms and are expensed over the remaining risk period. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Provision is made for estimated unrecoverable reinsurance. (D) FEE INCOME AND OTHER Fee income and other includes fees earned for insurance related services provided and is earned over the service period of the contract. Any adjustments to fees earned or the service period are reflected in income in the period when determined. Fee income and other also includes changes in the fair value of weather risk management products, as discussed in Note 2(e). (E) DERIVATIVE INSTRUMENTS AND WEATHER RISK MANAGEMENT PRODUCTS The Financial Accounting Standards Board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. FAS 133 establishes accounting and reporting standards for derivative instruments including those embedded in other contracts (collectively referred to as derivatives), and for hedging activity. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Non-exchange traded weather products are not covered by FAS 133, however they are also recorded at fair value. The Company adopted FAS 133, as amended, as of January 1, 2001. The Company conducts activities in three main types of instruments: credit default swap derivatives, weather risk management products and investment related derivative instruments. There was no significant impact from the adoption of FAS 133. See Note 14 for further information on these derivative instruments. CREDIT DEFAULT SWAP DERIVATIVES The Company considers credit default swaps to be, in substance, financial guaranty contracts as the Company intends to hold them to maturity. Fair value is determined using a model developed by the Company and is dependent upon a number of factors including changes in interest rates, credit spreads, changes in credit quality and other market factors. The change in fair value in a period is split between premiums, net losses and loss expenses, and net realized and unrealized gains and losses on derivative instruments. The change resulting from movements in credit and quality spreads is unrealized as the credit default swaps are not traded to realize this value and is included in net realized and unrealized gains and losses on derivative instruments. Other elements of the change in fair value are based upon pricing established at the inception of the contract. Prior to the adoption of FAS 133, the net premiums earned and loss and loss expenses were included in fee income and other. WEATHER RISK MANAGEMENT PRODUCTS Weather risk management products are recorded at fair value with the changes in fair value included in fee income and other. Fair value is determined using a quantitative analytical model developed by the Company and is dependent upon a number of factors including, among others, realized weather results, forecasted weather conditions, changes in interest rates and other market factors. 52 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENT RELATED DERIVATIVE INSTRUMENTS The Company uses investment derivatives to manage duration and currency exposure for its investment portfolio. None of these investment derivatives are designated hedges, and accordingly, financial futures, options and forward currency contracts are carried at fair value, with the corresponding realized and unrealized gains and losses included in net realized and unrealized gains and losses on derivative instruments. (F) INVESTMENTS AVAILABLE FOR SALE Investments are considered available for sale and are carried at fair value. The fair value of investments is based upon quoted market values where available or by reference to broker or underwriter bid indications. The net unrealized appreciation or depreciation on investments, net of tax, is included in accumulated other comprehensive loss. Any unrealized depreciation in value considered by management to be other than temporary is charged to income in the period that it is determined. An other than temporary decline is also considered to occur in investments where there has been a sustained reduction in market value and the Company has considered any mitigating factors. Short-term investments comprise investments with a maturity equal to or greater than 90 days but less than one year. Equity securities include investments in open end mutual funds. All investment transactions are recorded on a trade date basis. Realized gains and losses on sales of equities and fixed income investments are determined on the basis of average cost and amortized cost, respectively. Investment income is recognized when earned and includes interest and dividend income together with the amortization of premium and discount on fixed maturities and short-term investments. (G) CASH EQUIVALENTS Cash equivalents include fixed interest deposits placed with a maturity of under 90 days when purchased. (H) FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at year end exchange rates. Revenue and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations, net of applicable deferred income taxes, is included in accumulated other comprehensive loss. Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rate in effect at the balance sheet date with the resulting foreign exchange gains and losses recognized in income. Revenue and expense transactions are translated at the average exchange rates prevailing during the year. (I) INVESTMENTS IN AFFILIATES Investments in which the Company has significant influence over the operations are classified as affiliates and are carried under the equity method of accounting. Under this method, the Company records its proportionate share of income or loss from such investments in its results for the period. Significant influence is deemed to exist where the Company has an investment of 3% or greater in closed end funds or limited partnerships. Significant influence is considered for other strategic investments on a case-by-case basis. The equity in net income of affiliates is shown separately between equity in net income of strategic insurance affiliates and equity in net income of investment fund related affiliates. 53 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (J) OTHER INVESTMENTS The Company accounts for its other investments on a cost basis, as it has no significant influence over these entities. Investments are written down to their estimated realizable value where management considers there is an other than temporary decline in value, based on financial information received. Income is recorded when received. (K) AMORTIZATION OF INTANGIBLE ASSETS Intangible assets primarily represent goodwill recorded in connection with the Company's business combinations and are amortized on a straight-line basis over the expected life of the related operations acquired, not exceeding 40 years. The Company evaluates the recoverability of its intangible assets whenever changes in circumstances warrant. If it is determined that an impairment exists, the excess of the unamortized balance over the fair value of the intangible asset will be charged to income at that time. See Note 2(t) for further information. (L) LOSSES AND LOSS EXPENSES Unpaid losses and loss expenses includes reserves for unpaid reported losses and loss expenses and for losses incurred but not reported. The reserve for unpaid reported losses and loss expenses is established by management based on amounts reported from insureds or ceding companies and consultation with independent legal counsel, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. The reserve for losses incurred but not reported is estimated by management and reviewed by independent actuaries, based on loss development patterns determined by reference to the Company's underwriting practices, the policy form, type of insurance program and the experience of the relevant industries. Certain workers compensation reserves are considered fixed and determinable and are subject to tabular reserving. Such tabular reserves are discounted. Management believes that the reserves for unpaid losses and loss expenses are sufficient to cover losses that fall within coverages assumed by the Company. However, there can be no assurance that losses will not exceed the Company's total reserves. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate and any adjustments resulting therefrom are reflected in income of the year in which the adjustments are made. (M) DEPOSIT LIABILITIES Contracts entered into by the Company which are not deemed to transfer significant underwriting and/or timing risk are accounted for as deposits, whereby liabilities are initially recorded at the same amount as assets received. An initial accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the term of the contract. Accretion expense is recorded against investment income generated from the related invested assets. The Company periodically reassesses the estimated ultimate liability. Any changes to this liability are reflected as an adjustment to interest income to reflect the cumulative effect to date of the period the contract has been in force, and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term. 54 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (N) POLICY BENEFIT RESERVES Long duration contracts that do transfer significant mortality or morbidity risks to the Company are accounted for as insurance contracts and policy benefit reserves are established based on the present value of the estimated ultimate liability. An initial accretion rate is established based on actuarial estimates and the policy benefit reserve is increased to the estimated amounts payable over the term of the contract. This accretion charge is recorded in the period as life claims and policy benefit reserves. The Company periodically reassesses the estimated ultimate policy benefits. Any changes to this estimate will be reflected as an adjustment to life claims and policy benefit reserves to reflect the cumulative effect to date of the period the contract has been in force and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term. (O) INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. (P) STOCK PLANS The Company accounts for stock compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation expense for stock option grants and stock appreciation rights is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. (Q) PER SHARE DATA Basic earnings per share is based on weighted average common shares outstanding and excludes any dilutive effects of options and convertible securities. Diluted earnings per share assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock options. (R) SPECIAL PURPOSE VEHICLES The Company accounts for its investments in and relationships with special purpose vehicles in accordance with GAAP. The Company considers several factors to determine whether effective control exists. These factors include, but are not limited to, the initial equity investment made in the vehicle, the degree of exposure to the risks of the underlying assets and liabilities of the vehicle and the potential to benefit from the rewards. Those special purpose vehicles that the Company deems necessary to consolidate are accounted for in accordance with the accounting policy for subsidiaries in Note 2(a). Those which the Company does not consider should be consolidated are accounted for in accordance with the terms of the transactions and contractual agreements in place. GAAP is potentially subject to change during 2002 and this accounting policy will be amended if necessary. See Note 15(a) to the Consolidated Financial Statements for further discussion. (S) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of certain assets and liabilities are based on published market values, if available, or estimates of fair values of similar issues. 55 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (T) RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued FAS 141, "Business Combinations," and FAS 142, "Goodwill and Other Intangible Assets," in July 2001. The Company has adopted these standards for the acquisition of Winterthur International. FAS 141 addresses financial accounting and reporting for the acquisition of other companies and is applicable for new transactions effective after June 30, 2001. For previous transactions, this standard is effective for fiscal years beginning after December 15, 2001. FAS 142 addresses financial accounting and reporting for goodwill and other intangible assets both upon acquisition and after these assets have initially been recognized in the financial statements. The Company has commenced an initial assessment of the effect of the adoption of FAS 142 for goodwill, excluding Winterthur International, and will continue this assessment in accordance with the standard. Amortization expense may reduce in 2002 and future periods, however the assessment of any required impairment charge has not yet been completed. 3. SEGMENT INFORMATION The Company is organized into three underwriting segments - insurance, reinsurance, and financial products and services - in addition to a corporate segment that includes the investment and financing operations of the Company. Lloyd's syndicates are part of the insurance segment but are described separately. The Company evaluates performance of each segment based on underwriting profit or loss. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, management does not currently allocate assets by segment as it considers the underwriting results separately from the performance of the investment portfolio. Certain business written by the Company has loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's results and operational cash flows. General operations and Life operations are disclosed separately within each segment. General operations include property and casualty lines of business and financial products and services. INSURANCE OPERATIONS - EXCLUDING LLOYD'S SYNDICATES Insurance business written includes general liability, other liability including directors and officers, professional and employment practices liability, environmental liability, property, program business, marine, aviation, satellite and other product lines including customs bonds, surety, political risk and specialty lines. INSURANCE OPERATIONS - LLOYD'S SYNDICATES The Lloyd's syndicates write property, marine and energy, aviation and satellite, professional indemnity, liability coverage and other specialty lines. REINSURANCE OPERATIONS Reinsurance business written includes treaty and facultative reinsurance to primary insurers of casualty risks, principally: general liability; professional liability; automobile and workers compensation; commercial and personal property risks; specialty risks including fidelity and surety and ocean marine; property catastrophe; property excess of loss; property pro-rata; marine and energy; aviation and satellite; and various other reinsurance to insurers on a worldwide basis. The Company endeavors to manage its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide and requires that its property catastrophe contracts provide for aggregate limits and varying attachment points. 56 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 3. SEGMENT INFORMATION (CONTINUED) FINANCIAL PRODUCTS AND SERVICES Financial products and services business written includes insurance, reinsurance and derivative solutions for complex financial risks. These include financial guaranty insurance and reinsurance, credit enhancement swaps, other collateralized transactions and weather risk management products. While each of these is unique and is tailored for the specific needs of the insured or user, they are often multi-year contracts. Due to the nature of these types of contracts, premium volume as well as underwriting results can vary significantly from period to period. The following is an analysis of the underwriting profit or loss by segment together with a reconciliation of underwriting profit or loss to net income or loss:
FINANCIAL LLOYD'S PRODUCTS AND YEAR ENDED DECEMBER 31, 2001: INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL - ---------------------------- -------------------------------------------------------------------- GENERAL OPERATIONS: Net premiums earned .................. $ 1,222,196 $ 481,307 $ 1,029,618 $46,806 $ 2,779,927 Fee income and other ................. 22,065 (3,707) (7,180) 32,286 43,464 Net losses and loss expenses ......... 859,812 610,823 1,428,772 19,491 2,918,898 Acquisition costs .................... 187,443 155,804 292,069 3,730 639,046 Operating expenses (2) ............... 178,530 22,215 87,169 42,404 330,318 Exchange losses ...................... 4,924 3,198 4,062 -- 12,184 LIFE OPERATIONS: Life premiums earned ................. -- -- 695,595 -- 695,595 Claims and policy benefit reserves ... -- -- 698,675 -- 698,675 -------------------------------------------------------------------- Underwriting profit (loss) ........... $ 13,552 $(314,440) $ (792,714) $13,467 $(1,080,135) Net investment income ................ 562,606 Net realized losses on investments ... 93,237 Net realized and unrealized losses on derivative instruments .......... 12,176 Equity in net income of affiliates ... 75,280 Interest expense ..................... 65,350 Amortization of intangible assets .... 58,569 Corporate operating expenses (3) ..... 92,355 Minority interest .................... 2,113 Income tax benefit ................... 189,914 ----------- Net loss ............................. $ (576,135) =========== Loss and loss expense ratio .......... 70.4% 126.9% 138.8% 41.6% 105.0% Underwriting expense ratio ........... 29.9% 37.0% 36.8% 98.6% 34.9% -------------------------------------------------------------------- Combined ratio ....................... 100.3% 163.9% 175.6% 140.2% 139.9% ====================================================================
(1) Ratios are based on net premiums earned from general operations, excluding fee income and other. The underwriting expense ratio excludes exchange gains and losses. (2) Operating expenses exclude corporate operating expenses, shown separately. (3) Corporate operating expenses include charges of $14.0 million related to the acquisition of Winterthur International. 57 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 3. SEGMENT INFORMATION (CONTINUED)
FINANCIAL LLOYD'S PRODUCTS AND YEAR ENDED DECEMBER 31, 2001: INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL - ---------------------------- ----------------------------------------------------------------- GENERAL OPERATIONS: Net premiums earned .................. $ 726,506 $ 357,824 $ 927,195 $23,715 $ 2,035,240 Fee income and other ................. 7,692 (6,626) (2,197) 15,924 14,793 Net losses and loss expenses (2) ..... 502,898 260,372 663,173 6,116 1,432,559 Acquisition costs .................... 117,251 119,870 247,352 1,323 485,796 Operating expenses (3) ............... 94,129 28,727 102,132 29,969 254,957 Exchange (gains) losses .............. (2,344) (5,986) 3,868 -- (4,462) ---------------------------------------------------------------- Underwriting profit (loss) ........... $ 22,264 $ (51,785) $ (91,527) $ 2,231 $ (118,817) Net investment income ................ 542,500 Net realized gains on investments .... 45,090 Net realized and unrealized gains on derivative instruments .......... 5,481 Equity in net income of affiliates ... 74,355 Interest expense ..................... 32,147 Amortization of intangible assets .... 58,597 Corporate operating expenses (3) ..... 61,935 Other exchange gain .................. 55,159 Minority interest .................... 1,093 Income tax benefit ................... 56,356 --------- Net income ........................... $ 506,352 ========= Loss and loss expense ratio .......... 69.2% 72.8% 71.5% 25.8% 70.4% Underwriting expense ratio ........... 29.1% 41.5% 37.7% 131.9% 36.4% ---------------------------------------------------------------- Combined ratio ....................... 98.3% 114.3% 109.2% 157.7% 106.8% ================================================================
(1) Ratios are based on net premiums earned, excluding fee income and other. The underwriting expense ratio excludes exchange gains and losses. (2) Net losses and loss expenses for the insurance segment include, and the reinsurance segment exclude, $33.5 million relating to an intercompany stop loss arrangement. Total results are not affected. The loss and loss expense ratio would have been 64.6% and 75.1% and the underwriting results would have been a profit of $55.8 million and a loss of $125.0 million in the insurance and reinsurance segments, respectively, had this stop loss arrangement not been in place. (3) Operating expenses exclude corporate operating expenses, shown separately. 58 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 3. SEGMENT INFORMATION (CONTINUED)
FINANCIAL LLOYD'S PRODUCTS AND YEAR ENDED DECEMBER 31, 1999: INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL - --------------------------- ---------------------------------------------------------------- GENERAL OPERATIONS: Net premiums earned .................. $ 463,069 $ 355,769 $ 909,915 $21,253 $ 1,750,006 Fee income and other ................. 7,584 65,892 -- 26,924 100,400 Net losses and loss expenses (2) ..... 309,079 297,595 692,269 5,361 1,304,304 Acquisition costs .................... 65,318 89,195 224,359 2,108 380,980 Operating expenses (3) ............... 71,094 29,305 101,978 16,670 219,047 Exchange (gains) losses .............. (165) (1,180) 1,286 -- (59) ---------------------------------------------------------------- Underwriting profit (loss) ........... $ 25,327 $ 6,746 $(109,977) $24,038 $ (53,866) Net investment income ................ 525,318 Net realized gains on investments .... 66,800 Net realized and unrealized gains on derivative instruments .......... 27,556 Equity in net income of affiliates ... 40,907 Interest expense ..................... 37,378 Amortization of intangible assets .... 49,141 Corporate operating expenses (4) ..... 89,037 Minority interest .................... 220 Income tax benefit ................... 39,570 ----------- Net income ........................... $ 470,509 =========== Loss and loss expense ratio .......... 66.7% 83.6% 76.1% 25.2% 74.5% Underwriting expense ratio ........... 29.5% 33.3% 35.9% 88.4% 34.3% ---------------------------------------------------------------- Combined ratio ....................... 96.2% 116.9% 112.0% 113.6% 108.8% ================================================================
(1) Ratios are based on net premiums earned, excluding fee income and other. The underwriting expense ratio excludes exchange gains and losses. (2) Net losses and loss expenses for the insurance segment include, and the reinsurance segment exclude, $100.0 million relating to an intercompany stop loss arrangement. Total results are not affected. The loss and loss expense ratio would have been 45.2% and 87.1% and the underwriting results would have been a profit of $125.3 million and a loss of $210.0 million in the insurance and reinsurance segments, respectively, had this stop loss arrangement not been in place. (3) Operating expenses exclude corporate operating expenses, shown separately. (4) Corporate operating expenses include charges of $45.3 million related to the merger with NAC. 59 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 3. SEGMENT INFORMATION (CONTINUED) SUPPLEMENTAL SEGMENT AND GEOGRAPHIC INFORMATION The following table is an analysis of the Company's gross premiums written, net premiums written and net premiums earned from general operations, by line of business for the years ended December 31: GROSS PREMIUM WRITTEN: 2001 2000 1999 ------------------------------------ Casualty ................................. $1,699,460 $1,127,551 $ 779,291 Property ................................. 1,276,075 728,212 572,038 Marine, energy, aviation and satellite ... 510,291 365,850 212,452 Lloyd's syndicates (1) ................... 693,016 486,640 591,520 Other (2) ................................ 604,880 420,778 287,619 ------------------------------------ Total .................................... $4,783,722 $3,129,031 $2,442,920 ==================================== NET PREMIUM WRITTEN: 2001 2000 1999 ------------------------------------ Casualty ................................. $1,073,474 $ 723,062 $ 651,614 Property ................................. 546,575 537,037 440,175 Marine, energy, aviation and satellite ... 310,197 230,356 152,783 Lloyd's syndicates (1) ................... 537,614 311,814 423,880 Other (2) ................................ 460,566 313,971 233,431 ------------------------------------ Total .................................... $2,928,426 $2,116,240 $1,901,883 ==================================== NET PREMIUM EARNED: 2001 2000 1999 ------------------------------------ Casualty ................................. $1,017,565 $ 749,105 $ 604,455 Property ................................. 624,644 467,165 457,991 Marine, energy, aviation and satellite ... 287,387 212,273 163,112 Lloyd's syndicates (1) ................... 481,307 357,824 355,769 Other (2) ................................ 369,024 248,873 168,679 ------------------------------------ Total .................................... $2,779,927 $2,035,240 $1,750,006 ==================================== (1) Lloyd's syndicates write a variety of coverages encompassing most of the above lines of business. (2) Other premiums written and earned include political risk, surety, bonding and warranty. The following table shows an analysis of the Company's net premiums written by geographical location of subsidiary for the years ended December 31: NET PREMIUMS WRITTEN: .................... 2001 2000 1999 ------------------------------------ Bermuda .................................. $ 667,760 $ 609,609 $ 561,750 United States ............................ 1,277,668 934,110 684,468 Europe and other ......................... 982,998 572,521 655,665 ------------------------------------ Total .................................... $2,928,426 $2,116,240 $1,901,883 ==================================== 60 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 4. THE SEPTEMBER 11 EVENT Terrorist attacks at the World Trade Center in New York City, in Washington, D.C. and in Pennsylvania on September 11, 2001 (collectively, "the September 11 event") are estimated to have caused the largest ever man-made insured losses for the property and casualty insurance industry. The Company has exposure to this event with claims expected to arise mainly from its aviation, property, personal accident and business interruption insurance and reinsurance coverages. The Company has performed a detailed analysis of contracts it believes are exposed to this event. The process varied between segments, due to the specific nature of each of their operations, and by line of business. For the property lines of business, which are the main areas affected, the Company was able to identify a limited number of relevant contracts soon after the event. The process included identification of possible claims using underwriting systems to determine potential exposures on a case-by-case basis. The exposures were then analyzed to determine the exact location and magnitude of the potential loss. This process was complicated in the reinsurance operations where the Company is not a direct insurer. Potential losses on certain business lines were easily estimated, such as aviation and direct property catastrophe. Estimates related to the retrocessional book of business were more difficult to ascertain due to the inherent nature of determining the effect from losses arising on the underlying contracts. The amount of reinsurance recoveries was calculated in accordance with underlying reinsurance contract terms and management believes that the credit rating of the relevant reinsurers continues to provide confidence in ultimate recoverability of these balances. The Company estimates losses incurred of approximately $760.0 million, net of reinsurance recoveries, based on preliminary reports and estimates of loss and damage. This is management's best estimate at this time, however, it could change as more information becomes available. The following is an analysis of the impact on the Company's segments and total results of operations from the September 11 event for the year ended December 31, 2001:
FINANCIAL LLOYD'S PRODUCTS AND INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL ---------------------------------------------------------- Gross premium written .............. $ -- $ -- $ 147,900 $ -- $ 147,900 Reinsurance ceded .................. 3,900 21,400 340,400 -- 365,700 Net premiums earned ................ (3,900) (21,400) (120,400) -- (145,700) Net losses and loss expenses ....... 102,050 215,800 442,150 -- 760,000 ------------------------------------------------------------ Underwriting loss .................. $(105,950) $(237,200) $(562,550) -- $(905,700) ----------------------------------------------- Equity in net loss of affiliates ... (27,000) Income tax benefit ................. 136,760 --------- Net loss ........................... $(795,940) =========
Premiums written, ceded and earned related to reinstatement and adjustment premiums that are typically received and paid when a catastrophic event occurs. The premium is paid to reinstate coverage for the remaining life of the contract. Net losses and loss expenses comprise gross claims of $1.9 billion with estimated reinsurance recoveries of $1.1 billion, both excluding Winterthur International, discussed below. Approximately 96% of the relevant reinsurers currently fall into Standard & Poor's financial strength rating categories or equivalent of A or better, with approximately 65% rated AA or better. 61 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 4. THE SEPTEMBER 11 EVENT (CONTINUED) Winterthur International incurred gross losses of $321.0 million related to the September 11 event, which the Company expects to recover from third-party reinsurers or under the net loss reserve seasoning mechanism in the Sale and Purchase Agreement (defined in Note 5), or a combination of the two. These losses related to business written by Winterthur International prior to July 1, 2001. 5. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (A) WINTERTHUR INTERNATIONAL On July 25, 2001, the Company completed the acquisition of Winterthur International primarily to extend its predominantly North American based large corporate insurance business globally. This was an all-cash transaction. The preliminary purchase price of approximately $405.6 million was based on audited financial statements as at December 31, 2000 for the business being acquired, and is subject to final determination based on the audited financial statements of Winterthur International as at June 30, 2001. These audited financial statements are not expected to be completed until later in 2002, at which time any final adjustment payment will be made or receivable collected. Results of operations of Winterthur International have been included from July 1, 2001, the date from which the economic interest was transferred to the Company. The Second Amended and Restated Agreement for the Sale and Purchase of Winterthur International ("the Sale and Purchase Agreement") provides the Company with significant post-closing protection with respect to adverse development of reserves with respect to Winterthur International business written prior to July 1, 2001. This protection is based upon actual net loss experience and development over a three year post closing seasoning period based on loss development experience, collectible reinsurance, reinsurance recoveries and certain other factors. Business in force at June 30, 2001 carries a maximum exposure to a combined ratio of 105%. The Company's exposure to a deficiency in the net reserves and the run-off of expiring business of the acquired Winterthur International operations, including by reason of uncollectible reinsurance, is limited to $61.0 million. Certain Winterthur International businesses and product lines were not purchased, primarily asbestos, certain insurance liabilities in respect of 1985 and prior years, certain captive management, alternative risk and life insurance business. The acquisition has been accounted for under the purchase method of accounting and, therefore, the identifiable assets and liabilities of Winterthur International were recorded at their estimated fair value on June 30, 2001 based on the unaudited financial statements prepared by the seller and provided to the Company at that time. The process of determining the fair value of such assets and liabilities acquired, as required under purchase accounting, included management's estimates and independent valuations. The purchase price was preliminarily allocated to the acquired assets and liabilities based upon their estimated fair value at June 30, 2001. The excess of the purchase price over acquired tangible net assets was then applied to intangible assets with finite and indefinite lives. The remaining purchase price excess over fair value of net assets was allocated to goodwill. The Company's estimate of the fair value of loss reserves is approximately $5.0 million less than the carrying value recorded by the seller at July 1, 2001. This difference will be charged to income over the next six years. The Company has included the $61.0 million exposure in establishing its risk premium adjustment inherent in the fair value of loss reserves. The fair value adjustment estimate consists of two components: (i) discounting the net loss reserves and unearned premium reserves to present value using a risk-free rate of return, net of deferred taxes, and (ii) developing an expense, profit and risk margin for the acquired reserves based on management's estimate of current market pricing and the terms in the Sale and Purchase Agreement. 62 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 5. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (CONTINUED) The expected payment patterns for the gross loss reserves and the associated reinsurance recoverable amounts are derived by developing separate payment patterns for the gross loss reserves using historical Winterthur International data by line of business and for the associated reinsurance recoverable amounts by lagging the gross payout patterns. In addition, management has estimated a 5% risk and profit margin within these reserves. This margin is based on current pricing quotes expected from a prospective reinsurer or other third party assuming the same risks and takes into account the reserve seasoning protection provided by the seller to the Company. Determination of a fair value for the net unearned premium reserve follows a similar approach to that applied to the loss reserves but with some minor adjustments. The fair value of significant assets and liabilities acquired by the Company include $0.2 billion of cash, $1.2 billion of invested assets, $1.1 billion of premiums receivable, $1.3 billion of unpaid losses and loss expenses recoverable, $2.6 billion of unpaid losses and loss expenses, $513.0 million of unearned premiums and $391.9 million of reinsurance balances payable. Allocation of the purchase price is as follows: Fair value of assets acquired .......................... $4,791,338 Fair value of liabilites acquired ...................... 4,564,376 ---------- Fair value of tangible net assets acquired ............. $ 226,962 Fair value of intangible assets acquired ............... 29,800 Goodwill related to the acquisition .................... 40,476 ---------- $ 297,238 ---------- Adjusted preliminary purchase price .................... $ 274,738 Other costs of acquisition ............................. 22,500 ---------- $ 297,238 ---------- The decrease in purchase price to $274.7 million as compared to the preliminary purchase price of $405.6 million at December 31, 2000 reflects the decline in the net asset value of Winterthur International as presented in the unaudited financial statements as at June 30, 2001. The difference of $130.9 million, which is subject to final adjustment upon completion of the audit, will be recoverable from the seller when the audited financial statements at June 30, 2001 are available and is included in other assets at December 31, 2001. As additional information becomes available, the Company may be required to make certain reclassifications to balance sheet items with minimal impact on net income. The Company has made a preliminary estimate of the value of intangible assets acquired and estimates that $14.7 million relates to insurance licenses and sales force, which have an indefinite life and are not therefore subject to amortization. The remaining $15.1 million relates to the value of business in force, which is estimated to have a finite life of up to five years and is being amortized over that period. The following unaudited pro forma financial information for the year ended December 31, 2001 includes the unaudited financial information for Winterthur International for the year ended December 31, 2001 as if the acquisition occurred on January 1, 2001. The unaudited pro forma financial information for the year ended December 31, 2000 includes the audited financial information for Winterthur International for the year ended December 31, 2000 as if the acquisition occurred on January 1, 2000. 63 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 5. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (CONTINUED) Winterthur International results of operations for the first six months of 2001 and the year ended December 31, 2000 included in the pro forma financial information have not been adjusted for the contractual protection that the Company has received from the seller with effect from July 1, 2001. The pro forma financial information is based upon information currently available and certain assumptions that the Company's management believes are reasonable. The financial information of Winterthur International for both periods presented is taken from the financial statements of the seller and were prepared on a GAAP basis for the first time. The pro forma financial information does not purport to represent what the Company's results of operations or financial condition would have been had the transaction occurred on such dates or to project the Company's results of operations or financial condition for any future period or date. The pro forma financial information necessarily does not give effect to any changes in underwriting, reinsurance, investment policies or other practices that are or may be instituted post-closing. In addition, they also do not give effect to any integration of the Winterthur International operations with certain insurance operations of the Company. As a result of the above, the pro forma financial information should be reviewed with caution and undue reliance should not be placed on such information. (UNAUDITED) (UNAUDITED) PRO FORMA PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2001 2000 ------------------------- Net premiums earned - general operations ....... $ 3,119,977 $2,568,867 Net premiums earned - life operations .......... 695,595 -- Net investment income .......................... 587,676 612,486 Net realized (losses) gains on investments ..... (93,318) 56,107 Net realized and unrealized gains and losses on derivative instruments ............. (12,176) 5,481 Equity in net income of investment affiliates .................................... 80,580 70,032 Fee income and other ........................... 55,421 26,978 ------------------------- Total revenues ................................. $ 4,433,755 $3,339,951 ------------------------- Net losses and loss expenses incurred - general operations ........................... $ 3,294,452 $1,866,269 Claims and policy benefit reserves - life operations .............................. 698,675 -- Acquisition costs, operating expense and foreign currency gains and losses ............ 1,214,828 872,883 Interest expense ............................... 69,100 39,647 Amortization of intangible assets .............. 59,069 97,458 ------------------------- Total expenses ................................. $ 5,336,124 $2,876,257 ------------------------- Net (loss) income .............................. $ (729,129) $ 527,158 ========================= (Loss) earnings per ordinary share - Basic ..... $(5.76) $4.23 (Loss) earnings per ordinary share - Diluted ... $(5.76) $4.19 (B) THE LONDON ASSURANCE COMPANY OF AMERICA, INC. In the first quarter of 2001, the Company acquired The London Assurance Company of America, Inc., a shell company licensed in forty five U.S. states, for the purpose of obtaining licenses for the financial guaranty operations of the Company. The cost of the acquisition less cash acquired was $16.5 million. Goodwill arising from the acquisition was $11.2 million. 64 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 5. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (CONTINUED) (C) NAC RE CORP On June 18, 1999, the Company merged with NAC in an all-stock transaction. Shareholders of NAC received 0.915 Company shares for each NAC share in a tax-free exchange. Approximately 16.9 million of the Company's ordinary shares were issued in this transaction. The merger transaction was accounted for as a pooling of interests under GAAP. Following the merger, the Company changed its fiscal year end from November 30 to December 31 as a conforming pooling adjustment. No adjustments were necessary to conform NAC's accounting policies, although certain reclassifications were made to the NAC financial statements to conform to the Company's presentation. NAC was renamed XL America Inc. (D) ECS, INC AND INTERCARGO CORPORATION In 1999, the Company acquired ECS, an underwriting manager that specializes in environmental insurance coverages and risk management services. ECS commenced underwriting policies on behalf of the Company's insurance and reinsurance subsidiaries effective January 1, 2000. In 1999, the Company acquired Intercargo, which underwrites specialty insurance products for companies engaged in international trade, including customs bonds and marine cargo insurance. The Intercargo and ECS acquisitions were accounted for under the purchase method of accounting. The combined purchase price was $222.8 million and the resulting goodwill of $159.6 million is being amortized over 20 years. Net cash acquired as a result of the acquisition was $49.6 million. Intercargo was renamed XL Specialty during 2000. 6. INVESTMENTS Net investment income is derived from the following sources: YEAR ENDED DECEMBER 31 -------------------------------- 2001 2000 1999 -------------------------------- Fixed maturities, short-term investments and cash equivalents ...................... $657,163 $622,826 $552,333 Equity securities ........................... 9,646 10,661 11,835 -------------------------------- Total gross investment income ............ 666,809 633,487 564,168 Accretion charge for deposit liabilities .... 81,686 71,509 14,164 Investment expenses ......................... 22,517 19,478 24,686 -------------------------------- Net investment income ....................... $562,606 $542,500 $525,318 ================================ 65 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 6. INVESTMENTS (CONTINUED) The following represents an analysis of net realized gains (losses) and the change in unrealized appreciation on investments:
YEAR ENDED DECEMBER 31 ------------------------------------- 2001 2000 1999 ------------------------------------- Net realized gains (losses): Fixed maturities and short-term investments: Gross realized gains ................................. $ 343,564 $ 254,647 $ 97,493 Gross realized losses ................................ (373,651) (295,117) (223,019) ------------------------------------- Net realized gains (losses) ....................... (30,087) (40,470) (125,526) Equity securities: Gross realized gains ................................. 126,853 303,503 254,779 Gross realized losses ................................ (140,864) (149,842) (62,453) ------------------------------------- Net realized gains (losses) ....................... (14,011) 153,661 192,326 Write down of other investments (see Note 8) ............ (49,139) (66,200) -- Net realized loss on sale of investment in affiliate ......................................... -- (1,901) -- ------------------------------------- Net realized gains (losses) on investments ........ (93,237) 45,090 66,800 ------------------------------------- Net realized and unrealized gains (losses) on investment derivative instruments ........... 14,638 5,481 27,556 ------------------------------------- Change in unrealized appreciation: Fixed maturities and short-term investments .......... 3,712 137,628 (333,868) Equity securities .................................... (69,305) (231,140) 101,652 Transfer of U.K. sterling investments ................ (21,000) -- -- Deferred gains (losses) gains on forward contracts ... 10,283 (9,388) 762 Investment portfolio of affiliates ................... 1,266 (6,290) (11,438) Change in deferred income tax liability .............. 4,040 (9,131) 31,050 ------------------------------------- Net change in unrealized appreciation On investments ....................................... (71,004) (118,321) (211,842) ------------------------------------- Total net realized gains (losses) and change in unrealized appreciation on investments ...... $(149,603) $ (67,750) $(117,486) =====================================
Gross realized losses included $66.4 million of provisions for declines in fair value considered to be other than temporary, for fixed maturities and equity securities in the year ended December 31, 2001. In addition to specific review by management, an other than temporary decline is considered to occur in investments where there has been a sustained reduction. The transfer of U.K. sterling investments arose when the Company reorganized its corporate and operational structure for U.K. sterling asset accumulation business from a U.S. dollar denominated entity to a U.K. sterling denominated branch. 66 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 6. INVESTMENTS (CONTINUED) The cost (amortized cost for fixed maturities and short-term investments), market value and related unrealized gains (losses) of investments are as follows:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET DECEMBER 31, 2001 COST GAINS LOSSES VALUE ---------------------------------------------------- Fixed maturities: U.S. Government and Government agency .................. $ 1,047,642 $ 19,044 $ (27,034) $ 1,039,652 Corporate .............................................. 5,095,415 115,427 (212,385) 4,998,457 Mortgage-backed securities ............................. 3,278,103 24,707 (9,733) 3,293,077 U.S. States and political subdivisions of the States ... 58,978 1,832 (585) 60,225 Non-U.S. Sovereign Government .......................... 1,465,430 6,072 (30,986) 1,440,516 ---------------------------------------------------- Total fixed maturities ............................. $10,945,568 $167,082 $(280,723) $10,831,927 ==================================================== Short-term investments: U.S. Government and Government agency .................. $ 592,011 1,001 $ (1,099) $ 591,913 Corporate .............................................. 419,331 2,218 (400) 421,149 Non-U.S. Sovereign Government .......................... 38,673 33 (1,655) 37,051 ---------------------------------------------------- Total short-term investments ....................... $ 1,050,015 $ 3,252 $ (3,154) $ 1,050,113 ==================================================== Total equity securities ................................... $ 575,090 $ 42,679 $ (69,964) $ 547,805 ====================================================
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET DECEMBER 31, 2000 COST GAINS LOSSES VALUE ---------------------------------------------------- Fixed maturities: U.S. Government and Government agency .................. $ 1,361,972 $ 51,524 $ (1,373) $ 1,412,123 Corporate .............................................. 4,419,283 65,962 (255,122) 4,230,123 Mortgage-backed securities ............................. 1,818,697 18,649 (6,951) 1,830,395 U.S. States and political subdivisions of the States ... 516,949 18,936 (2,100) 533,785 Non-U.S. Sovereign Government .......................... 597,295 16,318 (14,958) 598,655 ---------------------------------------------------- Total fixed maturities ............................. $ 8,714,196 $171,389 $(280,504) $ 8,605,081 ==================================================== Short-term investments: U.S. Government and Government agency .................. $ 162,641 202 $ (27) $ 162,816 Corporate .............................................. 179,709 1,451 (9,539) 171,621 Non-U.S. Sovereign Government .......................... 4,797 52 (279) 4,570 ---------------------------------------------------- Total short-term investments ....................... $ 347,147 $ 1,705 $ (9,845) $ 339,007 ==================================================== Total equity securities ................................... $ 515,440 $ 84,650 $ (42,630) $ 557,460 ====================================================
The contractual maturities of fixed maturity securities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 67 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 6. INVESTMENTS (CONTINUED) DECEMBER 31, 2001 DECEMBER 31, 2000 ------------------------------------------------ AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ------------------------------------------------ Due after 1 through 5 years ... $ 2,173,907 $ 2,164,112 $1,829,636 $1,791,752 Due after 5 through 10 years .. 2,415,964 2,331,334 1,906,291 1,873,982 Due after 10 years ............ 3,077,594 3,043,404 3,159,572 3,108,952 Mortgage-backed securities .... 3,278,103 3,293,077 1,818,697 1,830,395 ------------------------------------------------ $10,945,568 $10,831,927 $8,714,196 $8,605,081 ================================================ At December 31, 2001 and 2000, approximately $328.3 million and $113.1 million, respectively, of securities were on deposit with various U.S. state or government insurance departments in order to comply with relevant insurance regulations. The increase in 2001 from 2000 related primarily to deposits required for the Company's Lloyd's operations related to the September 11 event. The Company has two facilities available for the issue of letters of credit collateralized against the Company's investment portfolio with a value of $169.0 million at December 31, 2001 and $483.0 million at December 31, 2000. At December 31, 2001 and 2000, approximately $120.0 million and $160.0 million, respectively, of letters of credit were issued and outstanding under these facilities. Included in cash and invested assets at December 31, 2001 and 2000 are approximately $14.8 million and $18.0 million, respectively, of assets held in an escrow account in accordance with Internal Revenue Service regulations. 7. INVESTMENTS IN AFFILIATES The Company's investment in affiliates and equity in net income from such affiliates are summarized below:
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 -------------------------------------------------------------------------- EQUITY IN EQUITY IN EQUITY IN NET INCOME NET INCOME NET INCOME CARRYING (LOSS) FOR CARRYING (LOSS) FOR CARRYING (LOSS) FOR VALUE THE YEAR VALUE THE YEAR VALUE THE YEAR -------------------------------------------------------------------------- Investment management companies and related investment funds ... $ 798,075 $ 80,580 $571,022 $ 70,032 $291,723 $ 43,865 Insurance affiliates ............. 239,269 (5,300) 221,700 4,323 188,188 (2,958) -------------------------------------------------------------------------- $1,037,344 $ 75,280 $792,722 $ 74,355 $479,911 $ 40,907 ==========================================================================
The Company has minority investments ranging from 20% to 30% in several investment fund managers. The significant investments include Highfields Capital Management LP, a global equity investment firm, and MKP Capital Management, a fixed income investment manager specializing in mortgage-backed securities. The Company has invested in certain closed end funds, including funds managed by these investment fund managers, all of which are included in investment management companies and related investment funds, above. 68 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 7. INVESTMENTS IN AFFILIATES (CONTINUED) The Company's significant insurance affiliate investments at December 31, 2001 and 2000 include Le Mans Re, Annuity & Life Re and FSA International, with ownership in those entities at 49%, 12% and 20%, respectively. Insurance affiliates included Risk Capital Holdings at December 31, 1999. See Note 25 for further discussion of the Company's investment in Le Mans Re. In certain investments, the carrying value is different from the underlying share of the investee's net assets. The difference represents goodwill on acquisition that is being amortized over a period not exceeding 30 years. 8. OTHER INVESTMENTS Other investments include strategic investments over which the Company does not have significant influence and whose fair value is generally unquoted. This includes investments in limited partnerships where the Company does not participate in the management of the partnerships. The Company received income from its limited partnership investments of $5.8 million and $4.0 million for the years ended December 31, 2001 and 2000, respectively. See Note 15(d) for further information. The Company continually reviews the performance of these other investments. The Company recorded losses of $49.1 million and $66.2 million in 2001 and 2000, respectively, due to other than temporary declines in values of these investments. Included in the Company's other investments at December 31, 2001 is a convertible debenture issued by Mutual Risk Management Ltd carried at $63.2 million. Although the market value of Mutual Risk Management has declined significantly, the Company has assessed the value of the debenture and, due to underlying security features, believes there is no impairment. 9. LOSSES AND LOSS EXPENSES Unpaid losses and loss expenses are comprised of: YEAR ENDED DECEMBER 31 --------------------------------------- 2001 2000 1999 --------------------------------------- Reserve for reported losses and loss expenses ................. $ 7,313,253 $2,788,378 $2,175,688 Reserve for losses incurred but not reported .................. 4,512,427 2,883,684 3,193,714 --------------------------------------- Unpaid losses and loss expenses ..... $11,825,680 $5,672,062 $5,369,402 ======================================= Net losses and loss expenses incurred are comprised of: YEAR ENDED DECEMBER 31 --------------------------------------- 2001 2000 1999 --------------------------------------- Loss and loss expense payments ...... $ 2,651,566 $1,910,624 $1,392,024 Change in unpaid losses and loss expenses ................. 3,263,049 625,043 303,140 Reinsurance recoveries .............. (2,995,717) (1,103,108) (390,860) --------------------------------------- Net losses and loss expenses incurred ................. $ 2,918,898 $1,432,559 $1,304,304 ======================================= 69 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 9. LOSSES AND LOSS EXPENSES (CONTINUED) The following table represents an analysis of paid and unpaid losses and loss expenses and a reconciliation of the beginning and ending unpaid losses and loss expenses for the years indicated:
2001 2000 1999 ----------------------------------------- Unpaid losses and loss expenses at beginning of year ....... $ 5,672,062 $5,369,402 $4,896,643 Unpaid losses and loss expenses recoverable ................ (1,339,767) (831,864) (593,960) ----------------------------------------- Net unpaid losses and loss expenses at beginning of year ... 4,332,295 4,537,538 4,302,683 Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in: Current year ........................................ 2,743,094 1,827,443 1,591,414 Prior years ......................................... 175,804 (394,884) (287,110) ----------------------------------------- Total net incurred losses and loss expenses ............. 2,918,898 1,432,559 1,304,304 Exchange rate effects ...................................... 61,598 (27,064) (5,950) Net loss reserves acquired ................................. 1,296,362 52,932 30,003 Less net losses and loss expenses paid in respect of losses occurring in : Current year ........................................ 633,141 411,685 281,806 Prior year .......................................... 1,184,284 1,251,985 811,696 ----------------------------------------- Total net paid losses ................................... 1,817,425 1,663,670 1,093,502 Net unpaid losses and loss expenses at end of year ......... 6,791,728 4,332,295 4,537,538 Unpaid losses and loss expenses recoverable ................ 5,033,952 1,339,767 831,864 ----------------------------------------- Unpaid losses and loss expenses at end of year ............. $11,825,680 $5,672,062 $5,369,402 =========================================
Certain aspects of the Company's business has loss experience characterized as low frequency but high severity in nature. This may result in volatility in the Company's results of operations and financial condition and liquidity. Actuarial assumptions used to establish the liability for losses and loss expenses are periodically adjusted to reflect comparisons to actual loss and loss expense development, inflation and other considerations. Several aspects of the Company's casualty insurance operations complicate the actuarial reserving techniques for loss reserves as compared to other insurance operations. Among these aspects are the differences in the policy forms from more traditional forms, the lack of complete historical loss data for losses of the same type intended to be covered by the policies and the expectation that losses in excess of the attachment level of the Company's policies generally will be characterized by low frequency and high severity, limiting the utility of claims experience of other insureds for similar claims. While management believes it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance operations, and there can be no assurance that losses and loss expenses will not exceed the total reserves. Current year net losses incurred in 2001 increased significantly over 2000 mainly due to losses related to the September 11 event, where the Company has estimated and recorded losses incurred of approximately $760.0 million, net of reinsurance recoveries, based upon preliminary reports and estimates of loss and damage. This preliminary estimate could change as more information becomes available. Current year net losses incurred in 2001 also include: (i) Winterthur International from July 1, 2001, which had net incurred losses of $241.2 million; (ii) catastrophic and other loss events, including the bankruptcy of Enron Corp., several satellite losses, the Toulouse, France petrochemical plant explosion, Tropical Storm Allison, the Petrobras oil rig loss in Brazil, the Seattle earthquake and several other European property losses; and (iii) other growth of the Company's operations related to new business assumed. 70 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 9. LOSSES AND LOSS EXPENSES (CONTINUED) Prior year loss development in 2001 related primarily to continued adverse loss development in the Company's casualty reinsurance business written for the 1997 to 1999 underwriting years. This deterioration occurred industry-wide primarily as a result of competitive pressures on pricing. The Company recorded adverse development for this business of approximately $180.0 million in the fourth quarter of 2001. In 2000, current year development reflected the growth in business assumed over 1999, an increase in loss ratios applied due to a competitive market environment which reduced premium rates, and also the early development of certain losses on the Company's large account business within its insurance operations. Historically, the Company had not experienced the reporting of such losses at an early stage and the Company's reserving methodology for these lines of business extrapolates these losses into the projections of future development. If future development is eventually determined to be less than the estimated ultimate losses recorded, loss reserves will be reduced at that time. This occurred for the 1993 through 1996 underwriting years, resulting in a reduction in prior year losses in 2000 and 1999. Net losses incurred for 2000 also reflected reserve adjustments to several unprofitable lines of business that the Company exited, including trucking, inland energy and certain classes of aviation. A net reserve charge of $114.0 million was recorded for these lines. The decrease in prior year incurred losses in 2000 and 1999 was driven primarily by the Company's insurance liability excess of loss reserves. The basis for establishing IBNR for these lines is relatively judgmental due to the lack of industry data available. Consequently, the Company estimates loss reserves through actuarial models based upon its own experience. When the Company commenced writing this type of business in 1986, limited data was available and the Company has made its best estimate of loss reserves for each underwriting year since that time. Over time, the amount of data has increased, providing a larger statistical base for estimating reserves. Redundancies in prior year loss reserves have occurred where loss experience has developed more favorably than expected. This trend did not continue in 2001 where the competitive effect of pricing has necessitated an increase to prior year loss reserves, particularly in the casualty lines as discussed above. In 1999, the Lloyd's operations experienced loss deterioration on the U.K. motor business principally from the 1998 and 1999 underwriting years of approximately $20.0 million. Partially offsetting the increase in net incurred losses in 2000 compared to 1999 was a reduction in the number and magnitude of catastrophe losses that occurred. Catastrophe losses in 2000 included an oil refinery loss in Kuwait, several satellite losses, and the Singapore Airlines loss, and totaled approximately $95.0 million. By comparison, 1999 generated approximately $185.0 million of catastrophe losses to the Company, including the European storms in December, hailstorms in Sydney, tornadoes in Oklahoma and satellite losses. 1999 incurred losses also included an increase to casualty reinsurance loss reserves of $95.0 million related to an alignment of reserving methodologies at the time of the merger with NAC in June 1999. Net loss reserves acquired in 2001 related primarily to the acquisition of Winterthur International. The Company has contractual post-closing protection with respect to adverse development of reserves, including unearned premium reserves, resulting from Winterthur International business written prior to July 1, 2001. Business in force at June 30, 2001 carries a maximum exposure to a combined ratio of 105%. Exchange rate effects on net loss reserves in 2001 also related primarily to Winterthur International which has several operations where the functional currency is not the U.S dollar. Translation of loss reserves into U.S. dollars and movements in the exchange rates, particularly the Swiss franc, have given rise to the increase in the exchange rate effects in 2001. 71 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 9. LOSSES AND LOSS EXPENSES (CONTINUED) The amount of paid losses increased in 2001 over 2000 due mainly to an increase in current year loss events. However, the majority of net losses incurred related to the September 11 event and other loss events in the fourth quarter of 2001 had not been reported to the Company as paid losses by December 31, 2001. Consequently, the Company expects a higher level of paid losses in 2002 related to these 2001 loss events. Higher paid losses in 2000 as compared to 1999 was due to the settlement of previously established reserves, particularly catastrophe losses as noted above. The Company's net incurred losses and loss expenses included a charge of $21.5 million, $2.8 million and $10.6 million in 2001, 2000 and 1999, respectively, for estimates of actual and potential non-recoveries from reinsurers. Such charges for non-recoveries relate mainly to the September 11 event and reinsurance ceded for casualty business written prior to 1986. As at December 31, 2001 and 2000, the reserve for potential non-recoveries from reinsurers was $49.7 million and $25.6 million, respectively. Except for certain workers compensation liabilities, the Company does not discount its unpaid losses and loss expenses. The Company utilizes tabular reserving for workers compensation unpaid losses that are considered fixed and determinable and discounts such losses using an interest rate of 7%. The tabular reserving methodology results in applying uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. Tabular unpaid losses and loss expenses, net of reinsurance, at December 31, 2001 and 2000 were $231.0 million and $168.8 million, respectively. The related discounted unpaid losses and loss expenses were $98.0 million and $63.4 million as of December 31, 2001 and 2000, respectively. ASBESTOS AND ENVIRONMENTAL RELATED CLAIMS The Company's reserving process includes a continuing evaluation of the potential impact on unpaid liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. Liabilities are established to cover both known and incurred but not reported claims. A reconciliation of the opening and closing unpaid losses and loss expenses related to asbestos and environmental exposure claims related to business written prior to 1986 for the years indicated is as follows:
YEAR ENDED DECEMBER 31 ------------------------------- 2001 2000 1999 ------------------------------- Net unpaid losses and loss expenses at beginning of year ..... $34,747 $36,206 $34,850 Net incurred losses and loss expenses ........................ 2,016 1,053 4,416 Less net paid losses and loss expenses ....................... 3,611 2,512 3,060 ------------------------------- Net (decrease) increase in unpaid losses and loss expenses ... (1,595) (1,459) 1,356 Net unpaid losses and loss expenses at end of year ........... 33,152 34,747 36,206 Unpaid losses and loss expenses recoverable at end of year ... 60,166 48,133 49,022 ------------------------------- Gross unpaid losses and loss expenses at end of year ......... $93,318 $82,880 $85,228 ===============================
Incurred but not reported losses, net of reinsurance, included in the above table was $8.0 million in 2001, $14.0 million in 2000 and $16.1 million in 1999. Unpaid losses recoverable are net of potential uncollectible amounts. 72 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 9. LOSSES AND LOSS EXPENSES (CONTINUED) As of December 31, 2001 and 2000, the Company had approximately 453 and 374 open claim files, respectively, for potential asbestos exposures and 543 and 613 open claim files, respectively, for potential environmental exposures on business written prior to 1986. Approximately 44% and 45% of the open claim files for 2001 and 2000, respectively, are due to precautionary claim notices. Precautionary claim notices are submitted by the ceding companies in order to preserve their right to receive coverage under the reinsurance contract. Such notices do not contain an incurred loss amount to the Company. The Company believes it has made reasonable provision for its asbestos and environmental exposures and is unaware of any specific issues that would significantly affect its estimate for losses and loss expenses. The estimation of loss and loss expense liabilities for asbestos and environmental exposures is subject to much greater uncertainty than is normally associated with the establishment of liabilities for certain other exposures due to several factors, including: i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; ii) the lack of reliability of available historical claims data as an indicator of future claims development; iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and iv) the potential of insurers and reinsurers to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of loss and loss expense liabilities beyond recorded reserves can be established. As these uncertainties are resolved, additional reserve provisions, which could be material in amount, may be necessary. 10. REINSURANCE The Company utilizes reinsurance and retrocession agreements principally to increase aggregate capacity and to reduce the risk of loss on business assumed. The Company's reinsurance and retrocession agreements provide for recovery of a portion of losses and loss expenses from reinsurers and reinsurance recoverables are recorded as assets. The Company is liable if the reinsurers are unable to satisfy their obligations under the agreements. Under the Company's reinsurance security policy, reinsurers are generally required to be rated A or better by Standard & Poor's ("S&P") or, in the case of Lloyd's syndicates, S&P "Four Bells" and/or B+ from Moody's Investor Service. The Company's Chief Credit Officer will consider reinsurers that are not rated or do not fall within the above rating categories on a case-by-case basis. The effect of reinsurance and retrocessional activity on premiums written and earned from general operations is shown below:
PREMIUMS WRITTEN PREMIUMS EARNED YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 ---------------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------------- Direct ........ $ 2,978,370 $ 1,688,923 $1,088,028 $ 2,763,288 $1,456,064 $ 994,339 Assumed ....... 1,805,352 1,440,108 1,354,892 1,751,464 1,455,694 1,259,632 Ceded ......... (1,855,296) (1,012,791) (541,037) (1,734,825) (876,518) (503,965) ---------------------------------------------------------------------------------------- Net ........... $ 2,928,426 $ 2,116,240 $1,901,883 $ 2,779,927 $2,035,240 $1,750,006 ========================================================================================
73 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 10. REINSURANCE (CONTINUED) The Company recorded reinsurance recoveries on losses and loss expenses incurred of $3.0 billion, $1.1 billion and $390.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company is the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $1.3 billion at December 31, 2001, collateralizing reinsurance recoverables with respect to certain retrocessionnaires. Unpaid losses and loss expenses recoverable increased significantly during 2001 primarily due to the acquisition of Winterthur International and the September 11 event. See Notes 4 and 5 for further information. No reinsurer accounted for 10% or more of the outstanding reinsurance recoverable balance at December 31, 2001. At December 31, 2001, the largest reinsurance balance receivable and unpaid loss recoverable from a single reinsurer was $355.2 million due from Hannover Re (Ireland) Ltd, and $79.1 million from their affiliate, E+S Reinsurance (Ireland), Ltd, which are both rated A+ by A.M. Best. 11. DEPOSIT LIABILITIES The Company has entered into certain contracts that transfer insufficient risk to be accounted for as insurance or reinsurance. These contracts have been recorded as deposit liabilities and are matched by an equivalent amount of investments. At December 31, 2001 and 2000, total deposit liabilities were $1.7 billion and $1.2 million, respectively. The Company has investment risk related to its ability to generate sufficient investment income to enable the total invested assets to cover the payment of the estimated ultimate liability. The Company establishes an initial accretion rate at inception of the contract, which is reviewed and adjusted periodically based on claims activity and current investment yields. 12. POLICY BENEFIT RESERVES During 2001, the Company entered into long duration contracts that subject the Company to mortality and morbidity risks and which were accounted for as life premiums earned. Policy benefit reserves were established using a net premium method and assumptions for investment yields, mortality, morbidity, terminations and expenses, applicable at the time the insurance contracts were made. The assumptions include provisions for the risk of adverse deviations. At December 31, 2001, policy benefit reserves related to these contracts were $625.1 million. The average rate of assumed investment yield for these contracts was 5.1% per annum. 13. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS As at December 31, 2001, the Company had bank, letter of credit and loan facilities available from a variety of sources, including commercial banks, totaling $4.4 billion (2000: $2.6 billion) of which $1.6 billion (2000: $450.0 million) of debt was outstanding. In addition, $2.0 billion (2000: $1.1 billion) of letters of credit were outstanding, 5% of which were collateralized by the Company's investment portfolio, supporting U.S. non-admitted business and the Company's Lloyd's capital requirements. 74 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 13. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS (CONTINUED) The financing structure at December 31, 2001 was as follows: IN USE/ FACILITY COMMITMENT OUTSTANDING ----------------------- DEBT: 364-day Revolver ................................. $ 500,000 $ -- 2 facilities of 5-year Revolvers - total ......... 350,000 350,000 7.15% Senior Notes due 2005 ...................... 100,000 99,970 6.58% Guaranteed Senior Notes due 2011 ........... 255,000 255,000 Zero Coupon Convertible Debentures due 2021 ...... 609,692 609,692 Liquid Yield Option NotesTM due 2021 ............. 290,147 290,147 Other operating debt ............................. 68 68 ----------------------- $2,104,907 $1,604,877 ======================= LETTERS OF CREDIT: 6 facilities - total $2,274,000 $2,029,000 ======================= The financing structure at December 31, 2000 was as follows: IN USE/ FACILITY COMMITMENT OUTSTANDING ----------------------- DEBT: 364-day Revolver ................................. $ 500,000 $ -- 2 facilities of 5 year Revolvers - total ......... 350,000 350,000 7.15% Senior Notes due 2005 ...................... 100,000 99,964 Other operating debt ............................. 68 68 ----------------------- $ 950,068 $ 450,032 ======================= LETTERS OF CREDIT: 5 facilities - total $1,679,000 $1,109,000 ======================= The Company entered into a $500.0 million 364-day revolving credit facility effective June 29, 2001, to replace a facility of $500.0 million that expired during 2001. A syndicate of banks provides this facility and borrowings are unsecured. The Company borrowed and repaid $200.0 million under a prior facility during the first quarter of 2000. The Company borrowed $50.0 million under the expired facility in March 2001 and repaid the borrowing in April 2001. There were no other borrowings under the facilities during the remainder of 2001. The weighted average interest rate on the funds borrowed during 2001 and 2000 was approximately 5.4% and 6.3%, respectively. Two syndicates of banks provide the two five-year facilities and borrowings are unsecured. The amount of $350.0 million outstanding at both December 31, 2001 and 2000 related primarily to acquisitions of subsidiaries. The weighted average interest rate on funds borrowed during 2001 was approximately 5.3% and 6.6% during 2000. The Company issued $100.0 million of 7.15% Senior Notes due November 15, 2005 through a public offering at a price of $99.9 million in 1995. In April 2001, the Company issued at par $255.0 million of 6.58% Guaranteed Senior Notes due April 2011 through a private placement to institutional investors. Proceeds of the debt were used for general corporate purposes. 75 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 13. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS (CONTINUED) In May 2001, the Company issued $1,010.8 million principal amount at maturity (subject to adjustment in the event there is an upward interest adjustment) of Zero Coupon Convertible Debentures ("CARZ") at $593.57 per bond and, unless converted or repaid before their due date of May 2021, they will be repaid in May 2021 at $1,000 per bond, at a total cost of $1.01 billion. The accretion rate is 2.625% per annum on a semi-annual basis or 2.6422% per annum on an annual basis. In September 2001, the Company also issued $508.8 million principal amount at maturity (subject to adjustment in the event there is an upward interest adjustment) of Liquid Yield Option Notes(TM) ("LYONs") at an initial price of $565.01 per bond. The LYONs will also be repaid at $1,000 each, unless converted or repaid before their due date of September 2021, at a total cost of $508.8 million. The accretion rate on the LYONs is 2.875% per annum on a semi-annual basis or 2.89566% per annum on an annual basis. Although both the CARZ and LYONs are due to be repaid in 2021, there are several features that may result in the bonds being repaid or converted into the Company's Class A Ordinary Shares before the redemption date. As these features include market-driven features and options available to the Company and bondholders, it is not possible to determine if the bonds will remain outstanding until their scheduled maturity in 2021 Each of the CARZ and LYONs provide the bondholders the right to require the Company to repurchase the bonds on predetermined dates ("put" dates) at predetermined values as set forth in the relevant indenture. The put dates for the CARZ occur on May 23 of 2002, 2004, 2006, 2008, 2011 and 2016. The put dates for the LYONs occur on September 7 of 2002, 2003, 2004, 2006, 2008, 2011 and 2016. The Company may, at its option, pay the repurchase price in cash or Class A ordinary shares or a combination thereof. In addition, each of the CARZ and LYONs provide for a contingent conversion feature that gives the bondholders the right to convert the bonds into the Company's shares at other times during the life of the bonds should the market price of the Company's shares trade at certain levels. Accordingly, if the Company's share price is at least 110% of the accreted conversion price for at least twenty of the thirty days during the relevant conversion period, the bondholders would have the right to convert the bonds into Class A Ordinary Shares. If converted for shares, each CARZ would be converted into 5.9467 shares and each holder of a LYONs would receive 5.277 shares. The accreted values would be determined by applying the accretion rate to the initial issue price. In the example of CARZ, the accreted price on May 23, 2002 will be $609.25 determined by adding one year's accretion of 2.6422% per annum on an annual basis to the original issue price of $593.57. The holders of each of the CARZ and LYONs also have the right to convert the bonds for shares in the event that the trading price of the bonds for a predetermined period falls below 95% of the value of the equivalent number of shares, provided however, if the shares are trading at a predetermined premium to the accreted price of the bonds, holders may receive cash, shares or a combination thereof in lieu of shares upon conversion. These bonds also provide for interest rates to be adjusted in the event that the Company's stock price falls below levels specified in the relevant indenture relative to the conversion price. In addition, in the event that the credit ratings assigned to the bonds by Standard & Poor's fall below the specified level of BBB+, the bonds would be convertible into shares at 5.9467 shares per CARZ and 5.277 per LYON. The rating assigned to the bonds at the time of issue was A+. Some corporate transactions, such as a change of control of the Company, would give the bondholders the right to require the Company to repurchase the bonds at the accreted value of the bonds at that time. 76 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 13. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS (CONTINUED) The bonds become immediately due if an event of default occurs and 25% or more of the bondholders demand repayment of the accreted value at the time of such event. Such an event of default would include failure to pay amounts due on the notes, an event of default occurring under the Company's other credit facilities, or certain other events such as bankruptcy or insolvency of the Company. The bonds are also callable as the Company has the right to redeem the bonds for cash, in full or in part, at their accreted value at any time after May 23, 2004, in the case of the CARZ, and September 7, 2004, in the case of the LYONs. The puts and the interest rate adjustment features embedded in the CARZ and LYONs are considered derivatives and are subject to fair value. There is currently minimal value ascribed to the puts, as the contingent events of these features are considered unlikely to occur or to the interest rate adjustment feature due to the current trading value of the bonds. Due to the contingent nature of the conversion features of these debt securities, there is no impact on fully diluted earnings (loss) per share at this time. Total pre-tax interest expense on the borrowings described above was $65.4 million, $32.1 million and $37.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Associated with the Company's bank and loan commitments are various covenants that include, among other things, the requirement to maintain a minimum credit and financial strength rating and a minimum amount of consolidated shareholders' equity. The Company was in compliance with these covenants throughout the three years ended December 31, 2001. The Company had six letter of credit facilities available at December 31, 2001, two from two syndicates of banks, one from a U.K. bank, two from U.S. banks and one from the seller of Winterthur International. These facilities include a $1.0 billion unsecured syndicated letter of credit facility that replaced a syndicated facility that expired during the year. In addition, the Company entered into a new $390.0 million unsecured syndicated facility that replaced an expired syndicate facility that supports the Company's Lloyd's capital requirements. These facilities are utilized to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd's. All of these facilities are scheduled for renewal during 2002, and the Winterthur International arrangement will also terminate during 2002. Of the letters of credit outstanding at December 31, 2001, $110.0 million (2000: $160.0 million) were collateralized against the Company's investment portfolio and $1.9 billion (2000: $949.0 million) were unsecured. The letters of credit outstanding increased during 2001 due to the effects of the September 11 event. 14. DERIVATIVE INSTRUMENTS AND WEATHER RISK MANAGEMENT PRODUCTS The Company enters into derivative instruments for both risk management and trading purposes. The Company is exposed to potential loss from various market risks, including changes in interest rates, foreign currency exchange rates and commodity values, as it relates to the Company's participation in the weather risk management market. The Company manages its market risks based on guidelines established by management. These derivative instruments are carried at fair value with the resulting gains and losses recognized in income in the period in which they occur. 77 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 14. DERIVATIVE INSTRUMENTS (CONTINUED) The following table summarizes these instruments and the effect on net income in income in the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------------------------------ CREDIT DEFAULT SWAPS: Net premiums earned ....................................... $ 12,394 $ -- $ -- Losses and loss expenses .................................. 13,667 _ _ Net unrealized losses on derivative instruments ........... (26,814) _ _ Fee income and other ...................................... 8,661 15,924 _ ------------------------------ Total ..................................................... $(19,426) $15,924 $ -- ------------------------------ WEATHER RISK MANAGEMENT PRODUCTS: Fee income and other ...................................... $ 16,556 $ -- $ -- INVESTMENT DERIVATIVES: Net realized gains on derivative instruments .............. $ (1,332) $ 9,753 $21,648 Net unrealized gains (losses) on derivative instruments ... 15,970 (4,272) 5,908 ------------------------------ Total ..................................................... $ 14,638 $ 5,481 $27,556 ------------------------------ IMPACT ON NET INCOME (LOSS) .................................. $ 11,768 $21,405 $27,556 ==============================
(A) CREDIT DEFAULT SWAPS Credit default swaps issued by the Company meet the definition of a derivative under FAS 133. Effective January 1, 2001, the Company has recorded these products at fair value, modeled on prevailing market conditions and certain other factors relating to the structure of the transaction. The Company considers credit default swaps to be, in substance, financial guaranty contracts as the Company has the intent to hold them to maturity. The change resulting from movement in credit spreads is unrealized as the credit default swaps are not traded to realize this value and is included in net unrealized gains and losses on derivatives. Other elements of the change in fair value are based on pricing established at the inception of the contract. Credit default swaps generally enhance a synthetic portfolio of securities. The credit ratings of the underlying securities vary and a single rating is calculated for the portfolio at the inception of the transaction by an independent agency. In order to effectively price and market the transaction, different tranches are modeled for the purpose of assigning credit ratings based upon the level of subordination. Generally, a primary layer is created to enable the originator of the transaction to participate in the risks. The Company generally participates in senior or rated tranches of a risk, but may participate in the primary layer in selected instances. The Company fair values transactions related to the primary layers of credit default swaps using a model that calculates the net present value of the premiums and expected losses. The change in fair value recorded for transactions pertaining to primary layers as of December 31, 2001 was a gain of $8.1 million. Credit default swaps where the Company participates in the rated tranche are considered, in substance, financial guaranty transactions as the Company intends to hold them to maturity. Since the Company underwrites all financial guaranty transactions in the expectation of not incurring a loss, the net present value method described above is not considered appropriate. The rated tranches are therefore fair valued using changes in credit spreads to reflect current market conditions. The Company will also consider the characteristics and credit ratings of the 78 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 14. DERIVATIVE INSTRUMENTS (CONTINUED) underlying portfolio in order to apply the model to obtain an estimate of fair value. The change in fair value recorded for the rated tranches as of December 31, 2001 was a loss of $27.5 million. In accordance with FAS 133, the Company recorded a transition adjustment to recognize the difference between the carrying values and the fair values of the credit default swaps at January 1, 2001. This adjustment was not significant. (B) WEATHER RISK MANAGEMENT PRODUCTS The Company maintains a weather related derivatives trading portfolio. The fair value of these transactions is determined using internally developed models. The models used to determine these fair values are consistent with the models used to estimate the Company's Value-at-Risk ("VaR") exposure to weather risk. The VaR methodology is a comprehensive statistical measure that uses historical weather results to calculate the potential losses that could occur over a defined period of time given a certain probability. Currently, the Company believes that the methodology utilized is appropriate based upon a comparison with the VaR approaches used in other markets. Calculation of the fair value is based on historically realized weather results, including heating and cooling degree days. Historical data is then adjusted for any underlying weather trends and the expected potential payout is computed for each transaction. Actual weather results impacting each transaction are then compared to historical weather data and the fair value adjusted accordingly. The change in fair value recorded for the weather risk management products as of December 31, 2001 was a loss of $1.1 million and the realized gains totaled $17.7 million. These amounts have both been included in fee income and other. (C) INVESTMENT DERIVATIVES, INCLUDING EMBEDDED DERIVATIVES FOREIGN CURRENCY EXPOSURE MANAGEMENT The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of certain of its foreign currency fixed maturities and equity investments. These contracts are not designated as specific hedges for financial reporting purposes and therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. These contracts generally have maturities of three months or less. In addition, where the Company's investment managers believe potential gains exist in a particular currency, a forward contract may not be entered into. At December 31, 2001 and 2000, forward foreign exchange contracts with notional principal amounts totaling $45.5 million and $166.8 million, respectively were outstanding. The fair value of these contracts as at December 31, 2001 and 2000 was $45.7 million and $164.5 million, respectively, with unrealized gains of $0.1 million in 2001 and unrealized losses of $2.3 million in 2000. For the years ended December 31, 2001 and 2000, realized gains of $5.3 million and $48.3 million, respectively, and unrealized gains of $2.3 million and unrealized losses of $4.3 million, respectively, were recorded in net realized and unrealized gains and losses on derivative instruments. 79 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 14. DERIVATIVE INSTRUMENTS (CONTINUED) Until 2001, the Company attempted to hedge directly the foreign currency exposure of a portion of its foreign currency fixed maturity investments using forward foreign exchange contracts that generally had maturities of three months or less, and which were rolled over to provide continuing coverage for as long as the investments were held. Where an investment was sold, the related foreign exchange sale contract was closed by entering in to an offsetting purchase contract. At December 31, 2000, the Company had, as hedges, foreign exchange contracts for the sale of $121.0 million and the purchase of $25.7 million of foreign currencies at fixed rates, primarily Euros. The notional value of fixed maturities denominated in foreign currencies that were hedged and held by the Company as at December 31, 2000 was $100.6 million. In connection with these foreign exchange contracts directly hedging foreign currency fixed maturity investments, unrealized foreign exchange gains or losses were deferred and included in accumulated other comprehensive loss. As at December 31, 2000, unrealized losses amounted to $10.2 million and realized losses totaled $0.7 million. Since 2000, contracts the Company enters into are not designated as specific hedges, and consequently all realized and unrealized gains and losses are recorded in income in the period in which they occur. In 2000, the Company used foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on certain of its known claims payable in foreign currencies. These contracts were not designated as specific hedges for financial reporting purposes and therefore, realized and unrealized gains and losses on the contracts were recorded in income in the period in which they occurred. A loss of $6.8 million was realized in 2000 in connection with these contracts. At December 31, 2000, no such contracts were outstanding and no contracts were entered into in 2001. The Company has entered into other investment derivative instruments in 2001 and 2000. Results of these transactions are insignificant. The Company is exposed to credit risk in the event of non-performance by the other parties to the forward contracts, however the Company does not anticipate non-performance. The difference between the notional principal amounts and the associated market value is the Company's maximum credit exposure. FINANCIAL MARKET EXPOSURE The Company also uses bond and stock index futures to add value to the portfolio where market inefficiencies are believed to exist, to equitize cash holdings of equity managers and to adjust the duration of a portfolio of fixed income securities to match the duration of related deposit liabilities. These instruments are marked to market on a daily basis and changes in fair values are recorded through net realized and unrealized gains and losses on derivative instruments. The Company measures potential losses in fair values using various statistical techniques, including VaR. The Company calculates VaR for investment related derivatives based on a 95% confidence interval with a one month horizon. At December 31, 2001 and 2000, bond and stock index futures outstanding were $695.6 million (2000: $83.8 million) with underlying investments having a market value of $9.7 billion (2000: $2.5 billion). Losses of $1.0 million and $32.4 million on these contracts were realized during the years ended December 31, 2001 and 2000, respectively. The Company reduces its exposure to these futures through offsetting transactions, including options and forwards. The VaR of the total investment portfolio and of all investment related derivatives at December 31, 2001 was approximately $351.0 and $18.0 million, respectively. 80 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 14. DERIVATIVE INSTRUMENTS (CONTINUED) OTHER INVESTMENT DERIVATIVES The Company holds warrants in conjunction with certain of its other investments. These warrants are recorded at fair value based on quoted market prices. At December 31, 2001, the Company recorded a gain of $13.6 million related the change in fair value of these warrants. No such warrants were held in 2000. The Company entered into a treasury rate lock agreement with the underwriters of the 6.58% Guaranteed Senior Notes due 2011. The Notes were priced using a margin over the yield of a U.S. Treasury note with a similar maturity. The treasury rate lock agreement was designed to eliminate underlying pricing risk of the Company's debt that would have resulted from an increase in the yield of the comparable U.S. Treasury issue between the initiation of the transaction and the pricing of the transaction. A loss of $5.6 million was realized and recorded in net realized and unrealized gains and losses on derivative instruments in the year ended December 31, 2001 related to this treasury rate lock agreement. 15. COMMITMENTS AND CONTINGENCIES (A) SPECIAL PURPOSE VEHICLES The Company utilizes special purpose vehicles to a limited extent both indirectly and directly in the ordinary course of the Company's business. At the transactional level, the Company provides various forms of credit enhancement including financial guaranty insurance and reinsurance of structured transactions backed by pools of assets of specified types, municipal obligations supported by the issuers' ability to charge fees for specified services or projects, and corporate risk based obligations including essential infrastructure projects and obligations backed by receivables from future sales of commodities and other specified services. The obligations related to these transactions are often securitized through off-balance sheet vehicles. In synthetic transactions, the Company guarantees payment obligations of counterparties including special purpose vehicles under credit default swaps referencing asset portfolios. The Company only provides financial guaranty insurance, or indirectly reinsurance, of these vehicles for fixed premiums at market rates but does not hold any equity positions or subordinated debt in these off-balance sheet arrangements. Accordingly, these vehicles are not consolidated. The Company has a 38% investment in an asset-backed commercial paper company that invests funds provided through a commercial paper and a Euro Medium Term Note program. The assets of this company are guaranteed by an unrelated third party. The Company has a further indirect investment that does not provide any additional control. The Company accounts for this investment on an equity basis. The Company has loaned a $30.0 million note to this investment vehicle. The investment company has assets and liabilities of $950.0 million at December 31, 2001 and generated income net of start-up costs totaling $1.2 million. The Company believes its investment in this company and note receivable are realizable. The Company created XL Capital Finance (Europe) plc to facilitate the January 2002 issue of 6.5% Guaranteed Senior Notes in January 2002. This special purpose vehicle is wholly-owned and will be consolidated in the Company's consolidated financial statements. (B) EXPOSURES UNDER FINANCIAL GUARANTIES The Company provides and reinsures financial guaranties issued to support public and private borrowing arrangements. Financial guaranties are conditional commitments that guaranty the performance of an obligor to a third party. The Company's potential liability in the event of non-payment by the issuer of the insured obligation is represented by its proportionate share of the aggregate outstanding principal and interest payable ("insurance in force") on such insured obligation. In synthetic transactions, the Company guaranties payment obligations of coun- 81 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) terparties under credit default swaps. At December 31, 2001, the Company's net aggregate insurance in force was $29.0 billion. The range of maturity of the insured obligations is one to thirty five years. The Company does not record a carrying value for future installment premiums as they are recognized over the term of the contract. The present value of future installment premiums discounted at 7% is $205.9 million at December 31, 2001. The Company manages its exposures to underwriting risk on these transactions through a structured process which includes but is not limited to detailed credit analysis, review of and adherence to underwriting guidelines and the use of reinsurance. The Company has also implemented surveillance policies and procedures to monitor its exposure throughout the life of the transactions. In addition, the structure of the transactions are such that the insured obligation is backed by a stream of cash flows, pools of assets or some other form of collateral. This collateral would typically become the Company's upon the payment of a claim by the Company. (C) CONCENTRATIONS OF CREDIT RISK The creditworthiness of a counterparty is evaluated by the Company, taking into account credit ratings assigned by independent agencies. The credit approval process involves an assessment of factors including, among others, the counterparty, country and industry credit exposure limits. Collateral may be required, at the discretion of the Company, on certain transactions based on the creditworthiness of the counterparty. The areas where significant concentrations of credit risk may exist include unpaid losses and loss expenses recoverable and reinsurance balances receivable (collectively "reinsurance assets"), investments and cash and cash equivalent balances. The Company's reinsurance assets at December 31, 2001 amounted to $6.3 billion and resulted from reinsurance arrangements in the course of its operations. A credit exposure exists with respect to reinsurance assets as they may be uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and if necessary, the Company may hold collateral in the form of funds, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. See Note 10 for further information. In addition, the Company underwrites a significant amount of its business through brokers and a credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of insurance and reinsurance balances to the Company. During 2001, 2000 and 1999, approximately 23%, 22% and 21%, respectively, of the Company's consolidated gross written premiums from general operations were generated from or placed by Marsh & McLennan Companies. During 2001, 2000 and 1999, approximately 16%, 16% and 13%, respectively, of the Company's consolidated gross written premiums from general operations were generated from or placed by AON Corporation and its subsidiaries. Both of these companies are large, well established companies and there are no indications that either of them is financially troubled. No other broker and no one insured or reinsured accounted for more than 10% of gross premiums written from general operations in each of the three years ended December 31, 2001. The Company's available for sale investment portfolio is managed by external managers in accordance with guidelines that have been tailored to meet specific investment strategies, including standards of diversification, which limit the allowable holdings of any single issue. The Company did not have an aggregate investment in a single entity, other than the U.S. government, in excess of 10% of shareholders' equity at December 31, 2001 and 2000. 82 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) (D) OTHER INVESTMENTS The Company has committed to invest in several limited partnerships as part of its overall corporate strategy. The primary purpose of these partnerships is to invest capital provided by the partners in various insurance and reinsurance ventures. The Company had invested $163.3 million and $103.0 million as at December 31, 2001 and 2000, respectively, with commitments to invest a further $144.8 million over the next ten years. The Company does not actively participate in the management of the partnerships. (E) PROPERTIES The Company rents space for its principal executive offices under leases that expire up to 2014. Total rent expense for the years ended December 31, 2001, 2000 and 1999 was approximately $18.9 million, $18.3 million and $13.0 million, respectively. Future minimum rental commitments under existing leases are expected to be as follows: Year ending December 31: 2002 $ 16,643 2003 15,681 2004 14,080 2005 12,668 2006 10,126 Later years 48,590 -------- Total minimum future rentals $117,788 -------- In 1997, the Company acquired commercial real estate in Bermuda for the purpose of securing long-term office space for its worldwide headquarters. Development was completed in April 2001. The total cost of this development, including the land, was approximately $125.0 million. (F) TAX MATTERS The Company is a Cayman Islands corporation and, except as described below, neither it nor its non-U.S. subsidiaries have paid United States corporate income taxes (other than withholding taxes on dividend income) on the basis that they are not engaged in a trade or business or otherwise subject to taxation in the United States. However, because definitive identification of activities which constitute being engaged in trade or business in the United States is not provided by the Internal Revenue Code of 1986, regulations or court decisions, there can be no assurance that the Internal Revenue Service will not contend that the Company or its non-U.S. subsidiaries are engaged in trade or business or otherwise subject to taxation in the United States. If the Company or its non-U.S. subsidiaries were considered to be engaged in trade or business in the United States (and, if the Company or such subsidiaries were to qualify for the benefits under the income tax treaty between the United States and Bermuda or Ireland, such businesses were attributable to a "permanent establishment" in the United States), the Company or such subsidiaries could be subject to U.S. tax at regular tax rates on its taxable income that is effectively connected with its U.S. trade or business plus an additional 30% "branch profits" tax on such income remaining after the regular tax, in which case there could be a significant adverse effect on the Company's results of operations and financial condition. 83 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 16. SHARE CAPITAL (A) AUTHORIZED AND ISSUED The authorized share capital is 999,990,000 ordinary shares of a par value of $0.01 each. Holders of Class A ordinary shares are entitled to one vote for each share. In June 2000, the Company's Class B ordinary shares were converted into Class A ordinary shares on a one-for-one basis. All shares in issue at December 31, 2001 are Class A ordinary shares. The following table is a summary of shares issued and outstanding (in thousands): YEAR ENDED DECEMBER 31 ------------------------------- 2001 2000 1999 ------------------------------- Balance - beginning of year ................ 125,020 127,807 128,745 Exercise of options ........................ 1,812 2,247 443 Issue of restricted shares ................. 235 40 107 Repurchase of shares ....................... (1,533) (5,074) (1,488) Issue of shares ............................ 9,200 -- -- ------------------------------- Balance - end of year ...................... 134,734 125,020 127,807 =============================== The Company issued 9.2 million shares during 2001 at a price of $89.00 per share to support capital requirements subsequent to the September 11 event. Net proceeds received were $787.7 million. (B) SHARE REPURCHASES The Company has had several stock repurchase plans in the past as part of its capital management program. In June 1999, the Board of Directors rescinded the Company's share repurchase plans. On January 9, 2000, the Board of Directors authorized the repurchase of shares up to $500.0 million. During 2001, the Company repurchased 1.5 million shares at a total cost of $116.9 million, or an average cost of $76.40 per share. During 2000, the Company repurchased 5.1 million shares at a total cost of $247.7 million, or an average cost of $48.82 per share. (C) STOCK PLANS The Company's executive stock plan, the 1991 Performance Incentive Program, as amended and restated effective March 17, 2000, provides for grants of non-qualified or incentive stock options, restricted stock awards and stock appreciation rights ("SARs"). The plan is administered by the Company and the Compensation Committee of the Board of Directors. Stock options may be granted with or without SARs. Grant prices are established at the fair market value of the Company's common stock at the date of grant. Options and SARs have a life of not longer than ten years and vest as set forth by the Compensation Committee at the time of grant. Options currently vest annually over three years from date of grant. Restricted stock awards issued under the 1991 Performance Incentive Program plan vest over such periods as the Compensation Committee may approve. These shares contained certain restrictions, prior to vesting, relating to, among other things, forfeiture in the event of termination of employment and transferability. As the shares are issued, deferred compensation equivalent to the fair market value on the date of the grant is charged to shareholders' equity and subsequently amortized over the vesting period. Restricted stock issued under the plan totaled 227,795 shares, 77,472 shares and 113,100 shares in 2001, 2000 and 1999, respectively. Restricted stock awards granted by NAC prior to the merger amounted to 3,627 shares in 1999. Vesting for restricted stock awards generally occurs over a four to six year period. 84 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 16. SHARE CAPITAL (CONTINUED) All options granted to non-employee directors are granted under the 1991 Performance Incentive Program. All options vest immediately on the grant date. Directors may also make an irrevocable election preceding the beginning of each fiscal year to defer cash compensation that would otherwise be payable as his or her annual retainer in increments of $5,000. The deferred payments are credited in the form of shares calculated by dividing 110% of the deferred payment by the market value of the Company's stock at the beginning of the fiscal year. These shares are distributed under the terms of the plan. Shares issued under the plan totaled 4,240, 8,179 and nil in 2001, 2000 and 1999, respectively. A second stock plan is provided for the directors that grants share units equal to their annual retainer divided by market price of the Company's stock on January 1 of each year. These units receive dividends in the form of additional units equal to the cash value divided by the market price on the payment date. Stock units totaling 7,318, 12,903 and 1,217 were issued in 2001, 2000 and 1999, respectively. Total units are granted as shares upon retirement. Following the merger with NAC, new option plans were created in the Company to adopt the NAC plans. Options generally have a five or six year vesting schedule, with the majority expiring ten years from the date of grant; the remainder having no expiration. A stock plan is also maintained for non-employee directors. Options expire ten years from the date of grant and are fully exercisable six months after their grant date. In 1999, the Company adopted the 1999 Performance Incentive Plan under which 1,250,000 options were available and issued to employees who were not directors or executive officers of the Company. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard 123, "Accounting for Stock-Based Compensation." Had the Company adopted the accounting provisions of FAS 123, compensation costs would have been determined based on the fair value of the stock option awards granted in 2001, 2000 and 1999, and net income and earnings per share would have been reduced to the pro-forma amounts indicated below: YEAR ENDED DECEMBER 31 --------------------------------- 2001 2000 1999 --------------------------------- Net (loss) income - as reported ............ $(576,135) $506,352 $470,509 Net (loss) income - pro-forma .............. $(615,868) $481,560 $437,592 Basic (loss) earnings per share - as reported .............................. $(4.55) $4.07 $3.69 Basic (loss) earnings per share - pro-forma ................................ $(4.86) $3.87 $3.43 Diluted (loss) earnings per share - as reported .............................. $(4.55) $4.03 $3.62 Diluted (loss) earnings per share - pro-forma ................................ $(4.86) $3.83 $3.36 (D) FAS 123 PRO FORMA DISCLOSURE The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2001 2000 1999 --------------------------------- Dividend yield ............................. 2.26% 3.58% 3.43% Risk free interest rate .................... 4.65% 5.04% 5.90% Expected volatility ........................ 26.01% 25.77% 24.66% Expected lives ............................. 5.0 years 7.5 years 7.5 years Total stock based compensation expensed, which related to amortization of restricted stock, was $10.4 million, $9.5 million and $7.7 million in 2001, 2000 and 1999, respectively. 85 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 16. SHARE CAPITAL (CONTINUED) (E) OPTIONS Following is a summary of stock options and related activity:
2001 2000 1999 --------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------------------------------------------------------------------------- Outstanding - beginning of year ... 8,163,017 $51.09 10,282,723 $46.50 7,685,414 $50.61 Granted ........................... 3,089,999 $79.42 579,852 $49.95 3,207,492 $57.06 Exercised ......................... (1,943,966) $47.61 (2,515,774) $31.48 (421,163) $27.57 Cancelled ......................... (114,918) $66.26 (183,784) $61.80 (189,020) $55.25 --------------------------------------------------------------------------- Outstanding - end of year ......... 9,194,132 $61.10 8,163,017 $51.09 10,282,723 $46.50 =========================================================================== Options exercisable ............... 5,021,748 5,034,693 5,287,657 =========================================================================== Options available for grant ....... 5,915,430 * 9,904,918 * 1,028,853 * ===========================================================================
*Available for grant includes shares that may be granted as either stock options or restricted stock. The following table summarizes information about the Company's stock options (including stock appreciation rights) for options outstanding as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ---------------------------- AVERAGE REMAINING RANGE OF NUMBER OF AVERAGE CONTRACTUAL NUMBER OF AVERAGE EXERCISE PRICES OPTIONS EXERCISE PRICE LIFE OPTIONS EXERCISE PRICE - --------------- ---------------------------------------- ---------------------------- $10.44 - $32.93 378,237 $25.24 3.1 years 378,237 $25.24 $33.88 - $50.00 3,410,925 $46.48 5.4 years 2,491,064 $45.37 $51.00 - $64.69 1,447,971 $57.80 4.9 years 1,057,496 $58.71 $66.50 - $93.25 3,956,999 $78.33 8.5 years 1,094,951 $74.97 ------------------------------------------------------------------------------ $10.44 - $93.25 9,194,132 $61.10 7.2 years 5,021,748 $53.12 ==============================================================================
(F) VOTING The Company's Articles of Association restrict the voting power of any person to less than approximately 10% of total voting power. (G) SHARE RIGHTS PLAN Rights to purchase Class A ordinary shares ("the Rights") were distributed as a dividend at the rate of one Right for each Class A ordinary share held of record as of the close of business on October 31, 1998. Each Right entitles holders of Class A ordinary shares to buy one ordinary share at an exercise price of $350. The Rights would be exercisable, and would detach from the Class A ordinary shares, only if a person or group were to acquire 20% or more of the Company's outstanding Class A ordinary shares, or were to announce a tender or exchange offer that, if 86 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 16. SHARE CAPITAL (CONTINUED) consummated, would result in a person or group beneficially owning 20% or more of Class A ordinary shares. Upon a person or group without prior approval of the Board acquiring 20% or more of Class A ordinary shares, each Right would entitle the holder (other than such an acquiring person or group) to purchase Class A ordinary shares (or, in certain circumstances, Class A ordinary shares of the acquiring person) with a value of twice the Rights exercise price upon payment of the Rights exercise price. The Company will be entitled to redeem the Rights at $0.01 per Right at any time until the close of business on the tenth day after the Rights become exercisable. The Rights will expire at the close of business on September 30, 2008, and do not initially have a fair value. The Company has initially reserved 119,073,878 Class A ordinary shares being authorized and unissued for issue upon exercise of Rights. 17. RETIREMENT PLANS The Company maintains both defined contribution and defined benefit retirement plans, which vary for each subsidiary. Plan assets are invested principally in equity securities and fixed maturities. The Company has a qualified defined contribution plan which is managed externally and whereby employees and the Company contribute a certain percentage of the employee's gross salary into the plan each month. The Company's contribution generally vests over 5 years. The Company's expenses for its qualified contributory defined contribution retirement plans were $9.7 million, $7.4 million and $4.8 million in the years ended December 31, 2001, 2000 and 1999, respectively. At XL America, a qualified non-contributory defined benefit pension plan exists to cover substantially all its U.S. employees. This plan also includes a non-qualified supplemental defined benefit plan designed to compensate individuals to the extent their benefits under the Company's qualified plan are curtailed due to Internal Revenue Code limitations. Benefits are based on years of service and compensation, as defined in the plan, during the highest consecutive three years of the employee's last ten years of employment. Under these plans, the Company's policy is to make annual contributions to the plan that are deductible for federal income tax purposes and that meet the minimum funding standards required by law. The contribution level is determined by utilizing the entry age cost method and different actuarial assumptions than those used for pension expense purposes. The projected benefit obligation, accumulated benefit obligation and fair value of the assets for this plan with accumulated benefit obligations in excess of plan assets were $24.9 million, $15.1 million and $12.4 million, respectively, as of December 31, 2001, and $21.3 million, $12.6 million and $12.3 million, respectively, as of December 31, 2000. Winterthur International pension benefits and retirement plans are subject to transition provisions in the Sale and Purchase Agreement. Under these plans, employees accrue benefits based on years of credited service, average compensation and age. The pension obligation under these arrangements will continue with the seller until contractual terms are satisfied and the liability under a GAAP basis has been quantified and agreed between the Company and the seller, at which point all Winterthur International employees will be covered under a Company plan. Definition of various contractual rights and obligations and valuation of the plans are not expected to be completed until later in 2002. The seller will provide the assets to fund the pension liability. It is not believed that adoption of these plans will have a significant effect on the results of operations, financial position and liquidity of the Company. 87 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 18. ACCUMULATED OTHER COMPREHENSIVE LOSS The related tax effects allocated to each component of the change in accumulated other comprehensive income were as follows: BEFORE TAX NET OF TAX EXPENSE TAX AMOUNT (BENEFIT) AMOUNT -------------------------------- YEAR ENDED DECEMBER 31, 2001: Unrealized gains (losses) on investments: Unrealized losses arising during year .... $(160,201) $ 9,576 $(169,777) Less reclassification for gains (losses) realized in income ..................... (93,237) 5,536 (98,773) -------------------------------- Net unrealized losses on investments ........ (66,964) 4,040 (71,004) Foreign currency translation adjustments .... (31,882) 5,415 (37,297) -------------------------------- Change in accumulated other comprehensive loss ........................ $ (98,846) $ 9,455 $(108,301) ================================ YEAR ENDED DECEMBER 31, 2000: Unrealized gains (losses) on investments: Unrealized losses arising during year .... $ (82,362) $(21,980) $ (60,382) Less reclassification for gains (losses) realized in income ..................... 45,090 (12,849) 57,939 -------------------------------- Net unrealized losses on investments ........ (127,452) (9,131) (118,321) Foreign currency translation adjustments .... (5,600) 102 (5,702) -------------------------------- Change in accumulated other comprehensive loss ........................ $(133,052) $ (9,029) $(124,023) ================================ YEAR ENDED DECEMBER 31, 1999: Unrealized gains (losses) on investments: Unrealized gains arising during year ..... $(176,092) $(36,394) $(139,698) Less reclassification for gains realized in income .............................. 66,800 (5,344) 72,144 -------------------------------- Net unrealized losses on investments ........ (242,892) (31,050) (211,842) Foreign currency translation adjustments .... (6,308) (2,276) (4,032) -------------------------------- Change in accumulated other comprehensive loss ........................ $(249,200) $(33,326) $(215,874) ================================ 19. CONTRIBUTED SURPLUS Under the laws of the Cayman Islands, the use of the Company's contributed surplus is restricted to the issue of fully paid shares (i.e. stock dividend or stock split) and the payment of any premium on the repurchase of ordinary shares. 20. DIVIDENDS In 2001, four regular quarterly dividends were paid at $0.46 per share to shareholders of record of February 15, May 25, August 15 and November 30. In 2000, four regular quarterly dividends were paid at $0.45 per share to shareholders of record of February 15, May 25, August 15 and November 15. In 1999, four regular quarterly dividends were paid at $0.44 per share to shareholders of record at February 5, April 23, July 12 and September 24. This relates to the Company without inclusion of the pooling effect with NAC. 88 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 21. TAXATION The Company is not subject to any taxes in the Cayman Islands on either income or capital gains under current Caymans law. The Company has received an undertaking that the Company will be exempted from Cayman Islands income or capital gains taxes until June 2018 in the event of any such taxes being imposed. The Company's Bermuda subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law. In the event that there is a change such that these taxes are imposed, the Bermuda subsidiaries would be exempted from any such tax until March 2016 pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966, and Amended Act of 1987. The Company's U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the Internal Revenue Code and Regulations thereunder. Should the U.S. subsidiaries pay a dividend to the Company, withholding taxes will apply. The Company has operations in subsidiary and branch form in various other jurisdictions around the world, including but not limited to the U.K., Switzerland, Ireland, Germany, France and Luxembourg that are subject to relevant taxes in those jurisdictions. The income tax provisions for the years ended December 31, 2001, 2000 and 1999 are as follows: YEAR ENDED DECEMBER 31 ------------------------------- 2001 2000 1999 ------------------------------- CURRENT (BENEFIT) EXPENSE: U.S ....................................... $ 5,398 $ (3,175) $(27,098) Non U.S ................................... 16,506 8,612 9,664 ------------------------------- Total current expense (benefit) .............. 21,904 5,437 (17,434) ------------------------------- DEFERRED BENEFIT: U.S ....................................... (69,384) (53,338) (17,534) Non U.S ................................... (142,434) (8,455) (4,602) ------------------------------- Total deferred benefit ....................... (211,818) (61,793) (22,136) ------------------------------- TOTAL TAX BENEFIT ......................... $(189,914) $(56,356) $(39,570) =============================== The weighted average expected tax provision has been calculated using the pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate. Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the years December 31, 2001 and 2000 is provided below: 2001 2000 --------------------- Expected tax provision at weighted average rate ... $(178,371) $(61,625) Permanent differences: Tax-exempt interest ............................. (8,964) (12,184) Goodwill ........................................ 691 6,000 Other ........................................... (3,270) 11,453 Net withholding taxes ............................. -- -- --------------------- Total tax benefit ................................. $(189,914) $(56,356) --------------------- 89 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 21. TAXATION (CONTINUED) Significant components of the Company's deferred tax assets and liabilities as of December 31, 2001 and 2000 were as follows: 2001 2000 -------------------- DEFERRED TAX ASSET: Net unpaid loss reserve discount .................... $112,646 $ 83,230 Net unearned premiums ............................... 12,224 13,929 Compensation liabilities ............................ 8,396 9,271 Net operating losses ................................ 241,235 53,563 Currency translation adjustments .................... 1,693 -- Other ............................................... 52,656 1,866 Deferred tax asset, gross of valuation allowance ....... 428,850 161,859 Valuation allowance - foreign tax credit ............... 2,508 -- -------------------- Deferred tax asset, net of valuation allowance ......... 426,342 161,859 -------------------- DEFERRED TAX LIABILITY: Net unrealized appreciation on investments .......... 2,686 7,553 Currency translation adjustments .................... -- 566 Other ............................................... 4,434 1,572 -------------------- Deferred tax liability ................................. 7,120 9,691 -------------------- NET DEFERRED TAX ASSET ................................. $419,222 $152,168 ==================== At December 31, 2001 and 2000, the Company's management concluded that all deferred tax assets are more likely than not to be realized. A valuation allowance was taken for the U.S. foreign tax credits due to expire in 2002. U.S. net operating loss carryforwards at December 31, 2001 were approximately $285.0 million and will expire in future years through 2019. As at December 31, 2001, net operating loss carryforwards in the U.K. were $447.0 million and have no expiration. Shareholders' equity at December 31, 2001 and 2000 reflected tax benefits of $9.1 million and $3.3 million, respectively, related to compensation expense deductions for stock options exercised for one of the Company's U.S. subsidiaries. 22. STATUTORY FINANCIAL DATA The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The payment of such dividends is limited by applicable laws and statutory requirements of the jurisdictions the Company operates in, including Bermuda, the U.S. and the U.K., among others. Statutory capital and surplus as reported to relevant regulatory authorities for the principal operating subsidiaries of the Company was as follows:
BERMUDA U.S. U.K. AND EUROPE ------------------------------------------------------------------------ DECEMBER 31 DECEMBER 31 DECEMBER 31 ------------------------------------------------------------------------ 2001 2000 2001 2000 2001 2000 ------------------------------------------------------------------------ Required statutory capital and surplus $1,208,968 $ 791,251 $121,000 $111,000 $ 87,144 $ 8,000 Actual statutory capital and surplus. $3,578,807 $4,189,834 $639,422 $575,575 $449,449 $276,400
90 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 22. STATUTORY FINANCIAL DATA (CONTINUED) The difference between statutory financial statements and statements prepared in accordance with GAAP vary by jurisdiction however the primary difference is that statutory financial statements do not reflect deferred policy acquisition costs, deferred income tax net assets, intangible assets, unrealized appreciation on investments and any unauthorized/authorized reinsurance charges. With the exception of XL Re America, there are no statutory restrictions on the payment of dividends from retained earnings by any of the Company's subsidiaries as applicable minimum levels of solvency and liquidity have been met and all regulatory requirements and licensing rules complied with. At December 31, 2001 and 2000, XL Re America had a statutory earned deficit and is restricted from making a dividend distribution at this time by the New York Insurance Department. 23. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: YEAR ENDED DECEMBER 31 ------------------------------ 2001 2000 1999 ------------------------------ BASIC (LOSS) EARNINGS PER SHARE: Net (loss) income .............................. $(576,135) $506,352 $470,509 Weighted average ordinary shares outstanding ... 126,676 124,503 127,601 Basic (loss) earnings per share ................ $ (4.55) $ 4.07 $ 3.69 ============================== DILUTED (LOSS) EARNINGS PER SHARE: Net (loss) income .............................. $(576,135) $506,352 $470,509 Add back after-tax interest on convertible debentures (3) ............................... -- -- 1,752 ------------------------------ Adjusted net (loss) income ..................... $(576,135) $506,352 $472,261 ------------------------------ Weighted average ordinary shares outstanding - basic ........................... 126,676 124,503 127,601 Average stock options outstanding (1) (2) ...... -- 1,194 1,872 Conversion of convertible debentures (3) ....... -- -- 831 ------------------------------ Weighted average ordinary shares outstanding - diluted ......................... 126,676 125,697 130,304 ------------------------------ Diluted (loss) earnings per share .............. $ (4.55) $ 4.03 $ 3.62 ============================== (1) Net of shares repurchased under the treasury stock method. (2) Average stock options outstanding have been excluded where anti-dilutive to earnings per share. (3) The 5.25% Convertible Subordinated Debentures due 2000 were called in June 1999 and the actual conversion is reflected in 1999. Future weighted average number of shares outstanding may be affected by the convertible debt issued during 2001. See Note 13 for further information. 24. RELATED PARTY TRANSACTIONS In 2001, a limited partnership, XL Capital Principal Partners I, L.L.C. ("the Partnership"), was formed. The general partner of the Partnership is a newly-formed wholly-owned subsidiary of the Company. All of the limited partners of the Partnership are current or former senior officers or directors of the Company or its subsidiaries. The Company's investment in this partnership is included in other investments. 91 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 24. RELATED PARTY TRANSACTIONS (CONTINUED) The stated purpose of the Partnership is to achieve long-term capital appreciation for its investors through a portfolio of investments including, without limitation: private equity, venture capital and hedge funds; equity and equity-related securities of all types; investments in debt securities, preferred shares and other financial instruments; and securities issued by companies providing financial guaranty, insurance and reinsurance contracts. Generally, the Partnership is expected to co-invest in investments made by the Company substantially on the same terms as the similar investments made by the Company. The aggregate capital commitment of the Partnership is $49.1 million, of which $8.7 million was invested at December 31, 2001. The capital commitment of the general partner is $39.3 million and the capital commitments of the limited partners in the aggregate is $9.8 million. 25. SUBSEQUENT EVENTS Effective January 2002, the Company completed the acquisition of a 67% majority shareholding in Le Mans Re, increasing its shareholding from 49% at December 31, 2001. Les Mutuelles du Mans Assurances Group, which previously held 51% of the French reinsurer, will retain a 33% stake in Le Mans Re. In January 2002, the Company issued $600.0 million par value Guaranteed Senior Notes due January 2012. The Notes were issued at $99.469 and gross proceeds were $596.8 million. The Guaranteed Senior Notes have a coupon of 6.5%. Related expenses of the offering amounted to $7.9 million. Proceeds of the Notes were used to pay down $350.0 million of outstanding revolving credit in February 2002 that would have expired in June 2002, and for general corporate purposes. The Company registered its Dividend Reinvestment and Share Purchase Plan effective January 2002. This plan is intended to provide registered holders of XL Capital Class A ordinary shares with a convenient and economical way to reinvest all or a portion of their cash dividends and to make additional cash investments, subject to minimum and maximum purchase limitations, in its Class A ordinary shares. 26. UNAUDITED QUARTERLY FINANCIAL DATA The following is a summary of the unaudited quarterly financial data for 2001 and 2000:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- --------- --------- 2001 Net premiums earned - general operations ..................... $542,154 $640,984 $ 705,277 $ 891,512 Net premiums earned - life operations ........................ $ -- $ -- $ 46,247 $ 649,348 Underwriting profit (loss) ................................... $ 33,467 $ 51,219 $(925,087) $(239,734) Net income (loss) ............................................ $218,929 $128,606 $(840,032) $ (83,638) Net income (loss) per share and share equivalent - basic ..... $ 1.76 $ 1.03 $ (6.70) $ (0.64) Net income (loss) per share and share equivalent - diluted ... $ 1.73 $ 1.01 $ (6.70) $ (0.64) 2000 Net premiums earned - general operations ..................... $494,499 $503,375 $ 539,945 $ 497,421 Underwriting profit (loss) ................................... $ 36,530 $ 8,792 $ 23,462 $(187,601) Net income ................................................... $223,759 $142,484 $ 139,461 $ 648 Net income per share and share equivalent - basic ............ $ 1.78 $ 1.15 $ 1.13 $ 0.01 Net income per share and share equivalent - diluted .......... $ 1.77 $ 1.13 $ 1.10 $ 0.01
92 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts) 26. UNAUDITED QUARTERLY FINANCIAL DATA (CONTINUED) In the fourth quarter of 2001, the Company incurred adverse loss development of its casualty reinsurance business written prior to 1999 of approximately $140.0 million after-tax, and losses related to certain other events, including the bankruptcy of Enron Corp., American Airlines Flight 587 and several large European property losses. In the third quarter of 2001, the Company recorded net losses of approximately $795.9 million after tax due to the September 11 event. In addition, the effect of other loss events, including the Sri Lanka airport attack, Toulouse plant explosion, satellite losses and adverse development in the Company's Lloyd's operations, were $103.7 million after taxes. In the fourth quarter of 2000, the Company incurred after-tax charges of $124.6 million, or $0.98 per share, which included certain reserve adjustments together with employee severance charges and other costs associated with the realignment of the Company's operations and the discontinuation of certain business lines. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or any disagreements with accountants regarding accounting and financial disclosure within the twenty-four months ending December 31, 2001. 93 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits. PAGE ---- - Report of PricewaterhouseCoopers LLP on Financial Statements and Financial Statement Schedules ........ 101 1. FINANCIAL STATEMENTS Included in Part II - See Item 8 of this report. 2. FINANCIAL STATEMENT SCHEDULES Included in Part IV of this report: SCHEDULE NUMBER PAGE ----------------- - Consolidated Summary of Investments-Other than Investments in Related Parties, as of December 31, 2001 .................................. I 102 - Condensed Financial Information of Registrant, as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000, and 1999 ...... II 103 - Reinsurance, for the years ended December 31, 2001, 2000 and 1999 ...................................... IV 106 - Supplementary Information Concerning Property/Casualty Insurance Operations for the years ended December 31, 2001, 2000 and 1999 ................... VI 107 Other Schedules have been omitted as they are not applicable to the Company. 94 3. EXHIBITS 1.1 Underwriting Agreement, dated November 1, 2001, by and among XL Capital Ltd, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, incorporated by reference to the Company's Current Report on Form 8-K dated November 7, 2001. 1.2 Pricing Agreement, dated November 1, 2001, by and among XL Capital Ltd, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, incorporated by reference to the Company's Current Report on Form 8-K dated November 7, 2001. 1.3 Underwriting Agreement, dated January 7, 2002, by and among XL Capital Finance (Europe) plc, XL Capital Ltd, Salomon Smith Barney Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Barclays Capital Inc. and Credit Lyonnais Securities (USA) Inc., incorporated by reference to the Company's Current Report on Form 8-K dated November 7, 2001. 1.4 Pricing Agreement, dated January 7, 2002, by and among XL Capital Finance (Europe) plc, XL Capital Ltd, Salomon Smith Barney Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Barclays Capital Inc. and Credit Lyonnais Securities (USA) Inc., incorporated by reference to the Company's Current Report on Form 8-K dated November 7, 2001. 3.1 Memorandum of Association, incorporated by reference to Annex G to the Joint Proxy Statement of EXEL Limited and Mid Ocean limited dated July 2, 1998. 3.2 Articles of Association, incorporated by reference to Annex G to the Joint Proxy Statement of EXEL Limited and Mid Ocean Limited dated July 2, 1998. 4.1 Rights Agreement, dated September 11, 1998, between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent, incorporated by reference to the Company's Current Report on Form 8-K dated October 21, 1998. 4.2 Registration Rights Agreement, dated May 23, 2001, between XL Capital Ltd and Goldman, Sachs & Co., Deutsche Banc Alex. Brown, and Dresdner Kleinwort Wasserstein L.L.C., as initial purchasers, as incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-66976). 4.3 Registration Rights Agreement, dated September 4, 2001, between XL Capital Ltd and Merrill Lynch, Pierce, Fenner & Smith Incorporated, incorporated by reference to Exhibit 4.51 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 4.4 Indenture, dated January 10, 2002, by and among XL Capital Finance (Europe) plc, XL Capital Ltd and State Street Bank and Trust Company, incorporated by reference to the Company's Current Report on Form 8-K dated January 10, 2002. 4.5 Form of XL Capital Finance (Europe) plc Debt Security, incorporated by reference to the Company's Current Report on Form 8-K dated January 10, 2002. 4.6 Excerpts from the Authorizing Resolutions of the Board of Directors of XL Capital Finance (Europe) plc, dated January 7, 2002, incorporated by reference to the Company's Current Report on Form 8-K dated January 10, 2002. 4.7 Indenture, dated September 4, 2001, between XL Capital Ltd and State Street Bank & Trust Company relating to the Liquid-Yield Option Notes due 2021, incorporated by reference to Exhibit 4.49 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 4.8 Form of Liquid-Yield Option Note due 2021 (referred to in Exhibit 4.7 above) and incorporated by reference to Exhibit 4.50 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 95 4.9 Indenture, dated May 23, 2001, between XL Capital Ltd and Goldman, Sachs & Co., Deutsche Banc Alex. Brown, and Dresdner Kleinwort Wasserstein L.L.C., as initial purchasers, incorporated by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-3 (No. 333-66976). 4.10 Form of Zero Coupon Convertible debenture, due May 23, 2021 (referred to in Exhibit 4.8 above) and incorporated by reference to Exhibit 10.14.41 to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001. 4.11 Form of Note Purchase Agreement, dated April 12, 2001, relating to 6.58% Guaranteed Senior Notes due April 12, 2011, incorporated by reference to Exhibit 10.14.43 to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001. 4.12 Form of Note Purchase Agreement, dated November 1995, relating to 7.15% senior notes due November 15, 2005, incorporated by reference to NAC Re Corporation's Registration Statement on Form S-3 (No. 33-97878). 10.1 Money Accumulation Savings Program, incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.2 1991 Performance Incentive Plan, incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.3 First Amendment to the 1991 Performance Incentive Program, incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.4 1991 Performance Incentive Program as amended and restated, effective March 17, 2000, incorporated by reference to the Company's Proxy Statement dated April 7, 2000. 10.5 Retirement Plan for Non-employee Directors of XL Capital Ltd, as amended, incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.6 XL Capital Ltd Directors Stock and Option Plan, as amended, incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.7 XL Capital Ltd Stock Plan for Non-employee Directors, incorporated by reference to Exhibit 10.6 to the Company's Annual report on Form 10-K for the year ended November 30, 1996. 10.8 Fourth Amendment to EXEL Limited Directors Stock and Option Plan, incorporated by reference to Exhibit 10.6.2 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.9 Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan, incorporated by reference to Exhibit 10.9.1 to the Company's Annual report on form 10-K for the year ended November 30, 1998. 10.10 Amendment to Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan, incorporated by reference to Exhibit 10.9.2 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.11 Mid Ocean Ltd. Stock & Deferred Compensation Plan for Non-employee Directors, incorporated by reference to Exhibit 10.10.1 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.12 Form of Severance Contract between NAC Re Corporation and the executive officers of NAC Re Corporation, incorporated herein by reference to the Company's Annual Report on Form 10-K of NAC Re Corporation for the year ended December 30, 1988. 10.13 1997 Incentive and Capital Accumulation Plan, incorporated by reference to Exhibit A to the NAC Re Corporation definitive Proxy Statement filed with the Securities and Exchange Commission. 10.14 Dividend Reinvestment and Share Purchase Plan, dated January 18, 2002, incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-76988). 96 10.15 Mark E. Brockbank Consultancy Agreement, incorporated by reference to Exhibit 10.12.1 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.16 Henry C. V. Keeling Employment Agreement, incorporated by reference to Exhibit 10.11.2 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.17 Amendment to Henry C. V. Keeling Service Agreement, incorporated by reference to Exhibit 10.12.2 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.18 Michael A. Butt Employment Agreement, incorporated by reference to Exhibit 10.11.5 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.19 Amendment to Michael A. Butt Service Agreement, incorporated by reference to Exhibit 10.12.4 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.20 Ronald L. Bornheutter Consulting Agreement, dated July 1, 1999, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on form 10-K for the year ended December 31, 1999. 10.21 Ronald L. Bornheutter Settlement Agreement, dated June 30, 1999, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.22 Nicholas M. Brown, Jr. Employment Contract, dated June 30, 1998, incorporated herein by reference to NAC Re Corporation's quarterly report on Form 10-Q for the period ended June 30, 1998. 10.23 Amended and Restated Employment Agreement with Nicholas M. Brown, Jr., dated June 18, 1999, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.24 Jerry de St. Paer Employment Agreement, dated March 1, 2001, incorporated by reference to Exhibit 10.14.37 to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001. 10.25 Credit Agreement (5-Year), between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.1 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.26 Amendment No. 1, to Credit Agreement (5-Year) between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.2 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.27 Amendment No. 2, to Credit Agreement (5-year) between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.28 Amendment No. 3, to Credit Agreement (5-year) between Mid Ocean Limited and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.29 Revolving Credit Agreement, dated as of June 6, 1997, between XL Insurance Company, Ltd X.L. Reinsurance Company, Ltd, and Exel Acquisition Ltd, as the banks, and Mellon Bank N.A., as agent, incorporated by reference to Exhibit (b)(2) of the GCR Schedule 14D-1, incorporated by reference to Exhibit 10.14.14 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 10.30 First Amendment, dated as of November 5, 1997, to Revolving Credit Agreement dated as of June 6, 1997, incorporated by reference to Exhibit 10.14.15 to the Company's Annual Report on Form 10-K for the year ended November 30,1998. 10.31 Second Amendment, dated as of August 3, 1998, to Revolving Credit Agreement dated as of June 6, 1997, incorporated by reference to Exhibit 10.14.16 to the Company's Annual Report on Form 10-K for the year ended November 30, 1998. 97 10.32 Third Amendment, dated as of December 4, 1998, to Revolving Credit Agreement dated as of June 6, 1997, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.33 Fourth Amendment, dated as of June 30, 1999, to Revolving Credit Agreement dated as of June 6, 1997, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.34 Fifth Amendment, dated as of February 25, 2000, to Revolving Credit Agreement dated as of June 6, 1997, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.35 Sixth Amendment, dated as of August 27, 2001, to Revolving Credit Agreement dated as of June 6, 1997, incorporated by reference to Exhibit 10.47 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 10.36 Seventh Amendment, dated as of September 26, 2001, to Revolving Credit Agreement dated as of June 6, 1997, incorporated by reference to Exhibit 10.46 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 10.37 Letter of Credit Facility and Reimbursement Agreement, dated as of June 30, 1999, by and among XL Insurance (Bermuda) Ltd (formerly known as XL Insurance Ltd) XL Capital Ltd, XL Europe Ltd, XL Re Ltd (formerly known as Mid Ocean Reinsurance Ltd), The Brockbank Group plc, as account parties and XL Insurance (Bermuda) Ltd, XL Capital Ltd, XL Re Ltd, and XL Investments Ltd, as guarantors and Mellon Bank, N.A., as issuing bank and agent incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.38 First Amendment dated as of January 21, 2000, to Letter of Credit Facility and Reimbursement Agreement dated June 30, 1999, incorporated by reference to Exhibit 10.14.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10.39 Second Amendment dated as of November 28, 2000, to Letter of Credit Facility and Reimbursement Agreement dated June 30, 1999, incorporated by reference to Exhibit 10.14.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 10.40 364-day Credit Agreement, dated as of July 5, 2000, between XL Capital Ltd, X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd and XL Mid Ocean Reinsurance Ltd, as borrowers and guarantors, the lenders named therein, The Chase Manhattan Bank, as administrative agent, Chase Securities Inc., as advisor, lead arranger and book manager, Deutsche Bank AG, as syndication agent, and Mellon Bank, N.A. and Citibank, N.A., as co-documentation agent, incorporated by reference to Exhibit 10.14.31 to the Company's quarterly report on Form 10-Q for the period ended June 30, 2000. 10.41 Letter of Credit and Reimbursement Agreement, dated as of July 5, 2000, between XL Capital Ltd, X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd and XL Mid Ocean Reinsurance Ltd, as account parties and guarantors, the lenders party thereto, The Chase Manhattan Bank, as administrative agent, Chase Securities Inc., as advisor, lead arranger and book manager, Deutsche Bank AG, as syndication agent, and Mellon Bank, N.A. and Citibank, N.A., as co-documentation agents, incorporated by reference to Exhibit 10.14.32 to the Company's quarterly report on Form 10-Q for the period ended June 30, 2000. 10.42 Letter of Credit and Reimbursement Agreement, dated November 3, 2000, between XL Capital Ltd, XL America Inc., XL Insurance (Bermuda) Ltd (formerly known as XL Insurance Ltd), XL Europe and XL Re Ltd (formerly known as XL Mid Ocean Reinsurance Ltd), the guarantors, the lenders named therein, Citibank International plc, as agent and security trustee and Solomon Brothers International Limited, as arranger, incorporated by reference to Exhibit 10.14.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 98 10.43 Amendment No. 1, dated as of September 26, 2001, to the Letter of Credit and Reimbursement Agreement dated November 3, 2000 between XL Capital Ltd as account party and guarantor, and X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd and XL Re Ltd, as guarantors, and the lenders party thereto and Citibank International plc, as agent and security trustee for the lenders and Salomon Brothers International Limited, as arranger, incorporated by reference to Exhibit 10.49 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 10.44 Letter of Credit Agreement (Secured), between XL Mid Ocean Reinsurance Ltd and Citibank International plc dated May 19, 1993 (as amended) incorporated by reference to the Company's Prospectus Supplement dated November 3, 1998. 10.45 364-day Credit Agreement, dated as of June 29, 2001, between XL Capital Ltd, X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd and XL Re Ltd, as borrowers and guarantors, the lenders party thereto, and The Chase Manhattan Bank, as administrative agent, J.P. Morgan Securities Inc., as advisor, lead arranger and bookrunner and Mellon Bank, N.A. and Citibank, N.A., as co-syndication agents, incorporated by reference to Exhibit 10.14.38 to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001. 10.46 Amendment No. 1, dated as of September 26, 2001, to the 364-day Credit Agreement dated as of June 29, 2001 between XL Capital Ltd, X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd and XL Re Ltd, as borrowers and guarantors and the lenders party thereto and The Chase Manhattan Bank, as administrative agent, incorporated by reference to Exhibit 10.45 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 10.47 Letter of Credit and Reimbursement Agreement, dated as of June 29, 2001, between XL Capital Ltd, X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd and XL Re Ltd, as account parties and guarantors, and The Chase Manhattan Bank, as administration agent, incorporated by reference to Exhibit 10.14.39 to the Company's quarterly report on Form 10-Q for the period ended June 30, 2001. 10.48 Amendment No. 1, dated as of September 26, 2001, to the Letter of Credit and Reimbursement Agreement dated as of June 29, 2001 between XL Capital Ltd, X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd and XL Re Ltd, each an account party and guarantor, the lenders party thereto and The Chase Manhattan Bank, as administrative agent, incorporated by reference to Exhibit 10.48 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 10.49 Amended and Restated Credit Agreement, dated August 31, 2001, between XL Capital Ltd, XL Insurance Ltd, XL Re Ltd and Mid Ocean Limited, as borrowers and guarantors, and The Chase Manhattan Bank as administrative agent.* 10.50 Amendment No. 1, dated as of September 26, 2001, to the Amended and Restated Credit Agreement dated as of August 31, 2001 between XL Capital Ltd, XL Insurance Ltd, XL Re Ltd and Mid Ocean Limited, as borrowers and guarantors, the banks party thereto and The Chase Manhattan Bank, as administrative agent, incorporated by reference to Exhibit 10.44 to the Company's quarterly report on Form 10-Q for the period ended September 30, 2001. 10.51 Second Amended and Restated Agreement for the Sale and Purchase of Winterthur International, dated February 15, 2001, incorporated by reference to the Company's Current Report on Form 8-K dated July 25, 2001. 10.52 Letter of Credit Facility and Reimbursement Agreement, dated November 20, 2001, between XL Capital Ltd X.L. America, Inc., XL Europe Ltd, XL Insurance (Bermuda) Ltd and XL Re Ltd as guarantors and Citibank International Plc as agent and security trustee and Salomon Brothers International Limited as the arranger and the lenders party thereto.* * Filed herewith 99 10.53 Letter of Credit Facility and Reimbursement Agreement, dated as of December 31, 2001, between XL Capital Ltd, X.L. America Inc., XL Insurance (Bermuda) Ltd, XL Europe Ltd and XL Re Ltd, as account parties and guarantors and Mellon Bank, as issuing bank, agent and arranger.* 10.54 Pledge Agreement, dated as of December 18, 2001, made by XL Investments Ltd, XL Re Ltd, XL Insurance (Bermuda) Ltd and XL Europe Ltd as guarantors and in favor of Citibank, N.A.* 10.55 Limited Liability Company Agreement of XL Capital Principal Partners I, L.L.C., dated June 26, 2001.* 10.56 Amended and Restated Agreement of Limited Partnership of XL Capital Partners I, L.P., dated May 31, 2001.* 10.57 Amended and Restated Agreement of Limited Partnership of XL Principal Partners I, L.P., dated June 28, 2001.* 12.1 Statement regarding computation of ratios.* 21.1 List of subsidiaries of the Registrant.* 23.1 Consent of PricewaterhouseCoopers LLP.* 99.1 The audited financial statements of Winterthur International as at and for the year ended December 31, 2000, incorporated by reference to the Company's Current Report on Form 8-K dated July 25, 2001. 99.2 Consent of KPMG Audit plc, incorporated by reference to the Company's Current Report on Form 8-K dated July 25, 2001. 99.3 The unaudited pro forma condensed financial information as at and for year ended December 31, 2000, incorporated by reference to the Company's Current Report on Form 8-K dated July 25, 2001. 99.4 Press Release, dated August 6, 2001, incorporated by reference to the Company's Current Report on Form 8-K dated July 25, 2001. 99.5 XL Capital Assurance Inc. audited financial statements as at and for the years ended December 31, 2001, 2000, and 1999.* 99.6 XL Financial Assurance Ltd. audited financial statements as at and for the years ended December 31, 2001 and 2000, and as at and for the 63 week period ended December 31, 1999.* (b) Reports on Form 8-K (1) Current Report on Form 8-K filed on October 4, 2001, under Item 5 thereof. (2) Current Report on Form 8-K filed on October 29, 2001, under Item 5 thereof. (3) Current Report on Form 8-K filed on November 2, 2001, under Item 5 thereof. * Filed herewith 100 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of XL Capital Ltd: In our opinion, based upon our audits, the accompanying consolidated balance sheets, the related consolidated statements of income and comprehensive income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of XL Capital Ltd and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in Item 14(a) of this Form 10-K, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. The consolidated financial statements give retroactive effect to the merger with NAC Re Corp. on July 15, 1999 in a transaction accounted for as a pooling of interests, as described in Note 6 to the consolidated financial statements. We conducted our audits of these statements and schedules in accordance with generally accepted auditing standards in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP New York, New York February 12, 2002 101 XL CAPITAL LTD SUPPLEMENTAL SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES AS AT DECEMBER 31, 2001 (U.S dollars in thousands) AMOUNT SHOWN COST OR IN THE AMORTIZED MARKET BALANCE TYPE OF INVESTMENT COST (1) VALUE SHEET ------------------------------------ Fixed Maturities: Bonds and notes: U.S. Government and Government agency ................. $ 1,047,642 $ 1,039,652 $ 1,039,652 ------------------------------------- Corporate ........................... 5,095,415 4,998,457 4,998,457 Mortgage-backed securities .......... 3,278,103 3,293,077 3,293,077 U.S. States and political subdivisions of the States ........ 58,978 60,225 60,225 Non-U.S. Sovereign Government ....... 1,465,430 1,440,516 1,440,516 ------------------------------------- Total fixed maturities ........ $10,945,568 $10,831,927 $10,831,927 ------------------------------------- Equity Securities: ...................... $ 575,090 $ 547,805 $ 547,805 ------------------------------------- Short-term investments .................. $ 1,050,015 $ 1,050,113 $ 1,050,113 ------------------------------------- Other investments ....................... $ 273,528 $ 273,528 $ 273,528 ------------------------------------- Total investments other than related parties ....................... $12,844,201 $12,703,373 $12,703,373 ------------------------------------- (1) Investments in fixed maturities and short-term investments are shown at amortized cost. 102 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS-PARENT COMPANY ONLY AS AT DECEMBER 31, 2001 AND 2000 (U.S. dollars in thousands) 2001 2000 ---------------------- A S S E T S Investments available for sale: Fixed maturities at fair value (amortized cost: 2001, $145,713; 2000, $292,759) ................... $ 149,318 $ 295,770 Equity securities at fair value (cost: 2001, $375; 2000: nil) ..................... 376 -- Short-term investments at fair value (amortized cost: 2001, $240,490: 2000, $11,032) ... 241,193 10,997 ---------------------- Total investments available for sale ............ 390,887 306,767 Cash and cash equivalents ............................. 303,628 40,391 Investments in subsidiaries on an equity basis ........ 6,130,799 6,748,846 Investment in affiliates .............................. 31,400 162 Investments in limited partnerships ................... 42,342 35,712 Accrued investment income ............................. 2,330 2,629 Other assets .......................................... 31,432 22,049 ---------------------- Total assets ................................... $6,932,818 $7,156,556 ====================== L I A B I L I T I E S Amount due to subsidiaries ............................ $ 535,781 $1,515,071 Notes payable and debt ................................ 899,838 -- Accounts payable and accrued liabilities .............. 60,015 67,817 ---------------------- Total liabilities .............................. $1,495,634 $1,582,888 ====================== S H A R E H O L D E R S' E Q U I T Y Ordinary shares ....................................... $ 1,347 $ 1,250 Contributed surplus ................................... 3,378,549 2,497,416 Accumulated other comprehensive loss .................. (213,013) (104,712) Deferred compensation ................................. (27,177) (17,727) Retained earnings ..................................... 2,297,478 3,197,441 ---------------------- Total shareholders' equity ..................... $5,437,184 $5,573,668 ---------------------- Total liabilities and shareholders' equity ..... $6,932,818 $7,156,556 ====================== 103 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF INCOME AND COMPREHENSIVE INCOME-PARENT COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. dollars in thousands) 2001 2000 1999 ------------------------------- Net investment income ........................ $ 18,251 $ 4,466 $ 1,890 Net realized gains (losses) on investments and derivative instruments ................. 5,992 643 (278) Equity in net (loss) earnings of subsidiaries (Dividends were Nil in 2001, 2000 and 1999, respectively) ...... (481,566) 576,502 560,166 Equity in net (loss) income of affiliates .... (957) 88 -- Income from limited partnerships ............. 1,719 2,594 4,947 ------------------------------- Total revenues ............................... (456,561) 584,293 566,725 ------------------------------- Operating expenses ........................... 96,589 77,941 96,216 Interest expense ............................. 22,985 -- -- ------------------------------- Total expenses ............................... 119,574 77,941 96,216 ------------------------------- Net (loss) income ............................ (576,135) 506,352 470,509 Change in net unrealized appreciation on investments ............................. 1,790 4,458 (3,084) ------------------------------- Comprehensive (loss) income .................. $(574,345) $510,810 $ 467,425 =============================== 104 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF CASH FLOWS-PARENT COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S dollars in thousands)
2001 2000 1999 ------------------------------------- Cash flows provided by (used in) operating activities: Net (loss) income .......................................................... $(576,135) $ 506,352 $ 470,509 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gains (losses) on investments and derivative instruments ... (5,992) -- -- Equity in net loss (earnings) of subsidiaries, net of dividends ......... 483,461 (586,663) (557,317) Equity in net loss (income) of affiliates, net of dividends ............. 1,198 (88) -- Amortization of intangible assets ....................................... 31,348 31,348 31,348 Amortization of deferred compensation ................................... 10,352 8,861 7,657 Amortization of discounts on fixed maturities ........................... 1,708 637 366 Accretion of notes payable and debt ..................................... 12,339 -- -- Accrued investment income ............................................... 299 (2,090) 1,428 Accounts payable and accrued liabilities ................................ (7,875) (60,226) 10,522 Other ................................................................... 10,034 (8,890) (5,069) ------------------------------------- Total adjustments .................................................... 536,872 (617,111) (511,065) ------------------------------------- Net cash (used in) provided by operating activities .................. (39,263) (110,759) (40,556) ------------------------------------- Cash flows provided by (used in) investing activities: Proceeds from sale of fixed maturities and short-term investments .......... 497,940 230,110 118,756 Proceeds from redemption of fixed maturities and short-term investments .................................................. 80,299 43,500 107,885 Purchases of fixed maturities and short term investments ................... (658,872) (432,722) (121,995) Investment in subsidiaries ................................................. (6,770) (25,000) -- Investment in affiliates ................................................... (29,860) -- -- Investment in limited partnerships ......................................... (6,630) 3,640 (18,974) ------------------------------------- Net cash provided by (used in) investing activities .................. (123,893) (180,472) 85,672 ------------------------------------- Cash flows provided by (used in) financing activities: Issue of shares ............................................................ 787,678 -- -- Proceeds from exercise of options .......................................... 105,233 74,564 14,014 Dividends paid ............................................................. (237,628) (225,572) (212,659) Amount due to subsidiaries ................................................. (979,290) 605,461 229,811 Repurchase of shares ....................................................... (117,133) (248,450) (99,344) Proceeds from loans ........................................................ 917,533 -- -- Repayment of loans ......................................................... (50,000) -- -- ------------------------------------- Net cash provided by (used in) financing activities .................. 426,393 206,003 68,178) ------------------------------------- Net change in cash and cash equivalents .............................. 263,237 (85,228) (23,062) Cash and cash equivalents - beginning of year ................................. 40,391 125,619 148,681 ------------------------------------- Cash and cash equivalents - end of year ....................................... $ 303,628 $ 40,391 $ 125,619 =====================================
105 XL CAPITAL LTD SCHEDULE IV-REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S dollars in thousands) CEDED ASSUMED GROSS TO OTHER FROM OTHER NET AMOUNT COMPANIES COMPANIES AMOUNT ---------------------------------------------------- 2001 ................. $2,978,370 $1,855,296 $1,805,352 $2,928,426 ---------------------------------------------------- 2000 ................. $1,688,923 $1,012,791 $1,440,108 $2,116,240 ---------------------------------------------------- 1999 ................. $1,088,028 $ 541,037 $1,354,892 $1,901,883 ---------------------------------------------------- 106 XL CAPITAL LTD SCHEDULE VI SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S dollars in thousands)
LOSSES AND LOSS EXPENSES NET PAID RESERVES INCURRED RELATED TO LOSSES AMORTIZATION DEFERRED FOR LOSSES RESERVES FOR NET ------------------------ AND OF DEFERRED NET ACQUISITION AND LOSS UNEARNED NET EARNED INVESTMENT CURRENT PRIOR LOSS ACQUISITION PREMIUMS COSTS EXPENSES PREMIUMS PREMIUMS INCOME YEAR YEAR EXPENSES COSTS WRITTEN --------------------------------------------------------------------------------------------------------------------------- 2001 ... $394,258 $11,825,680 $2,682,089 $2,779,927 $562,606 $2,743,094 $ 175,804 $1,817,425 $639,046 $2,928,426 --------------------------------------------------------------------------------------------------------------------------- 2000 ... $309,268 $ 5,672,062 $1,741,393 $2,035,240 $542,500 $1,827,443 $(394,884) $1,663,670 $485,796 $2,116,240 --------------------------------------------------------------------------------------------------------------------------- 1999 ... $275,716 $ 5,369,402 $1,497,376 $1,750,006 $525,318 $1,591,414 $(287,110) $1,093,502 $380,980 $1,901,883 ---------------------------------------------------------------------------------------------------------------------------
107 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. XL CAPITAL LTD By /s/ BRIAN M. O'HARA ----------------------------------------- Brian M. O'Hara PRESIDENT AND CHIEF EXECUTIVE OFFICER March 22, 2002 POWER OF ATTORNEY We, the undersigned directors and executive officers of XL Capital Ltd, hereby severally constitute Michael P. Esposito, Jr., Brian M. O'Hara and Paul S. Giordano, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE ---------- ----- ---- /s/ BRIAN M. O'HARA President, Chief Executive March 22, 2002 - --------------------------- Officer and Director Brian M. O'Hara (Principal Executive Officer) /s/ JERRY M. DE ST. PAER Executive Vice President March 22, 2002 - --------------------------- (Principal Financial Officer Jerry M. de St Paer and Principal Accounting Officer) /s/ MICHAEL P. ESPOSITO JR. Director and Chairman of the March 22, 2002 - --------------------------- Board of Directors Michael P. Esposito, Jr. /s/ RONALD L. BORNHUETTER Director March 22, 2002 - --------------------------- Ronald L. Bornhuetter /s/ MICHAEL A. BUTT Director March 22, 2002 - --------------------------- Michael A. Butt /s/ ROBERT CLEMENTS Director March 22, 2002 - --------------------------- Robert Clements /s/ DALE COMEY Director March 22, 2002 - --------------------------- Dale Comey /s/ SIR F. BRIAN CORBY Director March 22, 2002 - --------------------------- Sir F. Brian Corby /s/ ROBERT R. GLAUBER Director March 22, 2002 - --------------------------- Robert R. Glauber 108 SIGNATURES TITLE DATE ---------- ----- ---- /s/ PAUL E. JEANBART Director March 22, 2002 - --------------------------- Paul E. Jeanbart /s/ JOHN LOUDON Director March 22, 2002 - --------------------------- John Loudon /s/ ROBERT S. PARKER Director March 22, 2002 - --------------------------- Robert S. Parker /s/ CYRIL E. RANCE Director March 22, 2002 - --------------------------- Cyril E. Rance /s/ ALAN Z. SENTER Director March 22, 2002 - --------------------------- Alan Z. Senter /s/ JOHN T. THORNTON Director March 22, 2002 - --------------------------- John T. Thornton /s/ ELLEN E. THROWER Director March 22, 2002 - --------------------------- Ellen E. Thrower /s/ JOHN W. WEISER Director March 22, 2002 - --------------------------- John W. Weiser 109 EX-10.49 3 c23420_ex10-49.txt AMENDED AND RESTATED CREDIT AGREEMENT EXECUTION COUNTERPART ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 31, 2001 between XL CAPITAL LTD, XL INSURANCE LTD, MID OCEAN LIMITED and XL RE, LTD (Formerly known as XL MID OCEAN REINSURANCE LTD), as Borrowers and Guarantors, The BANKS Party Hereto and THE CHASE MANHATTAN BANK, as Administrative Agent ------------- $100,000,000 ------------- ================================================================================ TABLE OF CONTENTS Page Section 1. Definitions and Accounting Matters.................................1 1.01 Certain Defined Terms............................................1 1.02 Accounting Terms; GAAP and SAP..................................15 1.03 Currencies and Types of Loans...................................15 Section 2. Commitments, Loans and Prepayments................................15 2.01 Loans...........................................................15 2.02 Borrowings of Loans.............................................16 2.03 Changes of Commitments; Reduction of Maximum Loan Amounts.......16 2.04 Fees............................................................16 2.05 Lending Offices.................................................17 2.06 Several Obligations.............................................17 2.07 Evidence of Debt................................................17 2.08 Optional Prepayments............................................18 2.09 Mandatory Prepayments...........................................18 Section 3. Payments of Principal and Interest................................19 3.01 Repayment of Loans..............................................19 3.02 Interest........................................................19 Section 4. Payments; Pro Rata Treatment; Computations; Etc...................20 4.01 Payments........................................................20 4.02 Pro Rata Treatment..............................................21 4.03 Computations....................................................22 4.04 Minimum Amounts.................................................22 4.05 Certain Notices.................................................22 4.06 Non-Receipt of Funds by the Administrative Agent................23 4.07 Sharing of Payments, Etc........................................24 Section 5. Yield Protection, Etc.............................................26 5.01 Additional Costs................................................26 5.02 Limitation on Types and Currencies of Loans.....................28 5.03 Treatment of Affected Loans.....................................28 5.04 Compensation....................................................29 5.05 Taxes...........................................................30 5.06 Replacement of Banks............................................31 AMENDED AND RESTATED CREDIT AGREEMENT -ii- Section 6. Guarantee.........................................................31 6.01 The Guarantee...................................................31 6.02 Obligations Unconditional.......................................32 6.03 Reinstatement...................................................33 6.04 Subrogation.....................................................33 6.05 Remedies........................................................33 6.06 Continuing Guarantee............................................33 6.07 Rights of Contribution..........................................33 6.08 General Limitation on Guarantee Obligations.....................34 Section 7. Conditions Precedent..............................................35 7.01 Effective Date..................................................35 7.02 Initial and Subsequent Loans....................................36 Section 8. Representations and Warranties....................................36 8.01 Organization; Powers............................................36 8.02 Authorization; Enforceability...................................36 8.03 Governmental Approvals; No Conflicts............................37 8.04 Financial Condition; No Material Adverse Change.................37 8.05 Properties......................................................38 8.06 Litigation and Environmental Matters............................38 8.07 Compliance with Laws and Agreements.............................38 8.08 Investment and Holding Company Status...........................39 8.09 Taxes...........................................................39 8.10 ERISA...........................................................39 8.11 Disclosure......................................................39 8.12 Use of Credit...................................................39 8.13 Subsidiaries....................................................40 8.14 Withholding Taxes...............................................40 8.15 Stamp Taxes.....................................................40 8.16 Legal Form......................................................40 Section 9. Covenants of the Borrowers........................................41 9.01 Financial Statements and Other Information......................41 9.02 Notices of Material Events......................................43 9.03 Preservation of Existence and Franchises........................43 9.04 Insurance.......................................................43 9.05 Maintenance of Properties.......................................43 AMENDED AND RESTATED CREDIT AGREEMENT -iii- 9.06 Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities.........43 9.07 Financial Accounting Practices.................................44 9.08 Compliance with Applicable Laws................................44 9.09 Use of Proceeds................................................45 9.10 Continuation of and Change in Businesses.......................45 9.11 Visitation.....................................................45 9.12 Mergers........................................................45 9.13 Dispositions...................................................45 9.14 Liens..........................................................46 9.15 Transactions with Affiliates...................................48 9.16 Ratio of Total Funded Debt to Total Capitalization.............48 9.17 Consolidated Net Worth.........................................48 9.18 Indebtedness...................................................48 9.19 Claims Paying Ratings..........................................49 9.20 Private Act....................................................49 Section 10. Events of Default................................................49 Section 11. The Administrative Agent.........................................51 11.01 Appointment, Powers and Immunities.............................51 11.02 Reliance by Administrative Agent...............................52 11.03 Defaults.......................................................53 11.04 Rights as a Bank...............................................53 11.05 Indemnification................................................53 11.06 Non-Reliance on Administrative Agent and Other Banks...........54 11.07 Failure to Act.................................................54 11.08 Resignation of Administrative Agent............................54 Section 12. Miscellaneous....................................................55 12.01 Waiver.........................................................55 12.02 Notices........................................................55 12.03 Expenses, Etc..................................................56 12.04 Amendments, Etc................................................56 12.05 Successors and Assigns.........................................57 12.06 Survival.......................................................60 12.07 Captions.......................................................61 12.08 Counterparts...................................................61 AMENDED AND RESTATED CREDIT AGREEMENT -iv- 12.09 Governing Law; Submission to Jurisdiction.....................61 12.10 Waiver of Jury Trial..........................................62 12.11 Treatment of Certain Information; Confidentiality.............62 12.12 Judgment Currency.............................................63 12.13 European Monetary Union.......................................64 AMENDED AND RESTATED CREDIT AGREEMENT SCHEDULE I - Commitments SCHEDULE II - Indebtedness and Liens SCHEDULE III - Litigation SCHEDULE IV - Environmental Matters SCHEDULE V - Subsidiaries EXHIBIT A-1 - Form of Opinion of Paul S. Giordano, Esq., Counsel to XL Capital EXHIBIT A-2 - Form of Opinion of Special U.S. Counsel to the Obligors EXHIBIT A-3 - Form of Opinion of Special Bermuda Counsel to XL Insurance and XL Re EXHIBIT A-4 - Form of Opinion of Special Cayman Islands Counsel to XL Capital and Mid Ocean EXHIBIT B - Form of Opinion of Special New York Counsel to Chase EXHIBIT C - Form of Assignment and Acceptance AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 31, 2001, between XL CAPITAL LTD, a company incorporated under the laws of the Cayman Islands, British West Indies ("XL CAPITAL"), XL INSURANCE LTD, a Bermuda limited liability company ("XL INSURANCE"), MID OCEAN LIMITED, a corporation duly organized and validly existing under the laws of the Cayman Islands, British West Indies ("MID OCEAN") and XL RE, LTD (formerly known as XL MID OCEAN REINSURANCE LTD), a Bermuda limited liability company ("XL RE" and, together with XL Capital, XL Insurance and Mid Ocean, each a "BORROWER" and each a "GUARANTOR" and, collectively, the "BORROWERS" and the "GUARANTORS"; the Borrowers and the Guarantors being collectively referred to as the "OBLIGORS"), the BANKS party hereto, and THE CHASE MANHATTAN BANK, as Administrative Agent. WHEREAS, the Obligors, the Administrative Agent, and certain of the Banks are parties to a Credit Agreement dated as of September 2, 1997 (as heretofore amended and supplemented and in effect immediately prior to the effectiveness of this Agreement, the "EXISTING CREDIT AGREEMENT"); WHEREAS, the parties hereto wish to amend the Existing Credit Agreement in certain respects to make certain modifications thereto, and to restate the Existing Credit Agreement in its entirety as so amended, it being the intention of the parties hereto that the loans outstanding under the Existing Credit Agreement on the Effective Date (as defined below) shall continue and remain outstanding hereunder and not be repaid on the Effective Date; NOW, THEREFORE, the parties hereto agree as follows: Section 1. DEFINITIONS AND ACCOUNTING MATTERS. 1.01 CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and VICE VERSA): "ADMINISTRATIVE AGENT'S ACCOUNT" shall mean, for each Currency, an account in respect of such Currency designated by the Administrative Agent in a notice to XL Capital and the Banks. "ADMINISTRATIVE QUESTIONNAIRE" shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent. "AFFILIATE" shall mean, with respect to a specified Person, another Person that directly, or indirectly, Controls or is Controlled by or is under common Control with the Person specified. "AGREED FOREIGN CURRENCY" shall mean at any time any of Australian Dollars, English Pounds Sterling, Japanese Yen, New Zealand Dollars and, with the agreement of each AMENDED AND RESTATED CREDIT AGREEMENT -2- Bank, any other Foreign Currency, so long as at such time (a) such Currency is dealt with in the London (or, in the case of English Pounds Sterling, Paris) interbank deposit market, (b) such Currency is freely transferable and convertible into Dollars in the London foreign exchange market and (c) no central bank or other governmental authorization in the country of issue of such Currency is required to permit use of such Currency by any Bank for making any Loan hereunder and/or to permit any Borrower to borrow and repay the principal thereof and to pay the interest thereon, unless such authorization has been obtained and is in full force and effect. "APPLICABLE FACILITY FEE RATE" AND "APPLICABLE MARGIN" shall mean, during any period when any Rating Group set forth below is applicable, with respect to any facility fee payable hereunder or any Type of Loan outstanding hereunder, the percentage set forth below opposite such fee or Type of Loan under such Rating Group: ============================ ============== =============== ============== Rating Group Rating Group Rating Group Fee or Loan I II III ---------------------------- -------------- --------------- -------------- Facility Fee 0.070% 0.100% 0.150% ---------------------------- -------------- --------------- -------------- Eurocurrency Loans 0.155% 0.225% 0.325% ---------------------------- -------------- --------------- -------------- Base Rate Loans 0.000% 0.000% 0.000% ============================ ============== =============== ============== For the purposes of this Agreement, any change in the Applicable Facility Fee Rate or Applicable Margin for any facility fee or any outstanding Loans by reason of (a) a change in the Standard & Poor's Rating shall become effective on the date of announcement or publication of a change in such rating or, in the absence of such announcement or publication, on the effective date of such changed rating and (b) any other change in the Rating Group shall become effective on the date of the occurrence of the event that resulted in such change in the Rating Group. "APPLICABLE LENDING OFFICE" shall mean, for each Bank and for each Type and Currency of Loan, the "Lending Office" of such Bank (or of an Affiliate of such Bank) designated for such Type and Currency of Loan in the Administrative Questionnaire submitted by such Bank or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the Administrative Agent and XL Capital as the office by which its Loans of such Type and Currency are to be made and maintained. "ASSIGNMENT AND ACCEPTANCE" shall mean an assignment and acceptance entered into by a Bank and an assignee (with the consent of any Person whose consent is required by AMENDED AND RESTATED CREDIT AGREEMENT -3- Section 12.05(b) hereof), and accepted by the Administrative Agent, in the form of Exhibit C hereto or any other form approved by the Administrative Agent. "BANK" shall mean each of the lenders that is a signatory hereto identified under the caption "BANKS" on the signature pages hereto or that, pursuant to Section 12.05(b) hereof, shall become a "Bank" hereunder. "BANK AFFILIATE" shall mean, with respect to any Bank, (a) an Affiliate of such Bank or (b) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Bank or an Affiliate of such Bank. "BASE RATE" shall mean, for any day, a rate per annum equal to the higher of (a) the Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1/2 of 1%. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. "BASE RATE LOANS" shall mean Loans denominated in Dollars that bear interest at rates based upon the Base Rate. "BASLE ACCORD" shall mean the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. "BERMUDA COMPANIES LAW" shall mean the Companies Act of 1981, as amended, and the regulations promulgated thereunder. "BERMUDA INSURANCE LAW" shall mean the Insurance Act of 1978, as amended, and the regulations promulgated thereunder. "BORROWER JURISDICTION" shall mean (a) Bermuda, (b) the Cayman Islands and (c) any other country (i) where any Borrower is licensed or qualified to do business or (ii) from or through which payments hereunder are made by any Borrower. "BUSINESS DAY" shall mean any day (a) that is not a Saturday, Sunday or other day on which commercial banks in New York City, the Cayman Islands, British West Indies or AMENDED AND RESTATED CREDIT AGREEMENT -4- Bermuda are authorized or required by law to remain closed, (b) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, a continuation or conversion of or into, or the Interest Period for, a Eurocurrency Loan or to a notice by a Borrower with respect to any such borrowing, payment, prepayment, continuation, conversion, or Interest Period, that is also a day on which dealings in deposits denominated in the Currency of such Loan are carried out in the London interbank market and (c) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or the Interest Period for, any Loan denominated in any Foreign Currency or a notice by a Borrower with respect to any such borrowing, payment, prepayment or Interest Period, that is also a day on which commercial banks settle payments in the Principal Financial Center for the Currency in which such Loan is denominated and in which the London foreign exchange market settles payments in such Currency. "CAPITAL LEASE OBLIGATIONS" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "CHANGE IN CONTROL" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the SEC) of more than 40% of the voting securities of XL Capital; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of XL Capital; or (c) a majority of the members of XL Capital's board of directors are persons who are then serving on the board of directors without having been elected by the board of directors or having been nominated for election by its shareholders. "CHASE" shall mean The Chase Manhattan Bank. "CLASS" shall have the meaning assigned to such term in Section 1.03 hereof. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COMMITMENT" shall mean, as to each Bank, the obligation of such Bank to make Loans pursuant to Section 2.01 hereof in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set opposite such Bank's name on Schedule I hereto under the caption "Commitment" (as the same may at any time or from time to time be AMENDED AND RESTATED CREDIT AGREEMENT -5- reduced pursuant to Section 2.03 hereof or be increased or reduced pursuant to Section 12.05 hereof). "COMMITMENT TERMINATION DATE" shall mean September 2, 2002; PROVIDED that, if such date is not a Business Day, the Commitment Termination Date shall be the next preceding Business Day. "CONSOLIDATED NET WORTH" shall mean, at any date, the consolidated stockholders' equity of XL Capital and its Subsidiaries. "CONTROL" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "CONTROLLING" and "CONTROLLED" have meanings correlative thereto. "CURRENCY" shall mean Dollars or any Foreign Currency. "DEFAULT" shall mean any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "DOLLAR EQUIVALENT" shall mean, with respect to any Loan denominated in any Foreign Currency, the amount of Dollars that would be required to purchase the amount of the Foreign Currency of such Loan on the date such Loan is requested (or (i) in the case of any determination made under Section 2.01(c) hereof, on the date of any borrowing referred to in said Section 2.01(c) and (ii) in the case of any determination made under Section 2.09 or redenomination under the last sentence of Section 4.01 hereof, on the date of determination or redenomination therein referred to), based upon the spot selling rate at which Chase offers to sell such Foreign Currency for Dollars in the London foreign exchange market at approximately 11:00 a.m. London time for delivery two Business Days later. "DOLLARS" and "$" shall mean lawful money of the United States of America. "EFFECTIVE DATE" shall mean the date on which the conditions specified in Section 7.01 are satisfied (or waived in accordance with Section 12.04). "ENVIRONMENTAL LAWS" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Hazardous Materials, (c) protection of the public health or welfare from the effects of products, by-products, AMENDED AND RESTATED CREDIT AGREEMENT -6- wastes, emissions, discharges or releases of Hazardous Materials or (d) regulation of the manufacture, use or introduction into commerce of Hazardous Materials, including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. "ENVIRONMENTAL LIABILITY" shall mean any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of a Borrower or any Subsidiary resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract or agreement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "EQUITY RIGHTS" shall mean, with respect to any Person, any outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) that, together with any Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by any Borrower or any of such Borrower's ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by any Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by any Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by any Borrower or any ERISA Affiliate of any notice, or the receipt by AMENDED AND RESTATED CREDIT AGREEMENT -7- any Multiemployer Plan from any Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "EUROCURRENCY BASE RATE" shall mean, with respect to any Eurocurrency Loan in Dollars or any Agreed Foreign Currency for the Interest Period therefor: (a) the arithmetic mean, as calculated by the Administrative Agent, of the respective rates per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates appearing on the Screen at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of the Interest Period for such Loan as LIBOR for such Currency having a term comparable to such Interest Period; or (b) if the Screen shall cease to report such LIBOR or, in the reasonable judgment of the Majority Banks, shall cease accurately to reflect such LIBOR (as reported by any publicly available source of similar market data selected by the Majority Banks that, in the reasonable judgment of the Majority Banks, accurately reflects LIBOR for such Currency), the Eurocurrency Base Rate shall mean, with respect to such Eurocurrency Loan for such Interest Period the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%), as determined by the Administrative Agent, quoted by the Reference Bank at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of the Interest Period for such Eurocurrency Loan for the offering by the Reference Bank to leading banks in the London (or, in the case of Loans denominated in English Pounds Sterling, Paris) interbank market of deposits denominated in such Currency having a term comparable to such Interest Period and in an amount equal to $1,000,000 (or the Foreign Currency Equivalent thereof). "EUROCURRENCY LOANS" shall mean Loans made to any Borrower in Dollars or any Agreed Foreign Currency, which Loans bear interest at rates based on rates referred to in the definition of "Eurocurrency Base Rate" in this Section 1.01. "EUROCURRENCY RATE" shall mean, for any Eurocurrency Loan for the Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the Eurocurrency Base Rate for such Loan for such Interest Period multiplied by the Reserve Rate (if any) for such Interest Period. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Section 10 hereof. AMENDED AND RESTATED CREDIT AGREEMENT -8- "FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, PROVIDED that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate charged to Chase on such Business Day on such transactions as determined by the Administrative Agent. "FINANCIAL OFFICER" shall mean, with respect to any Obligor, a principal financial officer of such Obligor. "FOREIGN CURRENCY" shall mean at any time any Currency other than Dollars. "FOREIGN CURRENCY EQUIVALENT" shall mean, with respect to any amount in Dollars, the amount of any Foreign Currency that could be purchased with such amount of Dollars using the reciprocal of the foreign exchange rate(s) specified in the definition of the term "Dollar Equivalent", as determined by the Administrative Agent. "FRB" shall mean the Board of Governors of the Federal Reserve System (or any successor thereto). "GAAP" shall mean generally accepted accounting principles in the United States of America. "GOVERNMENTAL AUTHORITY" shall mean the government of the United States of America, or of any other nation, or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "GUARANTEE" shall mean with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefore for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or AMENDED AND RESTATED CREDIT AGREEMENT -9- purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guarantee hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount of the Indebtedness in respect of which such Guarantee is made. The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a correlative meaning. "HAZARDOUS MATERIALS" shall mean all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "HEDGING AGREEMENT" shall mean any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "INDEBTEDNESS" shall mean, for any Person, without duplication (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such Person's business as an insurance or reinsurance company (including GICs) or corporate member of The Council of Lloyd's or as a provider of financial or investment services or contracts (in each case other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness): (i) all indebtedness or liability for or on account of money borrowed by, or for or on account of deposits with or advances to (but not including accrued pension costs, deferred income taxes or accounts payable of) such Person; (ii) all obligations (including contingent liabilities) of such Person evidenced by bonds, debentures, notes, banker's acceptances or similar instruments; (iii) all indebtedness or liability for or on account of property or services purchased or acquired by such Person; (iv) any amount secured by a Lien on property owned by such Person (whether or not assumed) and Capital Lease Obligations of such Person (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such capital lease to repossession or sale of such property); (v) the maximum available amount of all standby letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed); and (vi) all Guarantees of such Person. AMENDED AND RESTATED CREDIT AGREEMENT -10- "INTEREST PERIOD" shall mean: (a) with respect to any Eurocurrency Loan, the period commencing on the date such Loan is made and ending on the numerically corresponding day in the first, second, third, or sixth calendar month thereafter, as XL Capital may select as provided in Section 4.05 hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; (b) with respect to any Base Rate Loan, the period commencing on the date such Base Rate Loan is made and ending on the earlier of the first Quarterly Date thereafter or the Commitment Termination Date. Notwithstanding the foregoing: (i) if any Interest Period for any Loan would otherwise end after the Commitment Termination Date in existence at the time such Interest Period is selected, such Interest Period shall not be available hereunder; (ii) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for a Eurocurrency Loan, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clauses (i) and (ii) above, no Interest Period for any Eurocurrency Loan shall have a duration of less than one month and, if the Interest Period for any Eurocurrency Loan would otherwise be a shorter period, such Interest Period shall not be available hereunder. "LAW" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "LETTER OF CREDIT AGREEMENT" shall mean the Letter of Credit and Reimbursement Agreement dated as of June 29, 2001 between the Obligors, the lenders party thereto and Chase, as administrative agent for such lenders. "LIBOR" shall mean, for any Currency, the rate at which deposits in such Currency are offered to lending banks in the London (or, in the case of English Pounds Sterling, Paris) interbank market. "LIEN" shall mean, with respect to any asset, any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. AMENDED AND RESTATED CREDIT AGREEMENT -11- "LOANS" shall mean Loans provided for by Section 2.01 hereof which may be Base Rate Loans or Eurocurrency Loans. "LOCAL TIME" shall mean, with respect to any Loan denominated in or any payment to be made in any Currency, the local time in the Principal Financial Center for the Currency in which such Loan is denominated or such payment is to be made. "MAJORITY BANKS" shall mean Banks having more than 50% of the aggregate amount of the Commitments or, if the Commitments shall have terminated, Banks holding more than 50% of the aggregate unpaid principal amount of the Loans. "MARGIN STOCK" shall mean "margin stock" within the meaning of Regulations T, U and X of the FRB. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on: (a) the assets, business, financial condition or operations of a Borrower and its Subsidiaries taken as a whole; or (b) the ability of a Borrower to perform any of its payment or other material obligations under this Agreement. "MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NON-U.S. BENEFIT PLAN" shall mean any plan, fund (including any superannuation fund) or other similar program established or maintained outside the United States by any Borrower or any of their Subsidiaries, with respect to which such Borrower or such Subsidiary has an obligation to contribute, for the benefit of employees of such Borrower or such Subsidiary, which plan, fund or other similar program provides, or results in, the type of benefits described in Section 3(1) or 3(2) of ERISA, and which plan is not subject to ERISA or the Code. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "PERSON" shall mean any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "PLAN" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA and in respect of which any Borrower or any ERISA Affiliate is (or, if such plan were AMENDED AND RESTATED CREDIT AGREEMENT -12- terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "POST-DEFAULT RATE" shall mean, in respect of any principal of any Loan or any other amount under this Agreement that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum equal to 2% PLUS the Base Rate as in effect from time to time (PROVIDED that, if the amount so in default is principal of a Eurocurrency Loan and the due date thereof is a day other than the last day of such Interest Period therefor, the "Post-Default Rate" for such principal shall be, for the period from and including such due date to but excluding the last day of such Interest Period, 2% plus the interest rate for such Loan as provided in Section 3.02 hereof and, thereafter, the rate provided for above in this definition). "PRIME RATE" shall mean the rate of interest from time to time announced by Chase at its principal office in New York, New York as its prime commercial lending rate. "PRINCIPAL FINANCIAL CENTER" shall mean, in the case of any Currency, the principal financial center of the country that issues such Currency, as determined by the Administrative Agent. "PRIVATE ACT" shall mean separate legislation enacted in Bermuda with the intention that such legislation apply specifically to a Borrower, in whole or in part. "PROPERTY" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "QUARTERLY DATES" shall mean the last Business Day of January, April, July and October in each year, the first of which shall be the first such day after the date hereof. "RATING GROUP" shall mean any of Rating Group I, Rating Group II or Rating Group III. "RATING GROUP I" shall mean (a) no Event of Default has occurred and is continuing and the Standard & Poor's Rating is at or above AA; "RATING GROUP II" shall mean (a) Rating Group I is not in effect and (b) no Event of Default has occurred and is continuing and (c) the Standard & Poor's Rating is at or above A; and "RATING GROUP III" shall mean neither Rating Group I nor Rating Group II is in effect. "REFERENCE BANK" shall mean Chase. AMENDED AND RESTATED CREDIT AGREEMENT -13- "REGISTER" shall have the meaning assigned to such term in Section 12.05 hereof. "REGULATIONS A, D, U AND X" shall mean, respectively, Regulations A, D, U and X of the FRB, as the same may be modified and supplemented and in effect from time to time. "REGULATORY CHANGE" shall mean, with respect to any Bank, any change after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Bank of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "RELATED PARTIES" shall mean, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "RESERVE RATE" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the FRB to which member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 are subject with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D). Such reserve percentages shall include those imposed pursuant to Regulation D. The Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "REVOLVING CREDIT AGREEMENT" shall mean the 364-Day Credit Agreement dated as of June 29, 2001 between the Obligors, the lenders party thereto and Chase, as administrative agent for such lenders. "SAP" shall mean, as to each Borrower and each Subsidiary that offers insurance products, the statutory accounting practices prescribed or permitted by the relevant Governmental Authority for such Borrower's or such Subsidiary's domicile for the preparation of its financial statements and other reports by insurance corporations of the same type as such Borrower or such Subsidiary in effect on the date such statements or reports are to be prepared, except if otherwise notified by XL Capital as provided in Section 1.02. "SCREEN" shall mean, for any Currency, the relevant display page for LIBOR for such Currency (as determined by the Administrative Agent) on the Telerate Service or on any AMENDED AND RESTATED CREDIT AGREEMENT -14- successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to deposits of such Currency in the London interbank market. "SEC" shall mean the Securities and Exchange Commission or any governmental authority succeeding to its principal functions. "STANDARD & POOR'S" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or any successor thereto. "STANDARD AND POOR'S RATING" shall mean, as at any date, the claims-paying rating of XL Re most recently published by Standard & Poor's. "SUBSIDIARY" shall mean, with respect to any Person (the "PARENT"), at any date, any corporation (or similar entity) of which a majority of the shares of outstanding capital stock normally entitled to vote for the election of directors (regardless of any contingency which does or may suspend or dilute the voting rights of such capital stock) is at such time owned directly or indirectly by the parent or one or more subsidiaries of the parent. Unless otherwise specified, "Subsidiary" shall mean a Subsidiary of a Borrower. "TAXES" shall have the meaning assigned to such term in Section 5.05(a) hereof. "TOTAL FUNDED DEBT" shall mean, at any time, all Indebtedness of XL Capital and its Subsidiaries which would at such time be classified in whole or in part as a liability on the consolidated balance sheet of XL Capital in accordance with GAAP. "TRANSACTIONS" shall mean the execution, delivery and performance by the Obligors of this Agreement, the borrowing of Loans and the use of the proceeds thereof. "TYPE" shall have the meaning assigned to such term in Section 1.03 hereof. "WHOLLY OWNED SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation or other similar legal entity, directors' qualifying shares or shares held by residents of the jurisdiction in which such corporation or other similar legal entity is organized as required by the law of such jurisdiction) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. AMENDED AND RESTATED CREDIT AGREEMENT -15- "WITHDRAWAL LIABILITY" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. 1.02 ACCOUNTING TERMS; GAAP AND SAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP or SAP, as the context requires, each as in effect from time to time; PROVIDED that, if XL Capital notifies the Administrative Agent that the Borrowers request an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or SAP, as the case may be, or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrowers that the Majority Banks request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or SAP, as the case may be, or in the application thereof, then such provision shall be interpreted on the basis of GAAP or SAP, as the case may be, as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. 1.03 CURRENCIES AND TYPES OF LOANS. Loans hereunder are distinguished by "Currency" and by "Type". The "Currency" of a Loan refers to the Currency in which such Loan is denominated. The "Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurocurrency Loan, each of which constitutes a Type. Loans may be identified by one or more of their Currency and Type. Section 2. COMMITMENTS, LOANS AND PREPAYMENTS. 2.01 LOANS. (a) Each Bank severally agrees, on the terms and conditions of this Agreement, to make loans to any Borrower in Dollars or in any Agreed Foreign Currency during the period from and including the date hereof to but not including the Commitment Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of the Commitment of such Bank as in effect from time to time. Subject to the terms and conditions of this Agreement, during such period the Borrowers may borrow, prepay, repay and reborrow the amount of the Commitments. (b) If, after giving effect to any Loan to be made under this Section 2.01, more than four separate Interest Periods in respect of Loans denominated in any single Currency would be outstanding at the same time (for which purpose Interest Periods described in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest AMENDED AND RESTATED CREDIT AGREEMENT -16- Periods even if they are coterminous), then such Loan shall not be required to be made hereunder. (c) For purposes of determining (i) whether the amount of any borrowing of Loans, together with all other Loans then outstanding, would exceed the aggregate amount of Commitments, (ii) under Section 2.03(b) hereof, the aggregate unutilized amount of the Commitments and (iii) under Section 7.02 hereof, the outstanding aggregate principal amount of Loans, the outstanding principal amount of any Loan that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent (determined as of the date of borrowing of such Loan) of the amount in the Foreign Currency of such Loan of the amount in the Currency of such Loan. 2.02 BORROWINGS OF LOANS. XL Capital shall give the Administrative Agent notice of each borrowing of Loans hereunder as provided in Section 4.05 hereof. Not later than 11:00 a.m. Local Time on the date specified for each borrowing of Loans hereunder, each Bank shall make available the amount of the Loan or Loans to be made by it on such date to the Administrative Agent, at the Administrative Agent's Account for the Currency in which such Loan is denominated, in immediately available funds, for account of the relevant Borrower. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the relevant Borrower by depositing the same, in immediately available funds, in an account of such Borrower designated by XL Capital. 2.03 CHANGES OF COMMITMENTS; REDUCTION OF MAXIMUM LOAN AMOUNTS. (a) The aggregate amount of the Commitments shall be automatically reduced to zero on the Commitment Termination Date. (b) The Borrowers shall have the right at any time or from time to time (i) so long as no Loans are (or at the time will be) outstanding, to terminate the Commitments and (ii) to reduce the aggregate unutilized amount of the Commitments; PROVIDED that (x) XL Capital shall give notice of each such termination or reduction as provided in Section 4.05 hereof and (y) each partial reduction of Commitments shall be in an aggregate amount at least equal to $10,000,000 (or a larger integral multiple of $1,000,000). (c) The Commitments once terminated or reduced may not be reinstated. 2.04 FEES. (a) FACILITY FEE. XL Capital shall pay to the Administrative Agent for account of each Bank a facility fee on the daily average amount of such Bank's Commitment (whether used AMENDED AND RESTATED CREDIT AGREEMENT -17- or unused), for the period from and including the date hereof to but not including the earlier of the date such Commitment is terminated and the Commitment Termination Date, at a rate per annum equal to the Applicable Facility Fee Rate. Accrued facility fee shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date. (b) UTILIZATION FEE. XL Capital shall pay to the Administrative Agent for account of each Bank, during any period that the aggregate outstanding principal amount of Loans exceeds 50% of the aggregate amount of the Commitments, a utilization fee on the daily average aggregate outstanding principal amount of such Bank's Loans at a rate per annum equal to 0.025% per annum. Accrued utilization fee shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date interest on such Bank's Loans are payable. 2.05 LENDING OFFICES. The Loans of each Type and Currency made by each Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such Type and Currency. 2.06 SEVERAL OBLIGATIONS. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, and neither any Bank nor the Administrative Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. 2.07 EVIDENCE OF DEBT. (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing, with respect to each Loan made by such Bank to each Borrower, the amounts of principal of and interest on such Loan payable and paid to such Bank from time to time hereunder. (b) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type and Currency thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Bank hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for account of the Banks and each Bank's share thereof. (c) The entries made in the accounts maintained pursuant to clause (a) or (b) of this Section 2.07 shall be PRIMA FACIE evidence of the existence and amounts of the obligations recorded therein; PROVIDED that the failure of any Bank or the Administrative Agent to maintain AMENDED AND RESTATED CREDIT AGREEMENT -18- such accounts or any error therein shall not in any manner affect the obligation of the Borrowers to repay the principal of, interest on, and other amounts in respect of, Loans in accordance with the terms of this Agreement. (d) Any Bank may request that Loans made by it be evidenced by a promissory note of each Borrower. In such event the Borrowers shall prepare, execute and deliver to such Bank a promissory note payable to the order of such Bank. 2.08 OPTIONAL PREPAYMENTS. Subject to Sections 3.02, 4.04 and 5.04 hereof, Loans may be prepaid at any time or from time to time, PROVIDED that, XL Capital shall give the Administrative Agent notice of each such prepayment as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder). 2.09 MANDATORY PREPAYMENTS. (a) Upon the receipt by the Administrative Agent of a Currency Valuation Notice (as defined below) and on each Quarterly Date, the Administrative Agent shall promptly determine the aggregate outstanding principal amount of all Loans (for which purpose the outstanding principal amount of any Loan that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent (determined as of the Business Day on which the Administrative Agent shall have received such Currency Valuation Notice prior to 11:00 a.m. New York time (or, if received by the Administrative Agent after such time on any Business Day, as of the next succeeding Business Day) or as of such Quarterly Date, as the case may be, of the amount in the Foreign Currency of such Loan). Upon making such determination, the Administrative Agent shall promptly notify the Banks and XL Capital thereof. (b) If, on the date of such determination the aggregate outstanding principal amount of all Loans exceeds 105% of the aggregate amount of the Commitments as then in effect, the Borrowers shall, if requested by the Majority Banks (through the Administrative Agent), prepay the Loans in an amount so that after giving effect thereto the aggregate outstanding principal amount of the Loans does not exceed the Commitments; PROVIDED that, any such payment shall be accompanied by any amounts payable under Sections 3.02 and 5.04 hereof. For purposes of this Section 2.09, "CURRENCY VALUATION NOTICE" shall mean a notice given by the Majority Banks to the Administrative Agent stating that such notice is a "Currency Valuation Notice" and requesting that the Administrative Agent determine the aggregate outstanding principal amount of all Loans. AMENDED AND RESTATED CREDIT AGREEMENT -19- Anything in this Section 2.09 to the contrary notwithstanding, the Administrative Agent shall not be required to make more than one valuation determination pursuant to Currency Valuation Notices within any rolling three month period. Section 3. PAYMENTS OF PRINCIPAL AND INTEREST. 3.01 REPAYMENT OF LOANS. Each Borrower hereby promises to pay to the Administrative Agent for account of each Bank the principal of each Loan made by such Bank to such Borrower, and each Loan shall mature, on the last day of the Interest Period therefor. 3.02 INTEREST. Each Borrower hereby promises to pay to the Administrative Agent for account of each Bank interest on the unpaid principal amount of each Loan made by such Bank to such Borrower for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) if such Loan is a Base Rate Loan, the Base Rate (as in effect from time to time); (b) if such Loan is a Eurocurrency Loan, the Eurocurrency Rate for such Loan for the Interest Period therefor PLUS the Applicable Margin. Notwithstanding the foregoing, each Borrower hereby promises to pay to the Administrative Agent for account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank and on any other amount payable by such Borrower hereunder to or for account of such Bank, that shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) on the last day of the Interest Period therefor and, if such Interest Period is longer than three months (in the case of a Eurocurrency Loan), at three-month intervals following the first day of such Interest Period, and (ii) in the case of any Loan, upon the payment or prepayment thereof (but only on the principal amount so paid or prepaid), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Banks to which such interest is payable and to XL Capital. AMENDED AND RESTATED CREDIT AGREEMENT -20- Section 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. 4.01 PAYMENTS. (a) Except to the extent otherwise provided herein, all payments of principal and interest on any Loan and other amounts to be paid by any Borrower under this Agreement shall be made in the Currency in which such Loan or other amount is denominated, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at the Administrative Agent's Account for the Currency in which such Loan or other amount is denominated, not later than 11:00 a.m. Local Time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day), PROVIDED that if a new Loan is to be made by any Bank to any Borrower on a date any Borrower is to repay any principal of an outstanding Loan of such Bank and in the same Currency, such Bank shall apply the proceeds of such new Loan to the payment of the principal to be repaid and only an amount equal to the difference between the principal to be borrowed and the principal to be repaid shall be made available by such Bank to the Administrative Agent as provided in Section 2.02 hereof or paid by such Borrower to the Administrative Agent pursuant to this Section 4.01, as the case may be. All amounts owing under this Agreement (including facility fees and utilization fees, but not including principal of, and interest on, Loans denominated in any Foreign Currency) are payable in Dollars. Notwithstanding the foregoing, if any Borrower shall fail to pay any principal of any Loan when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), the unpaid portion of such Loan shall, if such Loan is not denominated in Dollars, automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such principal shall be payable on demand; and if any Borrower shall fail to pay any interest on any Loan that is not denominated in Dollars, such interest shall automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such interest shall be payable on demand. (b) Subject to the proviso to the first sentence of Section 4.01(a) above, any Bank for whose account any such payment is to be made may (but shall not be obligated to) debit the amount of any such payment that is not made by such time to any ordinary deposit account of any Borrower with such Bank (with notice to XL Capital and the Administrative Agent). AMENDED AND RESTATED CREDIT AGREEMENT -21- (c) Each Borrower shall, at the time of making each payment under this Agreement for account of any Bank, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Loans or other amounts payable by such Borrower hereunder to which such payment is to be applied (and in the event that such Borrower fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02 hereof, may determine to be appropriate). (d) Each payment received by the Administrative Agent under this Agreement for account of any Bank shall be paid by the Administrative Agent promptly to such Bank, in immediately available funds, for account of such Bank's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made. (e) If the due date of any payment under this Agreement would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 PRO RATA TREATMENT. Except to the extent otherwise provided herein: (a) each borrowing under Section 2.01 hereof shall be made from the Banks pro rata according to their respective Commitments; (b) each payment of facility fee under Section 2.04(a) hereof shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.03 hereof shall be applied to the respective Commitments of the Banks, pro rata according to the amounts of their respective Commitments; (c) Eurocurrency Loans denominated in the same Currency and having the same Interest Period shall (other than as provided in Section 5.03 hereof) be allocated pro rata among the Banks according to their respective Commitments; (d) each payment or prepayment by any Borrower of principal of Loans of any Type and denominated in any Currency shall be made for account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Loans of such Type and denominated in such Currency held by them; and (e) each payment by any Borrower of interest and utilization fees on Loans of any Type and denominated in any Currency shall be made for account of the Banks pro rata in accordance with the amounts of interest and utilization fees on Loans of such Type and denominated in such Currency then due and payable to them. AMENDED AND RESTATED CREDIT AGREEMENT -22- 4.03 COMPUTATIONS. Interest on Eurocurrency Loans (other than Loans in English Pounds Sterling), facility fee and utilization fee shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable and interest on Base Rate Loans and Eurocurrency Loans in English Pounds Sterling shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Notwithstanding the foregoing, for each day that the Base Rate is calculated by reference to the Federal Funds Rate, interest on Base Rate Loans shall be computed on the basis of a year of 360 days and actual days elapsed. 4.04 MINIMUM AMOUNTS. Except for mandatory prepayments made pursuant to Section 2.09 hereof, each borrowing and partial prepayment of principal of Loans shall be in an aggregate amount at least equal to $5,000,000 or a larger integral multiple of $1,000,000 or, in the case of Eurocurrency Loans denominated in any Agreed Foreign Currency, the Foreign Currency Equivalent thereof (rounded downwards to the nearest 1,000 units of such Foreign Currency). Borrowings or prepayments of Loans of different Types or denominated in different Currencies or, in the case of Eurocurrency Loans, having different Interest Periods at the same time hereunder shall be deemed separate borrowings and prepayments for purposes of this Section 4.04, one for each Type, Currency or Interest Period. In addition, the aggregate principal amount of Eurocurrency Loans having the same Interest Period shall be in an amount at least equal to $5,000,000 or a larger integral multiple of $1,000,000 or, in the case of Eurocurrency Loans denominated in any Agreed Foreign Currency, the Foreign Currency Equivalent thereof (rounded downwards to the nearest 1,000 units of such Foreign Currency) and, if (i) any Eurocurrency Loans denominated in Dollars would otherwise be in a lesser principal amount for any period, such Loans shall be Base Rate Loans during such period and (ii) any Eurocurrency Loans denominated in any Foreign Currency would otherwise be in a lesser principal amount for any period, such Loans shall be unavailable hereunder. 4.05 CERTAIN NOTICES. Notices by XL Capital to the Administrative Agent of terminations or reductions of the Commitments, of reductions of borrowings and optional prepayments of Loans, of Types and Currencies of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 10:00 a.m. New York time (or, in the case of borrowings or prepayment of, or duration of Interest Periods for, Eurocurrency Loans denominated in a Foreign Currency, London time) on the number of Business Days prior to the date of the relevant termination, reduction, borrowing or prepayment or the first day of such Interest Period specified below: AMENDED AND RESTATED CREDIT AGREEMENT -23- Number of Business Notice Days Prior ------ ---------- Borrowing or prepayment of Base Rate Loans same day Borrowing or prepayment of, or duration of Interest Period for, Eurocurrency Loans denominated in Dollars 3 Borrowing or prepayment of, or duration of Interest Period for, Eurocurrency Loans denominated in a Foreign Currency 5 Each such notice of termination or reduction of the Commitments shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing or optional prepayment shall specify the Loans to be borrowed or prepaid and the amount (subject to Section 4.04 hereof), Type and Currency of each Loan to be borrowed or prepaid, the date of borrowing or optional prepayment (which shall be a Business Day), the Interest Period of the Loans to be borrowed or prepaid. The Administrative Agent shall promptly notify the Banks of the contents of each such notice. 4.06 NON-RECEIPT OF FUNDS BY THE ADMINISTRATIVE AGENT. Unless the Administrative Agent shall have been notified by a Bank or any Borrower (the "PAYOR") prior to the date on which the Payor is to make payment to the Administrative Agent of (in the case of any Bank) the proceeds of a Loan to be made by such Bank hereunder or (in the case of a Borrower) a payment to the Administrative Agent for account of one or more of the Banks hereunder (such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the "ADVANCE DATE") such amount was so made available by the Administrative Agent until but not including AMENDED AND RESTATED CREDIT AGREEMENT -24- the date the Administrative Agent recovers such amount at a rate per annum equal to the greater of (a) the Federal Funds Rate for such day and (b) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, PROVIDED that if neither the recipient(s) nor the Payor shall return the Required Payment to the Administrative Agent within three Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by any Borrower to the Banks, such Borrower and the recipient(s) shall each be obligated retroactively to the Advance Date to pay (without duplication) interest in respect of the Required Payment at the Post-Default Rate (without duplication of the obligation of such Borrower under Section 3.02 hereof to pay interest on the Required Payment at the Post-Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of such Borrower under said Section 3.02 to pay interest at the Post-Default Rate in respect of the Required Payment; and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Banks to any Borrower, the Payor and such Borrower shall each be obligated retroactively to the Advance Date to pay (without duplication) interest in respect of the Required Payment at the rate applicable to such Loan pursuant to Section 3.02 hereof, it being understood that the return by such Borrower of the Required Payment to the Administrative Agent shall not limit any claim such Borrower may have against the Payor in respect of such Required Payment. 4.07 SHARING OF PAYMENTS, ETC. (a) Each Borrower agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option (to the fullest extent permitted by law), to set-off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of such Borrower at any of such Bank's offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans or any other amount payable to such Bank hereunder, that is not paid when due (regardless of whether such deposit or other indebtedness is then due to such Borrower), in which case it shall promptly notify XL Capital and the Administrative Agent thereof, PROVIDED that such Bank's failure to give such notice shall not affect the validity thereof. AMENDED AND RESTATED CREDIT AGREEMENT -25- (b) If any Bank shall obtain from any Borrower payment of any principal of or interest on any Loan and denominated in any Currency owing to it or payment of any other amount under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on the Loans denominated in such Currency (the "APPLICABLE LOANS") or such other amounts then due hereunder by such Borrower to such Bank than the percentage received by any other Bank to which principal of or interest on the Applicable Loans or such other amounts is then due hereunder by such Borrower, it shall promptly purchase from such other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Applicable Loans or such other amounts, respectively, owing to such other Banks (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all such Banks shall share the benefit of such excess payment (net of any expenses that may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Applicable Loans or such other amounts, respectively, owing to each of such Banks. To such end all such Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) Each Borrower agrees that any Bank so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation (or direct interest). (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of any Borrower. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. AMENDED AND RESTATED CREDIT AGREEMENT -26- Section 5. YIELD PROTECTION, ETC. 5.01 ADDITIONAL COSTS. (a) Each Borrower shall pay (but without duplication, including by reason of Section 5.05(a) hereof) directly to each Bank from time to time such amounts as such Bank may reasonably determine to be necessary to compensate such Bank for any costs incurred by such Bank that such Bank reasonably determines are attributable to its making or maintaining of any Eurocurrency Loans to such Borrower or its obligation to make any Eurocurrency Loans to such Borrower hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation resulting from any Regulatory Change that: (i) shall subject such Bank (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or changes the basis of taxation of any amounts payable to such Bank under this Agreement in respect of any of such Loans (excluding changes in the rate of tax on the net income of such Bank or of such Applicable Lending Office by any jurisdiction in which such Bank is organized or has its principal office or in which such Applicable Lending Office is located or carrying on business); (ii) imposes or increases any reserve, special deposit or similar requirements (other than the reserve requirement utilized in the determination of the Eurocurrency Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including, without limitation, any of such Loans or any deposits referred to in the definition of "Eurocurrency Base Rate" in Section 1.01 hereof), or any commitment of such Bank (including, without limitation, the Commitment of such Bank hereunder); or (iii) imposes any other material condition affecting this Agreement (or any of such extensions of credit or liabilities) or its Commitment (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"). If any Bank requests compensation from any Borrower under this Section 5.01(a), such Borrower may, by notice to such Bank (with a copy to the Administrative Agent), suspend the obligation of such Bank thereafter to make Eurocurrency Loans to such Borrower until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.03 hereof shall be applicable), PROVIDED that such suspension shall not affect the right of such Bank to receive the compensation so requested. AMENDED AND RESTATED CREDIT AGREEMENT -27- (b) Without limiting the effect of the provisions of paragraph (a) of this Section 5.01, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank that includes deposits by reference to which the interest rate on Eurocurrency Loans denominated in any Currency as determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank that includes Eurocurrency Loans denominated in such Currency or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Bank so elects by notice to XL Capital (with a copy to the Administrative Agent), the obligation of such Bank to make Eurocurrency Loans in such Currency hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.03 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), each Borrower shall pay directly to each Bank from time to time on request such amounts as such Bank may reasonably determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it reasonably determines are attributable to the maintenance by such Bank (or any Applicable Lending Office or such bank holding company) of capital in respect of its Commitment or Loans pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basle Accord (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any Applicable Lending Office or such bank holding company) to a level below that which such Bank (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). (d) Each Bank shall notify XL Capital of any event occurring after the date hereof entitling such Bank to compensation under paragraph (a) or (c) of this Section 5.01 as promptly as practicable, but in any event within 90 days, after such Bank obtains actual knowledge thereof; PROVIDED that (i) if any Bank fails to give such notice within 90 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 90 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different Applicable Lending AMENDED AND RESTATED CREDIT AGREEMENT -28- Office for the Loans of such Bank affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank, except that such Bank shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Bank will furnish to XL Capital a certificate setting forth in reasonable detail the basis and amount of each request by such Bank for compensation under paragraph (a) or (c) of this Section 5.01. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (c) of this Section 5.01, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Bank under this Section 5.01, shall be conclusive absent manifest error, so long as such determinations and allocations are made on a reasonable basis. 5.02 LIMITATION ON TYPES AND CURRENCIES OF LOANS. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Eurocurrency Base Rate for any Interest Period pursuant to clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof: (a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof are not being provided by the Reference Bank in the relevant amounts or Currencies or for the relevant maturities for purposes of determining rates of interest for Eurocurrency Loans referred to in said clause (b) as provided herein; or (b) the Majority Banks determine, which determination shall be conclusive, and notify (or notifies, as the case may be) the Administrative Agent that the relevant rates of interest referred to in clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurocurrency Loans denominated in any Currency for such Interest Period is to be determined are not likely adequately to cover the cost to such Banks (or to such quoting Bank) of making or maintaining Eurocurrency Loans denominated in such Currency for such Interest Period; then the Administrative Agent shall give XL Capital and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make additional Eurocurrency Loans denominated in such Currency. 5.03 TREATMENT OF AFFECTED LOANS. If the obligation of any Bank to make Eurocurrency Loans denominated in Dollars shall be suspended pursuant to Section 5.01 hereof, then, unless and until such Bank gives notice as provided below that the circumstances specified -29- in Section 5.01 hereof that gave rise to such suspension no longer exist, all Loans that would otherwise be made by such Bank as Eurocurrency Loans denominated in Dollars shall be made instead as Base Rate Loans. If the obligation of any Bank to make Eurocurrency Loans denominated in any Agreed Foreign Currency to any Borrower shall be suspended pursuant to Section 5.01 hereof, then, unless and until such Bank gives notice as provided below that the circumstances specified in Section 5.01 hereof that gave rise to such suspension no longer exist, all Loans that would otherwise be made by such Bank to such Borrower as Eurocurrency Loans denominated in such Agreed Foreign Currency shall, except as provided in the immediately preceding sentence, be made instead as Eurocurrency Loans denominated in Dollars. 5.04 COMPENSATION. Each Borrower shall pay to the Administrative Agent for account of each Bank, upon the request of such Bank through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense that such Bank reasonably determines is attributable to: (a) any payment or mandatory or optional prepayment, of a Eurocurrency Loan to such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by such Borrower for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 7 hereof to be satisfied) to borrow a Eurocurrency Loan from such Bank on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 hereof. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid or not borrowed for the period ("RELEVANT PERIOD") from the date of such payment, prepayment or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate equal to the arithmetic mean, as reasonably determined by such Bank, of the respective rates per annum (rounded upward, if necessary, to the nearest 1/16 of 1%) of the bid rates for deposits in the Currency in which such Loan is denominated for the period approximately equal to the Relevant Period appearing on the Screen or other publicly available source (as described in the definition of the term "Eurocurrency Base Rate" in Section 1.01 hereof); PROVIDED that if the Screen is not publicly available, then the provisions of paragraph (b) of the definition of the term "Eurocurrency Base Rate" in Section 1.01 hereof shall apply herein MUTATIS MUTANDIS. AMENDED AND RESTATED CREDIT AGREEMENT -30- 5.05 TAXES. (a) Each Borrower agrees to pay to each Bank such additional amounts as are necessary in order that the net payment of any amount due to such Bank hereunder, after deduction for or withholding in respect of any Taxes imposed with respect to such payment (or in lieu thereof, payment of such Taxes by such Bank), will not be less than the amount stated herein to be then due and payable, PROVIDED that the foregoing obligation to pay such additional amounts shall not apply: (i) to any payment to any Bank hereunder unless such Bank is, on the date hereof (or on the date it becomes a Bank hereunder as provided in Section 12.05(b) hereof) and on the date of any change in the Applicable Lending Office of such Bank, entitled to a complete (or, in the case of an assignee or participant pursuant to paragraph (b) or (e) of Section 12.05 hereof, at least to the extent of the assignor or applicable Bank at the time of such assignment or participation) exemption from withholding or deduction by such Borrower of Taxes on all amounts to be received by such Bank hereunder in respect of the Loans made by such Bank to such Borrower, or (ii) to any Taxes required to be deducted or withheld solely by reason of the failure by such Bank, after being requested by such Borrower, to comply with applicable certification, information, documentation or other reporting requirements specifically identified by such Borrower in such request concerning the nationality, residence, identity or connections with the relevant Borrower Jurisdiction if such compliance is required by treaty, statute or regulation as a precondition to relief or exemption from such Taxes. For the purposes of this Section 5.05(a), "TAXES" shall mean with respect to a Borrower any and all present or future taxes, levies, imposts, duties, deductions, charges, or withholdings imposed by any Governmental Authority of any Borrower Jurisdiction on or in respect of payments of principal, interest, fees or other amounts payable under this Agreement, or any promissory notes evidencing the Loans made hereunder, including (without limitation) payments under this Section 5.05(a); PROVIDED, HOWEVER, that Taxes shall not include (x) income or franchise taxes imposed on or measured by the net income or capital of a Bank (or its Applicable Lending Office) by any Borrower Jurisdiction as a result of (i) such Bank being organized under the laws of such Borrower Jurisdiction, (ii) such Bank having its chief executive office in such Borrower Jurisdiction or (iii) its Applicable Lending Office being located or carrying on business in such Borrower Jurisdiction, (y) interest, penalties or additions to tax not attributable to any act, failure to act or misrepresentation of a Borrower (other than any act or failure to act permitted or contemplated hereunder) and (z) any tax other than a withholding tax unless the Bank's interest AMENDED AND RESTATED CREDIT AGREEMENT -31- in the Loan became subject thereto solely by reason of such Bank's participation in the transactions contemplated hereby. (b) Within 30 days after paying any amount to the Administrative Agent or any Bank from which it is required by law to make any deduction or withholding, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, XL Capital shall deliver to the Administrative Agent for delivery to such Bank evidence satisfactory to such Bank of such deduction, withholding or payment (as the case may be). 5.06 REPLACEMENT OF BANKS. If any Bank requests compensation pursuant to Section 5.01 or 5.05 hereof, or any Bank's obligation to make Loans of any Type or denominated in any Currency shall be suspended pursuant to Section 5.01 hereof (any such Bank requesting such compensation, or whose obligations are so suspended, being herein called a "REQUESTING BANK"), any Borrower, upon three Business Days' notice to the Administrative Agent, may require that such Requesting Bank transfer all of its right, title and interest under this Agreement to any bank or other financial institution identified by such Borrower that is satisfactory to the Administrative Agent in its reasonable determination (a) if such bank or other financial institution (a "PROPOSED BANK") agrees to assume all of the obligations of such Requesting Bank hereunder, and to purchase all of such Requesting Bank's Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Requesting Bank's Loans, together with interest thereon to the date of such purchase and (b) if such Requesting Bank has requested compensation pursuant to Section 5.01 or 5.05 hereof, such Proposed Bank's aggregate requested compensation, if any, pursuant to said Section 5.01 or 5.05 with respect to such Requesting Bank's Loans is lower than that of the Requesting Bank. Subject to the provisions of Section 12.05(b) hereof, such Proposed Bank shall be a "Bank" for all purposes hereunder. Without prejudice to the survival of any other agreement of the Borrowers hereunder the agreements of the Borrowers contained in Sections 5.01, 5.05 and 12.03 (without duplication of any payments made to such Requesting Bank by the Borrowers or the Proposed Bank) shall survive for the benefit of such Requesting Bank under this Section 5.06 with respect to the time prior to such replacement. Section 6. GUARANTEE. 6.01 THE GUARANTEE. Each Guarantor hereby jointly and severally guarantees to each Bank and the Administrative Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the Banks to each of the Borrowers (other than such Guarantor in its capacity as a Borrower hereunder) and all other amounts from time to time owing to the Banks or the Administrative Agent by such Borrowers under this Agreement, in AMENDED AND RESTATED CREDIT AGREEMENT -32- each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "GUARANTEED OBLIGATIONS"). Each Guarantor hereby further jointly and severally agrees that if any Borrower (other than such Guarantor in its capacity as a Borrower hereunder) shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, such Guarantor 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. 6.02 OBLIGATIONS UNCONDITIONAL. The obligations of the Guarantors under Section 6.01 are absolute and unconditional, joint and several, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Borrowers under this Agreement or any other agreement or instrument referred to herein or therein, 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 6 that the obligations of the Guarantors hereunder shall be absolute 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 and unconditional as described above: (i) at any time or from time to time, without notice to 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 this Agreement or any other agreement or instrument referred to herein 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 this Agreement or any other agreement or instrument referred to herein shall be waived 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. The Guarantors hereby expressly waive diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Bank exhaust any right, power or remedy or proceed against any Borrower under this Agreement or any other AMENDED AND RESTATED CREDIT AGREEMENT -33- agreement or instrument referred to herein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 6.03 REINSTATEMENT. The obligations of the Guarantors under this Section 6 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Borrower in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and the Guarantors jointly and severally agree that they will indemnify the Administrative Agent and each Bank on demand for all reasonable costs and expenses (including reasonable fees of counsel) incurred by the Administrative Agent or such Bank in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 6.04 SUBROGATION. The Guarantors hereby jointly and severally agree that until the payment and satisfaction in full of all Guaranteed Obligations and the expiration and termination of the Commitments they shall not exercise any right or remedy arising by reason of any performance by them of their guarantee in Section 6.01, whether by subrogation or otherwise, against any Borrower or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. 6.05 REMEDIES. The Guarantors jointly and severally agree that, as between the Guarantors and the Banks, the obligations of the Borrowers under this Agreement may be declared to be forthwith due and payable as provided in Section 10 (and shall be deemed to have become automatically due and payable in the circumstances provided in Section 10) for purposes of Section 6.01 notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against any Borrower and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by any Borrower) shall forthwith become due and payable by the Guarantors for purposes of Section 6.01. 6.06 CONTINUING GUARANTEE. The guarantee in this Section 6 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. 6.07 RIGHTS OF CONTRIBUTION. The Guarantors (other than XL Capital) hereby agree, as between themselves, that if any such Guarantor shall become an Excess Funding Guarantor (as defined below) by reason of the payment by such Guarantor of any Guaranteed Obligations, each other Guarantor (other than XL Capital) shall, on demand of such Excess AMENDED AND RESTATED CREDIT AGREEMENT -34- Funding Guarantor (but subject to the next sentence), pay to such Excess Funding Guarantor an amount equal to such Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, debts and liabilities of such Excess Funding Guarantor) of the Excess Payment (as defined below) in respect of such Guaranteed Obligations. The payment obligation of a Guarantor to any Excess Funding Guarantor under this Section shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Section 6 and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes of this Section, (i) "EXCESS FUNDING GUARANTOR" means, in respect of any Guaranteed Obligations, a Guarantor that has paid an amount in excess of its Pro Rata Share of such Guaranteed Obligations, (ii) "EXCESS PAYMENT" means, in respect of any Guaranteed Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guaranteed Obligations and (iii) "PRO RATA SHARE" means, for any Guarantor, the ratio (expressed as a percentage) of (x) the amount by which the aggregate present fair saleable value of all properties of such Guarantor (excluding any shares of stock of any other Guarantor) exceeds the amount of all the debts and liabilities of such Guarantor (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder and any obligations of any other Guarantor that have been Guaranteed by such Guarantor) to (y) the amount by which the aggregate fair saleable value of all properties of all of the Guarantors (other than XL Capital) exceeds the amount of all the debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of the Guarantors under this Section 6) of all of the Guarantors (other than XL Capital), determined (A) with respect to any Guarantor that is a party hereto on the date hereof, as of the date hereof, and (B) with respect to any other Guarantor, as of the date such Guarantor becomes a Guarantor hereunder. 6.08 GENERAL LIMITATION ON GUARANTEE OBLIGATIONS. In any action or proceeding involving any state corporate law, or any state or Federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Guarantor under Section 6.01 would otherwise, taking into account the provisions of Section 6.07, be held or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under Section 6.01, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by such Guarantor, any Bank, the Administrative Agent or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of other creditors as determined in such action or proceeding. AMENDED AND RESTATED CREDIT AGREEMENT -35- Section 7. CONDITIONS PRECEDENT. 7.01 EFFECTIVE DATE. The effectiveness of this Agreement is subject to the receipt by the Administrative Agent of each of the following documents, each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Bank) in form and substance (or such condition shall have been waived in accordance with Section 12.04): (a) EXECUTED COUNTERPARTS. From each Obligor and the Majority Banks (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page to this Agreement) that such party has signed a counterpart of this Agreement. (b) OPINIONS OF COUNSEL TO THE OBLIGORS. Opinions, each dated the Effective Date, of (i) Paul S. Giordano, Esq., counsel to XL Capital, substantially in the form of Exhibit A-1, (ii) Cahill Gordon & Reindel, special U.S. counsel for the Obligors, substantially in the form of Exhibit A-2, (iii) Conyers, Dill & Pearman, special Bermuda counsel to XL Insurance and XL Re, substantially in the form of Exhibit A-3 and (iv) Hunter & Hunter, special Cayman Islands counsel to XL Capital and Mid Ocean, substantially in the form of Exhibit A-4. (c) OPINION OF SPECIAL NEW YORK COUNSEL TO CHASE. An opinion, dated the Effective Date, of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to Chase, substantially in the form of Exhibit B (and Chase hereby instructs such counsel to deliver such opinion to the Banks). (d) CORPORATE DOCUMENTS. Such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Obligors, the authorization of the Transactions and any other legal matters relating to the Obligors, this Agreement or the Transactions, all in form and substance reasonably satisfactory to the Administrative Agent and its counsel. (e) OFFICER'S CERTIFICATE. A certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of XL Capital, confirming compliance with the conditions set forth in the lettered clauses of the first sentence of Section 7.02. (f) OTHER DOCUMENTS. Such other documents as the Administrative Agent or any Bank or special New York counsel to Chase may reasonably request. (g) PAYMENT OF FEES, EXPENSES AND OTHER AMOUNTS. Evidence of payment or delivery by the XL Capital of such fees as XL Capital shall have agreed to pay or deliver AMENDED AND RESTATED CREDIT AGREEMENT -36- to any Bank or an affiliate thereof or the Administrative Agent in connection herewith, including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to Chase, in connection with the negotiation, preparation, execution and delivery of this Agreement and each other document to be delivered by the Borrowers and the extensions of credit hereunder (to the extent that statements for such fees and expenses have been delivered to XL Capital). 7.02 INITIAL AND SUBSEQUENT LOANS. The obligation of any Bank to make any Loan hereunder (including such Bank's initial Loan) is subject to the further conditions precedent that, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) if such borrowing will increase the Dollar Equivalent of the aggregate outstanding principal amount of the Loans of the Banks hereunder, no Default shall have occurred and be continuing; and (b) if such borrowing will increase the Dollar Equivalent of the aggregate outstanding principal amount of the Loans of the Banks hereunder, the representations and warranties made by the Borrowers in Section 8 hereof (other than Section 8.04(b) hereof) shall be true and complete in all material respects on and as of the date of the making of such Loan with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Each notice of borrowing by XL Capital hereunder shall constitute a certification by the Borrowers to the effect set forth in the preceding sentence (both as of the date of such notice and as of the date of such borrowing). Section 8. REPRESENTATIONS AND WARRANTIES. Each Borrower represents and warrants to the Banks that: 8.01 ORGANIZATION; POWERS. Such Borrower and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. 8.02 AUTHORIZATION; ENFORCEABILITY. The Transactions are within such Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, by all AMENDED AND RESTATED CREDIT AGREEMENT -37- necessary shareholder action. This Agreement has been duly executed and delivered by such Borrower and constitutes a legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium, examination or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 8.03 GOVERNMENTAL APPROVALS; NO CONFLICTS. The Transactions (a) do not require any consent or approval of (including any exchange control approval), registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of such Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any material indenture, agreement or other instrument binding upon such Borrower or any of its Subsidiaries or assets, or give rise to a right thereunder to require any payment to be made by any such Person, and (d) will not result in the creation or imposition of any Lien on any asset of such Borrower or any of its Subsidiaries. 8.04 FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE. (a) FINANCIAL CONDITION. Such Borrower has heretofore furnished to the Banks the consolidated balance sheet and statements of income, stockholders' equity and cash flows of such Borrower and its consolidated Subsidiaries (A) as of and for the fiscal years ended December 31, 1999 and December 31, 2000, reported on by PricewaterhouseCoopers LLP, independent public accountants (as provided in XL Capital's Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2000), and (B) as of and for the fiscal quarter ended June 30, 2001, as provided in XL Capital's Report on Form 10-Q filed with the SEC for the fiscal quarter ended June 30, 2001. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of such Borrower and its respective consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP or (in the case of XL Insurance, Mid Ocean or XL Re) SAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (B) of the first sentence of this paragraph. (b) NO MATERIAL ADVERSE CHANGE. Since December 31, 2000, there has been no material adverse change in the assets, business, financial condition or operations of such Borrower and its Subsidiaries, taken as a whole. AMENDED AND RESTATED CREDIT AGREEMENT -38- 8.05 PROPERTIES. (a) PROPERTY GENERALLY. Such Borrower and each of its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, subject only to Liens permitted by Section 9.14 and except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (b) INTELLECTUAL PROPERTY. Such Borrower and each of its Subsidiaries owns, or is licensed to use, all trademarks, trade names, copyrights, patents and other intellectual property material to its business, and the use thereof by such Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 8.06 LITIGATION AND ENVIRONMENTAL MATTERS. (a) ACTIONS, SUITS AND PROCEEDINGS. Except as disclosed in Schedule III or as routinely encountered in claims activity, there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority now pending against or, to the knowledge of such Borrower, threatened against or affecting such Borrower or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect or (ii) that involve this Agreement or the Transactions. (b) ENVIRONMENTAL MATTERS. Except as disclosed in Schedule IV and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither such Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required for its business under any Environmental Law, (ii) has incurred any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. 8.07 COMPLIANCE WITH LAWS AND AGREEMENTS. Such Borrower and each of its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. AMENDED AND RESTATED CREDIT AGREEMENT -39- 8.08 INVESTMENT AND HOLDING COMPANY STATUS. Such Borrower is not (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 8.09 TAXES. Such Borrower and each of its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which such Person has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. 8.10 ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan by an amount that could reasonably be expected to result in a Material Adverse Effect. Except as could not reasonably be expected to result in a Material Adverse Effect, (i) all contributions required to be made by any Borrower or any of their Subsidiaries with respect to a Non-U.S. Benefit Plan have been timely made, (ii) each Non-U.S. Benefit Plan has been maintained in compliance with its terms and with the requirements of any and all applicable laws and has been maintained, where required, in good standing with the applicable Governmental Authority and (iii) neither any Borrower nor any of their Subsidiaries has incurred any obligation in connection with the termination or withdrawal from any Non-U.S. Benefit Plan. 8.11 DISCLOSURE. The reports, financial statements, certificates or other information furnished by such Borrower to the Banks in connection with the negotiation of this Agreement or delivered hereunder (taken as a whole) do not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED that, with respect to projected financial information, such Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. 8.12 USE OF CREDIT. Neither such Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock. No part AMENDED AND RESTATED CREDIT AGREEMENT -40- of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock (except for repurchases of the capital stock of XL Capital and purchases of Margin Stock in accordance with XL Capital's Statement of Investment Policy Objectives and Guidelines as in effect on the date hereof or as it may be changed from time to time by a resolution duly adopted by the board of directors of XL Capital (or any committee thereof)). The purchase of any Margin Stock with the proceeds of any Loan will not be in violation of Regulation U or X of the FRB and, after applying the proceeds of such Loan, not more than 25% of the value of the assets of XL Capital and its Subsidiaries taken as a whole consists or will consist of Margin Stock. 8.13 SUBSIDIARIES. Set forth in Schedule V is a complete and correct list of all of the Subsidiaries of XL Capital as of the date hereof, together with, for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and (iii) the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Schedule V, (x) each of XL Capital and its Subsidiaries owns, free and clear of Liens, and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Schedule V, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) except as disclosed in filings of XL Capital with the SEC prior to the date hereof, there are no outstanding Equity Rights with respect to any Borrower. 8.14 WITHHOLDING TAXES. Based upon information with respect to each Bank provided by each Bank or the Administrative Agent, as of the date hereof, the payment of principal of and interest on the Loans, the fees under Section 2.04 and all other amounts payable hereunder will not be subject, by withholding or deduction, to any Taxes imposed by any Borrower Jurisdiction. 8.15 STAMP TAXES. To ensure the legality, validity, enforceability or admissibility in evidence of this Agreement or any promissory notes evidencing Loans made (or to be made), it is not necessary that this Agreement or such promissory notes or any other document be filed or recorded with any Governmental Authority or that any stamp or similar tax be paid on or in respect of this Agreement or such promissory notes, or any other document other than such filings and recordations that have already been made and such stamp or similar taxes that have already been paid. 8.16 LEGAL FORM. Each of this Agreement and any promissory notes evidencing Loans made (or to be made) is in proper legal form under the laws of any Borrower Jurisdiction for the admissibility thereof in the courts of such Borrower Jurisdiction. AMENDED AND RESTATED CREDIT AGREEMENT -41- Section 9. COVENANTS OF THE BORROWERS. Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrowers covenant and agree with the Banks that: 9.01 FINANCIAL STATEMENTS AND OTHER INFORMATION. Each Borrower will furnish to the Administrative Agent and each Bank: (a) within 135 days after the end of each fiscal year of such Borrower (but in the case of XL Capital, within 100 days after the end of each fiscal year of XL Capital), the audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Borrower and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods) (it being understood that delivery to the Banks of XL Capital's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (a) to deliver the annual financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (a)), all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Insurance, Mid Ocean and XL Re) SAP, as the case may be, consistently applied; (b) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of such Borrower, the consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Borrower and its consolidated Subsidiaries as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of such Borrower as presenting fairly in all material respects the financial condition and results of operations of such Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Insurance, Mid Ocean and XL Re) SAP, as the case may be, consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that delivery to the Banks of XL Capital's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph AMENDED AND RESTATED CREDIT AGREEMENT -42- (b) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (b)); (c) concurrently with any delivery of financial statements under clause (a) or (b) of this Section, a certificate signed on behalf of each Borrower by a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 9.14, 9.16, 9.17 and 9.18 and (iii) stating whether any change in GAAP or (in the case of XL Insurance, Mid Ocean and XL Re) SAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 8.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with any delivery of financial statements under clause (a) of this Section, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by such Borrower or any of its respective Subsidiaries with the SEC, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any U.S. or other securities exchange, or distributed by such Borrower to its shareholders generally, as the case may be; (f) concurrently with any delivery of financial statements under clause (a) or (b) of this Section, a certificate of a Financial Officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (i) the aggregate book value of assets which are subject to Liens permitted under Section 9.14(g) and the aggregate book value of liabilities which are subject to Liens permitted under Section 9.14(g) (it being understood that the reports required by paragraphs (a) and (b) of this Section shall satisfy the requirement of this clause (i) of this paragraph (f) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (ii) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital; and (g) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of XL Capital or any of its AMENDED AND RESTATED CREDIT AGREEMENT -43- Subsidiaries, or compliance with the terms of this Agreement, as the Administrative Agent or any Bank may reasonably request. 9.02 NOTICES OF MATERIAL EVENTS. Each Borrower will furnish to the Administrative Agent and each Bank prompt written notice of the following: (a) the occurrence of any Default; and (b) any event or condition constituting, or which could reasonably be expected to have a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the relevant Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken by such Borrower with respect thereto. 9.03 PRESERVATION OF EXISTENCE AND FRANCHISES. Each Borrower will, and will cause each of its Subsidiaries to, maintain its corporate existence and its material rights and franchises in full force and effect in its jurisdiction of incorporation; PROVIDED that the foregoing shall not prohibit any merger or consolidation permitted under Section 9.12. Each Borrower will, and will cause each of its Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. 9.04 INSURANCE. Each Borrower will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurers, insurance with respect to its properties in such amounts as is customary in the case of corporations engaged in the same or similar businesses having similar properties similarly situated. 9.05 MAINTENANCE OF PROPERTIES. Each Borrower will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by and used or useful in its business and will make or cause to be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly conducted at all times except if the failure to do so would not have a Material Adverse Effect; PROVIDED, HOWEVER, that the foregoing shall not impose on such Borrower or any Subsidiary of such Borrower any obligation in respect of any property leased by such Borrower or such Subsidiary in addition to such Borrower's obligations under the applicable document creating such Borrower's or such Subsidiary's lease or tenancy. 9.06 PAYMENT OF TAXES AND OTHER POTENTIAL CHARGES AND PRIORITY CLAIMS PAYMENT AMENDED AND RESTATED CREDIT AGREEMENT -44- OF OTHER CURRENT LIABILITIES. Each Borrower will, and will cause each of its Subsidiaries to, pay or discharge: (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income; (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property (other than Liens not forbidden by Section 9.14) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Borrower in any proceeding under the Bermuda Companies Law or Bermuda Insurance Law, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Borrower or such Subsidiary; PROVIDED that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Borrower need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP or SAP, as the case may be, shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. 9.07 FINANCIAL ACCOUNTING PRACTICES. Such Borrower will, and will cause each of its consolidated Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Section 9.01 in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. 9.08 COMPLIANCE WITH APPLICABLE LAWS. Each Borrower will, and will cause each of its Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; PROVIDED that such Borrower or any Subsidiary of such Borrower will not be deemed to be in violation of this Section as a result of any failure to comply with any such Law which would not (i) result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would AMENDED AND RESTATED CREDIT AGREEMENT -45- have a Material Adverse Effect or (ii) otherwise impair the ability of such Borrower to perform its obligations under this Agreement. 9.09 USE OF PROCEEDS. Each Borrower will use the proceeds of all Loans for its general corporate purposes (which may include funding acquisitions, paying dividends and repurchasing securities). 9.10 CONTINUATION OF AND CHANGE IN BUSINESSES. Each Borrower and its Subsidiaries will continue to engage in substantially the same business or businesses it engaged in (or proposes to engage in) on the date of this Agreement and businesses related or incidental thereto. 9.11 VISITATION. Each Borrower will permit such Persons as any Bank may reasonably designate to visit and inspect any of the properties of such Borrower, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Borrower at such times as such Bank may reasonably request. Each Borrower hereby authorizes its financial management to discuss with any Bank the affairs of such Borrower. 9.12 MERGERS. No Borrower will merge with or into or consolidate with any other Person, except that if no Default shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto any Borrower may merge or consolidate with any other corporation, including a Subsidiary, if such Borrower shall be the surviving corporation. 9.13 DISPOSITIONS. No Borrower will, nor will it permit any of its Subsidiaries to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily (any of the foregoing being referred to in this Section as a "DISPOSITION" and any series of related Dispositions constituting but a single Disposition), any of its properties or assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper or general intangibles with or without recourse), except: (a) Dispositions in the ordinary course of business involving current assets or other assets classified on such Borrower's balance sheet as available for sale; (b) sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, PROVIDED that any such sales, conveyances or transfers shall not individually, or in the aggregate for the Borrowers and their respective Subsidiaries, exceed $500,000,000 in any calendar year; or AMENDED AND RESTATED CREDIT AGREEMENT -46- (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Borrower or its Subsidiaries. 9.14 LIENS. No Borrower will, nor will it permit any of its Subsidiaries to, create, incur, assume or permit to exist any Lien on any property or assets, tangible or intangible, now owned or hereafter acquired by it, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, PROVIDED that the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Part B of Schedule II; (b) Liens arising from taxes, assessments, charges, levies or claims described in Section 9.06 that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of Section 9.06; (c) Liens on property securing all or part of the purchase price thereof to such Borrower and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Borrower (and extension, renewal and replacement Liens upon the same property); PROVIDED (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Borrower, as applicable, shall not exceed 100% of the lesser of the fair market value of such property at such time or the actual purchase price of such property; (d) zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other minor Liens that do not in the aggregate materially detract from the value of a property or asset to, or materially impair its use in the business of, such Borrower or any such Subsidiary; (e) Liens securing Indebtedness permitted by Section 9.18(c) covering assets whose market value is not materially greater than the amount of the Indebtedness secured thereby plus a commercially reasonable margin; (f) Liens on cash and securities of a Borrower or its Subsidiaries incurred as part of the management of its investment portfolio in accordance with XL Capital's Statement of Investment Policy Objectives and Guidelines as in effect on the date hereof or as it may be changed from time to time by a resolution duly adopted by the board of directors of XL Capital (or any committee thereof); AMENDED AND RESTATED CREDIT AGREEMENT -47- (g) Liens on (i) assets received, and on actual or imputed investment income on such assets received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Borrower's or any of their Subsidiary's business as an insurance or reinsurance company (including GICs) or corporate member of The Council of Lloyd's or as a provider of financial or investment services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities or (ii) any other assets subject to any trust or other account arising out of or as a result of contractual, regulatory or any other requirements; PROVIDED that in no case shall any such Lien secure Indebtedness and any Lien which secures Indebtedness shall not be permitted under this clause (g); (h) statutory and common law Liens of materialmen, mechanics, carriers, warehousemen and landlords and other similar Liens arising in the ordinary course of business; and (i) Liens existing on property of a Person immediately prior to its being consolidated with or merged into any Borrower or any of their Subsidiaries or its becoming a Subsidiary, and Liens existing on any property acquired by any Borrower or any of their Subsidiaries at the time such property is so acquired (whether or not the Indebtedness secured thereby shall have been assumed) (and extension, renewal and replacement Liens upon the same property, PROVIDED that the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing); PROVIDED that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Subsidiary or such acquisition of property and (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such acquired property. AMENDED AND RESTATED CREDIT AGREEMENT -48- 9.15 TRANSACTIONS WITH AFFILIATES. No Borrower will, nor will it permit any of its Subsidiaries to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Borrower, or directly or indirectly agree to do any of the foregoing, except (i) transactions involving guarantees or co-obligors with respect to any Indebtedness described in Part A of Schedule II, (ii) transactions among the Borrowers and their wholly-owned Subsidiaries and (iii) transactions with Affiliates in good faith in the ordinary course of such Borrower's business consistent with past practice and on terms no less favorable to such Borrower or any Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 9.16 RATIO OF TOTAL FUNDED DEBT TO TOTAL CAPITALIZATION. XL Capital will not permit its ratio of (a) Total Funded Debt to (b) the sum of Total Funded Debt PLUS Consolidated Net Worth to be greater than 0.35:1.00 at any time. 9.17 CONSOLIDATED NET WORTH. XL Capital will not permit its Consolidated Net Worth to be less than the sum of (a) $4,600,000,000 PLUS (b) 25% of net income (if positive) for each fiscal quarter of XL Capital commencing with the fiscal quarter ending June 30, 2001. 9.18 INDEBTEDNESS. No Borrower will, nor will it permit any of its Subsidiaries to, at any time create, incur, assume or permit to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness created hereunder; (b) Indebtedness incurred pursuant to the Letter of Credit Agreement and the Revolving Credit Agreement; (c) secured Indebtedness (including secured reimbursement obligations with respect to letters of credit) of any Borrower or any Subsidiary in an aggregate principal amount (for all Borrowers and their respective Subsidiaries) not exceeding $300,000,000 at any time outstanding; (d) other unsecured Indebtedness, so long as upon the incurrence thereof no Default would occur or exist; (e) Indebtedness consisting of accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Borrower or any Subsidiary; AMENDED AND RESTATED CREDIT AGREEMENT -49- (f) Indebtedness incurred in transactions described in Section 9.14(f); and (g) Indebtedness existing on the date hereof and described in Part A of Schedule II and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof. 9.19 CLAIMS PAYING RATINGS. XL Capital will maintain at all times a claims-paying rating of at least "A" from A.M. Best & Co. (or its successor) and XL Insurance and XL Re will maintain at all times a rating of at least "A" from Standard & Poor's. 9.20 PRIVATE ACT. No Borrower will become subject to a Private Act other than the X.L. Insurance Company, Ltd. Act, 1989. Section 10. EVENTS OF DEFAULT. If any of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) any Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) any Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Section) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of 3 or more days; (c) any representation or warranty made or deemed made by any Borrower in or in connection with this Agreement or any amendment or modification hereof, or in any certificate or financial statement furnished pursuant to the provisions hereof, shall prove to have been false or misleading in any material respect as of the time made (or deemed made) or furnished; (d) any Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 9; (e) any Obligor shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (d) of this Section) and such failure shall continue unremedied for a period of 20 or more days after notice thereof from the Administrative Agent (given at the request of any Bank) to such Obligor; AMENDED AND RESTATED CREDIT AGREEMENT -50- (f) any Borrower or any of its Subsidiaries shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $50,000,000 or more, or any payment of any principal amount of $50,000,000 or more under Hedging Agreements, in each case beyond any period of grace provided with respect thereto, or (ii) in the performance of any other agreement, term or condition contained in any such agreement (other than Hedging Agreements) under which any such obligation in principal amount of $50,000,000 or more is created, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement, PROVIDED that this clause (f) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (g) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Borrower a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Borrower under the Bermuda Companies Law or the Cayman Islands Companies Law (2000 Revision), or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of 60 days; or a decree or order of a court having jurisdiction in the premises for the appointment of an examiner, receiver, or liquidator or trustee or assignee in bankruptcy or insolvency of such Borrower or a substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 60 days; (h) any Borrower shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bermuda Companies Law or the Cayman Islands Companies Law (2000 Revision) or any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of an examiner, receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate or other action shall be taken by such Borrower in furtherance of any of the aforesaid purposes; (i) one or more judgments for the payment of money in an aggregate amount in excess of $100,000,000 shall be rendered against any Borrower or any of its Subsidiaries or any combination thereof and the same shall not have been vacated, discharged, stayed (whether by appeal or otherwise) or bonded pending appeal within 45 days from the entry thereof; AMENDED AND RESTATED CREDIT AGREEMENT -51- (j) an ERISA Event (or similar event with respect to any Non-U.S. Benefit Plan) shall have occurred that, in the opinion of the Majority Banks, when taken together with all other ERISA Events and such similar events that have occurred, could reasonably be expected to result in liability of the Borrowers and their Subsidiaries in an aggregate amount exceeding $100,000,000; (k) a Change in Control shall occur; (l) XL Capital shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of capital stock of XL Insurance, XL Re or Mid Ocean (except, in the case of any company organized under the laws of Bermuda, for a nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law); or (m) the guarantee contained in Section 6 shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of each Guarantor or any Guarantor or any Person acting for or on behalf of any of such parties shall contest such validity or binding nature of such guarantee itself or the Transactions, or any other Person shall assert any of the foregoing; then, and in every such event (other than an event with respect to any Borrower described in clause (g) or (h) of this Section), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Majority Banks shall, by notice to the Borrowers, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrowers accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers; and in case of any event with respect to any Borrower described in clause (g) or (h) of this Section, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrowers accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers. Section 11. THE ADMINISTRATIVE AGENT. 11.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby appoints and authorizes the Administrative Agent to act as its agent hereunder with such powers as are AMENDED AND RESTATED CREDIT AGREEMENT -52- specifically delegated to the Administrative Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 11.05 and the first sentence of Section 11.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other document referred to or provided for herein or for any failure by any Obligor to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Administrative Agent may deem and treat the payee of any promissory note evidencing any Loans hereunder as the holder thereof for all purposes hereof unless and until an Assignment and Acceptance relating to such Loans shall have been filed with the Administrative Agent, together with the consent of each of the Borrowers thereto (to the extent provided in Section 12.05(b) hereof). 11.02 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions given by the Majority Banks (or, if so provided in Section 12.04 hereof, all of the Banks), and such instructions of the Majority Banks (or all of the AMENDED AND RESTATED CREDIT AGREEMENT -53- Banks, as the case may be) and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 11.03 DEFAULTS. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Default unless the Administrative Agent has received notice from a Bank or a Borrower specifying such Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall (subject to Sections 11.01 and 11.07 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, PROVIDED that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 11.04 RIGHTS AS A BANK. With respect to its Commitment and the Loans made by it, Chase (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Chase (and any successor acting as Administrative Agent) and its Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with any Borrower (and any of its Subsidiaries or Affiliates) as if it were not acting as the Administrative Agent, and Chase (and any other successor acting as Administrative Agent) and its Affiliates may accept fees and other consideration from any Borrower for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 11.05 INDEMNIFICATION. The Banks agree to indemnify the Administrative Agent (to the extent not reimbursed under Section 12.03 hereof, but without limiting the obligations of the Borrowers under said Section 12.03) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Bank) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses that the Borrowers are obligated to pay under Section 12.03 hereof but excluding (i) normal administrative costs and expenses incident to the performance of its agency duties hereunder and (ii) the costs and AMENDED AND RESTATED CREDIT AGREEMENT -54- expenses of the Administrative Agent in connection with the negotiation and preparation of this Agreement) or the enforcement of any of the terms hereof or of any such other documents, PROVIDED that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 11.06 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER BANKS. Each Bank agrees that it has, independently and without reliance on the Administrative Agent, or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrowers and their Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent, or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Borrowers of this Agreement or any other document referred to or provided for herein or to inspect the Properties or books of the Borrowers or any of their Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition, operations, business, Properties, liabilities or prospects of the Borrowers or any of their Subsidiaries (or any of their Affiliates) that may come into the possession of the Administrative Agent or any of its Affiliates. 11.07 FAILURE TO ACT. Except for action expressly required of the Administrative Agent hereunder, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 11.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 11.08 RESIGNATION OF ADMINISTRATIVE AGENT. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Banks and XL Capital. Upon any such resignation, the Majority Banks shall have the right (with, so long as no Default shall have occurred and be continuing, the consent of XL Capital, which consent shall not be unreasonably withheld or delayed) to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, (with, so long as no Default shall have occurred and be continuing, the consent of XL Capital, which consent shall not be unreasonably withheld or delayed) appoint a successor Administrative Agent, that shall be a Bank that has an office in New York, New AMENDED AND RESTATED CREDIT AGREEMENT -55- York with a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. Section 12. MISCELLANEOUS. 12.01 WAIVER. No failure on the part of the Administrative Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 12.02 NOTICES. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to any Borrower, to XL Capital at XL House, One Bermudiana Road, Hamilton HM11 Bermuda, Attention of William Robbie (Telecopy No. (441) 296-6399); WITH A COPY to Paul Giordano, Esq. at the same address and telecopy number (441) 295-4867; (b) if to the Administrative Agent, to The Chase Manhattan Bank, 1 Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Loan and Agency Services Group, Attention of Laura Rebecca (Telecopy No. (212) 552-7490; Telephone No. (212) 552-7253), WITH A COPY to The Chase Manhattan Bank, 270 Park Avenue, New York, 15th Floor, New York 10017, Attention of Helen Newcomb (Telecopy No. (212) 270-1511; Telephone No. (212) 270-6260); and (c) if to a Bank, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto (or, in the case of any such change by a Bank, by notice to XL Capital and the Administrative Agent). All notices and other AMENDED AND RESTATED CREDIT AGREEMENT -56- communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 12.03 EXPENSES, ETC. The Borrowers agree to pay or reimburse each of the Banks and the Administrative Agent for: (a) all reasonable out-of-pocket costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to Chase) in connection with the negotiation or preparation of any modification, supplement or waiver of any of the terms of this Agreement (whether or not consummated); (b) all reasonable out-of-pocket costs and expenses of the Banks and the Administrative Agent (including, without limitation, the reasonable fees and expenses of legal counsel) in connection with (i) any Default and any enforcement or collection proceedings resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 12.03; and (c) all transfer, stamp, documentary, recording or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any other document referred to herein. The Borrowers hereby agree to indemnify the Administrative Agent and each Bank and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses (without duplication of anything covered by Section 5 hereof) incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Administrative Agent to any Bank, whether or not the Administrative Agent or any Bank is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the Loans hereunder or any actual or proposed use by any Borrower or any of their Subsidiaries of the proceeds of any of the Loans hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 12.04 AMENDMENTS, ETC. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Obligors and the Majority Banks, or by each Obligor and the Administrative Agent acting with the AMENDED AND RESTATED CREDIT AGREEMENT -57- consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks or by the Administrative Agent acting with the consent of the Majority Banks; PROVIDED that (a) no such modification, supplement or waiver shall: (i) increase, or extend the term of the Commitment of any Bank, or extend the time or waive any requirement for the reduction or termination of such Commitment, without the written consent of such Bank; (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fee hereunder, without the written consent of each Bank affected thereby; (iii) reduce the amount of any such payment of principal, without the written consent of each Bank affected thereby; (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, without the written consent of each Bank affected thereby; (v) alter the rights or obligations of any Borrower to prepay Loans, without the written consent of each Bank affected thereby; (vi) alter the terms of Sections 4.02 or 4.07(b) hereof or this Section 12.04, without the written consent of each Bank; or (vii) modify the definition of the terms "Agreed Foreign Currency" or "Majority Banks" or modify in any other manner the number or percentage of the Banks required to make any determinations or waive any rights hereunder or to modify any provision hereof, without the written consent of each Bank; and (b) any modification of any of the rights or obligations of the Administrative Agent hereunder shall require the consent of the Administrative Agent. 12.05 SUCCESSORS AND ASSIGNS. (a) ASSIGNMENTS GENERALLY. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Borrower shall assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Bank (and any attempted assignment or transfer by a Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Banks) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) ASSIGNMENTS BY BANKS. Any Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); PROVIDED that (i) except in the case of an assignment to a Bank or a Bank Affiliate, each of the Borrowers and the Administrative Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Bank or a Bank Affiliate or an assignment of the entire remaining amount of the assigning Bank's Commitment, the amount of the Commitment of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such AMENDED AND RESTATED CREDIT AGREEMENT -58- assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrowers and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Bank's rights and obligations under this Agreement, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Bank, shall deliver an Administrative Questionnaire to the Administrative Agent (with a copy to XL Capital); PROVIDED FURTHER that any consent of the Borrowers otherwise required under this paragraph shall not be required if an Event of Default under clause (a), (b), (g) or (h) of Section 10 has occurred and is continuing. Upon acceptance and recording pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Bank under this Agreement, and the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 5.01, 5.04, 5.05 and 12.03). Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Bank of a participation in such rights and obligations in accordance with paragraph (e) of this Section. Notwithstanding anything to the contrary contained herein, any Bank (a "GRANTING BANK") may grant to a special purpose vehicle (an "SPV") of such Granting Bank, identified as such in writing from time to time by the Granting Bank to the Administrative Agent and the Borrowers, the option to provide to the Borrowers all or any part of any Loan that such Granting Bank would otherwise be obligated to make to the Borrowers pursuant to Section 2.01, PROVIDED that (i) nothing herein shall constitute a commitment by any SPV to make any Loan, (ii) if an SPV elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Bank shall be obligated to make such Loan pursuant to the terms hereof and (iii) the Borrowers may bring any proceeding against either or both the Granting Bank or the SPV in order to enforce any rights of the Borrowers hereunder. The making of a Loan by an SPV hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such Loan were made by the Granting Bank. Each party hereto hereby agrees that no SPV shall be liable for any payment under this Agreement for which a Bank would otherwise be liable, for so AMENDED AND RESTATED CREDIT AGREEMENT -59- long as, and to the extent, the related Granting Bank makes such payment. In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPV, it will not institute against, or join any other person in instituting against, such SPV any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof arising out of any claim against such SPV under this Agreement. In addition, notwithstanding anything to the contrary contained in this Section, any SPV may with notice to, but without the prior written consent of, the Borrowers or the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Bank or to any financial institutions (consented to by the Borrowers and the Administrative Agent) providing liquidity and/or credit support (if any) with respect to commercial paper issued by such SPV to fund such Loans and such SPV may disclose, on a confidential basis, confidential information with respect to any Borrower and its Subsidiaries to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit liquidity enhancement to such SPV. This paragraph may not be amended without the consent of any SPV at the time holding Loans under this Agreement. (c) MAINTENANCE OF REGISTER BY THE ADMINISTRATIVE AGENT. The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices in New York City a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to, each Bank pursuant to the terms hereof from time to time (the "REGISTER"). The entries in the Register shall be conclusive, and the Borrowers, the Administrative Agent and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by any Borrower and any Bank, at any reasonable time and from time to time upon reasonable prior notice. (d) EFFECTIVENESS OF ASSIGNMENTS. Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Bank and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Bank hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) PARTICIPATIONS. Any Bank may, without the consent of the Borrowers or the Administrative Agent, sell participations to one or more banks or other entities (a "PARTICIPANT") AMENDED AND RESTATED CREDIT AGREEMENT -60- in all or a portion of such Bank's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); PROVIDED that (i) any such participation sold to a Participant which is not a Bank, a Bank Affiliate or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Capital and the Administrative Agent, unless a Default has occurred and is continuing, in which case the consent of XL Capital shall not be required, (ii) such Bank's obligations under this Agreement shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (iv) the Borrowers, the Administrative Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Bank sells such a participation shall provide that such Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such agreement or instrument may provide that such Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the proviso to Section 12.04 that affects such Participant. Subject to paragraph (f) of this Section, the Borrowers agree that each Participant shall be entitled to the benefits of Sections 5.01, 5.04 and 5.05 to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to paragraph (b) of this Section. (f) LIMITATIONS ON RIGHTS OF ASSIGNEES AND PARTICIPANTS. A Participant or Assignee shall not be entitled to receive any greater payment under Section 5.01 or 5.05 than the applicable Bank would have been entitled to receive with respect to the participation sold to such Participant or the Bank interest assigned, unless the sale of the participation to such Participant or the assignment is made with the Borrowers' prior written consent. (g) CERTAIN PLEDGES. Any Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Bank, including any such pledge or assignment to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; PROVIDED that no such pledge or assignment of a security interest shall release a Bank from any of its obligations hereunder or substitute any such assignee for such Bank as a party hereto. (h) NO ASSIGNMENTS TO ANY BORROWER OR AFFILIATES. Anything in this Section to the contrary notwithstanding, no Bank may assign or participate any interest in any Loan held by it hereunder to any Borrower or any of its Affiliates or Subsidiaries without the prior consent of each Bank. 12.06 SURVIVAL. The obligations of the Borrowers to any Bank under Sections 5.01, 5.04, 5.05, and 12.03 hereof, and the obligations of any Bank under Sections 11.05 and 12.11 hereof, shall survive the repayment of the Loans made by such Bank and the termination of the Commitment of such Bank and, in the case of any Bank that may assign any AMENDED AND RESTATED CREDIT AGREEMENT -61- interest in its Commitment or Loans hereunder, shall survive the making of such assignment, notwithstanding that such assigning Bank may cease to be a "Bank" hereunder. In addition, each representation and warranty made, or deemed to be made by a notice of any Loan, herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any Loan, any Default that (i) may arise by reason of such representation or warranty proving to have been false or misleading or (ii) exists at the time such Loan was made, notwithstanding that such Bank or the Administrative Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading, or that such Default was existing, at the time such Loan was made. 12.07 CAPTIONS. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 12.08 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 12.09 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. Each Obligor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York County (and any appellate court from any thereof) for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Obligor irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Each Obligor hereby irrevocably agrees and consents that service of process in any such legal proceeding in any such court may be made on such Obligor by the mailing thereof by registered mail postage prepaid, or by transmitting the same by telecopier, to such Obligor in the manner specified in Section 12.02 hereof, and any such service shall be deemed good and effective when transmitted by telecopier or, in the case of mail, upon receipt; provided that nothing herein will affect the right of any Bank or the Administrative Agent to serve process in any other manner permitted by law. To the extent that any Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution or execution, on the ground of sovereignty or otherwise) with respect to itself or its Property, it hereby irrevocably waives, to the fullest extent permitted by applicable law, such immunity in respect of its obligations under this Agreement. AMENDED AND RESTATED CREDIT AGREEMENT -62- 12.10 WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 12.11 Treatment of Certain Information; Confidentiality. (a) TREATMENT OF CERTAIN INFORMATION. Each of the Borrowers acknowledge that from time to time financial advisory, investment banking and other services may be offered or provided to any Borrower or one or more of their Subsidiaries (in connection with this Agreement or otherwise) by any Bank or by one or more subsidiaries or affiliates of such Bank and each of the Borrowers hereby authorizes each Bank to share any information delivered to such Bank by such Borrower and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any such subsidiary or affiliate, it being understood that (i) any such information shall be used only for the purpose of advising the Borrowers or preparing presentation materials for the benefit of the Borrowers and (ii) any such subsidiary or affiliate receiving such information shall be bound by the provisions of paragraph (b) of this Section as if it were a Bank hereunder. Such authorization shall survive the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. (b) CONFIDENTIALITY. Each of the Administrative Agent and the Banks agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (i) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (ii) to the extent requested by any regulatory authority having jurisdiction over the Administrative Agent or any Bank, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement in writing containing provisions substantially the same as those of this paragraph and for the benefit of the Borrowers, to (a) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (b) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to any Borrower and its obligations, (vii) with the consent of the Borrowers or (viii) to the extent such Information (A) becomes publicly available other than as a result of a breach of AMENDED AND RESTATED CREDIT AGREEMENT -63- this paragraph or (B) becomes available to the Administrative Agent or any Bank on a nonconfidential basis from a source other than a Borrower. For the purposes of this paragraph, "INFORMATION" means all information received from a Borrower relating to a Borrower or its business, other than any such information that is available to the Administrative Agent or any Bank on a nonconfidential basis prior to disclosure by such Borrower; PROVIDED that, in the case of information received from a Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. Notwithstanding the foregoing, each of the Administrative Agent and the Banks agree that they will not trade the securities of any of the Borrowers based upon non-public Information that is received by them. 12.12 JUDGMENT CURRENCY. This is an international loan transaction in which the specification of Dollars or any Foreign Currency, as the case may be (the "SPECIFIED CURRENCY"), and any payment in New York County or the country of the Specified Currency, as the case may be (the "SPECIFIED PLACE"), is of the essence, and the Specified Currency shall be the currency of account in all events relating to Loans denominated in the Specified Currency. The payment obligations of the Borrowers under this Agreement shall not be discharged by an amount paid in another currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on conversion to the Specified Currency and transfer to the Specified Place under normal banking procedures does not yield the amount of the Specified Currency at the Specified Place due hereunder. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in the Specified Currency into another currency (the "SECOND CURRENCY"), the rate of exchange which shall be applied shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the Specified Currency with the Second Currency on the Business Day next preceding that on which such judgment is rendered. The obligation of each Borrower in respect of any such sum due from it to the Administrative Agent or any Bank hereunder shall, notwithstanding the rate of exchange actually applied in rendering such judgment, be discharged only to the extent that on the Business Day following receipt by the Administrative Agent or such Bank, as the case may be, of any sum adjudged to be due hereunder in the Second Currency to the Administrative Agent or such Bank, as the case may be, the Administrative Agent or such Bank, as the case may be, may in accordance with normal banking procedures purchase and transfer to the Specified Place the Specified Currency with the amount of the Second Currency so adjudged to be due; and the Borrowers hereby, as a separate obligation and notwithstanding any such judgment, agree to indemnify the Administrative Agent or such Bank, as the case may be, against, and to pay the Administrative Agent or such Bank, as the AMENDED AND RESTATED CREDIT AGREEMENT -64- case may be, on demand in the Specified Currency, any difference between the sum originally due to the Administrative Agent or such Bank, as the case may be, in the Specified Currency and the amount of the Specified Currency so purchased and transferred. 12.13 EUROPEAN MONETARY UNION. (a) If, as a result of the implementation of European monetary union, (i) any European Currency ceases to be lawful currency of the nation issuing the same and is replaced by a European common currency (the "EURO"), or (ii) any European Currency and the Euro are at the same time recognized by any Governmental Authority of the nation issuing such European Currency as lawful currency of such nation and the Administrative Agent or the Majority Banks shall so request in a notice delivered to XL Capital, then any amount payable hereunder by any party hereto in such European Currency shall instead be payable in the Euro and the amount so payable shall be determined by translating the amount payable in such European Currency to the Euro at the exchange rate recognized by the European Central Bank for the purpose of implementing European monetary union. Prior to the occurrence of the event or events described in clause (i) or (ii) of the preceding sentence, each amount payable hereunder in any European Currency will, except as otherwise provided herein, continue to be payable only in that Currency. (b) The Borrowers agree, at the request of any Bank, to compensate such Bank for any loss, cost, expense or reduction in return that such Bank shall reasonable determine shall be incurred or sustained by such Bank as a result of the implementation of European monetary union and that would not have been incurred or sustained but for the transactions provided for herein. A certificate of a Bank setting forth such Bank's determination of the amount or amounts necessary to compensate such Bank shall be delivered to XL Capital and shall be conclusive absent manifest error so long as such determination is made on a reasonable basis. XL Capital shall pay such Bank the amount shown as due on any such certificate within 10 days after receipt thereof. (c) The parties hereto agree, at the time of or at any time following the implementation of European monetary union, to use reasonable efforts to enter into an agreement amending this Agreement in order to reflect the implementation of such monetary union, to permit (if feasible) the Euro to qualify as an Agreed Foreign Currency under the terms and conditions of the definition of such term and to place the parties hereto in the position with respect to the settlement of payments of the Euro as they would have been with respect to the settlement of the Currencies it replaced. AMENDED AND RESTATED CREDIT AGREEMENT -65- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. XL INSURANCE LTD, as a Borrower and a Guarantor By /s PAUL S. GIORDANO -------------------- Name: Paul S. Giordano Title: Executive Vice President, General Counsel & Secretary MID OCEAN LIMITED, as a Borrower and a Guarantor By /s PAUL S. GIORDANO -------------------- Name: Paul S. Giordano Title: Secretary & Director XL RE LTD, (formerly known as MID OCEAN REINSURANCE LTD), as a Borrower and a Guarantor By /s PAUL S. GIORDANO -------------------- Name: Paul S. Giordano Title: Executive Vice President, General Counsel & Secretary AMENDED AND RESTATED CREDIT AGREEMENT -66- IN WITNESS WHEREOF, XL Capital has caused this Agreement to be duly executed as a Deed by an authorized officer as of the day and year first above written. EXECUTED AS A DEED by XL CAPITAL LTD, as a Borrower and a Guarantor /s/ BRIAN O'HARA ---------------- witness: Brian O'Hara By /s PAUL S. GIORDANO -------------------- Name: Paul S. Giordano Title: Executive Vice President, General Counsel & Secretary AMENDED AND RESTATED CREDIT AGREEMENT -67- BANKS THE CHASE MANHATTAN BANK, Individually and as Administrative Agent By /s/ HELEN NEWCOMB --------------------------- Title: Vice President AMENDED AND RESTATED CREDIT AGREEMENT -68- CITIBANK N.A. By /s/ MICHAEL A. TAYLOR --------------------------- Title: Vice President By --------------------------- Title: AMENDED AND RESTATED CREDIT AGREEMENT -69- DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /s/ RUTH LEUNG ------------------------------ Title: Director By /s/ JOHN S. MCGILL ------------------------------ Title: Director AMENDED AND RESTATED CREDIT AGREEMENT -70- MELLON BANK, N.A. By /s/ KARLA MALOOF --------------------------- Title: Vice President AMENDED AND RESTATED CREDIT AGREEMENT -71- ROYAL BANK OF CANADA By /s/ ALEXANDER BIRR ------------------- Title: Senior Manager AMENDED AND RESTATED CREDIT AGREEMENT -72- THE BANK OF BERMUDA LIMITED By /s/ A. KERRY DAVIDSON --------------------------- Title: VP - Credit Manager AMENDED AND RESTATED CREDIT AGREEMENT -73- CREDIT LYONNAIS NEW YORK BRANCH By /s/ PETER RASMUSSEN --------------------------- Title: First Vice President AMENDED AND RESTATED CREDIT AGREEMENT -74- STATE STREET BANK AND TRUST COMPANY By /s/ EDWARD ANDERSEN --------------------------- Title: Vice President AMENDED AND RESTATED CREDIT AGREEMENT -75- BANQUE NATIONALE DE PARIS By --------------------------- Title: By --------------------------- Title: AMENDED AND RESTATED CREDIT AGREEMENT -76- THE BANK OF NOVA SCOTIA NY AGENCY By --------------------------- Title: AMENDED AND RESTATED CREDIT AGREEMENT EX-10.52 4 c23420_ex10-52.txt LETTER OF CREDIT 11/20/01 CONFORMED COPY 20 NOVEMBER 2001 XL CAPITAL LTD AS ACCOUNT PARTY THE GUARANTORS (AS DEFINED HEREIN) THE LENDERS PARTY HERETO (AS DEFINED HEREIN) CITIBANK INTERNATIONAL PLC AS AGENT AND SECURITY TRUSTEE SALOMON BROTHERS INTERNATIONAL LIMITED AS ARRANGER ================================================================================ LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT ================================================================================ [LOGO] FRESHFIELDS BRUCKHAUS DERINGER CONTENTS CLAUSE PAGE 1. DEFINITIONS................................................................1 2. THE FACILITY..............................................................13 3. UTILISATION OF THE FACILITY...............................................15 4. EXTENSION OF LETTERS OF CREDIT............................................16 5. PAYMENT OF DEMANDS........................................................19 6. THE ACCOUNT PARTY'S LIABILITIES IN RELATION TO LETTERS OF CREDIT..........21 7. DEFAULT INTEREST..........................................................22 8. TERMINATION AND REDUCTION OF THE COMMITMENTS..............................22 9. FEES......................................................................23 10. TAXES.....................................................................24 11. TAX RECEIPTS..............................................................25 12. INCREASED COSTS...........................................................26 13. ILLEGALITY................................................................27 14. MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS............................28 15. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS...............29 16. GUARANTEE AND INDEMNITY...................................................31 17. REPRESENTATIONS AND WARRANTIES............................................34 18. AFFIRMATIVE COVENANTS.....................................................38 19. NEGATIVE COVENANTS........................................................42 20. EVENTS OF DEFAULT.........................................................46 21. THE AGENT, THE ARRANGER AND THE LENDERS...................................48 22. NOTICES...................................................................55 23. WAIVERS AND AMENDMENTS....................................................56 24. COSTS AND EXPENSES........................................................57 25. INDEMNITIES...............................................................58 26. ALTERATION TO THE PARTIES.................................................59 27. SET OFF...................................................................64 28. MISCELLANEOUS PROVISIONS..................................................64 29. GOVERNING LAW AND JURISDICTION............................................65 30. TREATMENT OF CERTAIN INFORMATION; CONFIDENTIALITY.........................66 31. THIRD PARTY RIGHTS........................................................67 SCHEDULE 1.......................................... Commitments................................... SCHEDULE 2.......................................... Indebtedness and Liens........................ Part A - Indebtedness......................... Part B - Liens................................ SCHEDULE 3.......................................... Subsidiaries.................................. XL CAPITAL - CAYMAN........................... SCHEDULE 4.......................................... Mandatory Costs Rate.......................... SCHEDULE 5.......................................... Conditions Precedent.......................... SCHEDULE 6.......................................... Utilisation Request........................... SCHEDULE 7.......................................... Form of Letter of Credit...................... APPENDIX 1.................................... APPENDIX 2.................................... APPENDIX 3.................................... SCHEDULE 8.......................................... Form of Transfer Certificate.................. SCHEDULE 9.......................................... Form of Charge Agreement...................... APPENDIX 1.................................... Page II CONFORMED COPY LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT dated 20 November 2001 BETWEEN: XL CAPITAL LTD, a company incorporated under the laws of the Cayman Islands (the ACCOUNT PARTY); The GUARANTORS as defined below; The LENDERS as defined below; CITIBANK INTERNATIONAL PLC, as agent and trustee for the Lenders (and when acting in such capacities the AGENT and SECURITY TRUSTEE respectively); and SALOMON BROTHERS INTERNATIONAL LIMITED (the ARRANGER). DEFINITIONS DEFINED TERMS 1.1 As used in this Agreement, the following terms have the meanings specified below: AFFILIATE means, with respect to a specified Person, another Person that directly, or indirectly, Controls or is Controlled by or is under common Control with the Person specified; APPLICABLE PERCENTAGE means, with respect to any Lender, the percentage of the Total Commitments represented by such Lender's Commitment. If the Total Commitments or Commitment of a Lender have terminated or expired, the Applicable Percentage shall be determined based upon the Total Commitments or Commitment of such Lender (as the case may be) most recently in effect, giving effect to any permitted assignments or transfers; APPLICANT means each of XL Europe, Mid Ocean, Global Capital, Stonebridge Underwriting, NAC Reinsurance, Dornoch, County Down, Brockbank and XL Re and any other Affiliate of the Account Party as may be agreed by the Agent and the Account Party from time to time; APPROVED CREDIT INSTITUTION means a credit institution within the meaning of the First Council Directive on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (No 77/780/EEC) which has been approved by Lloyd's for the purpose of providing guarantees and issuing or confirming letters of credit comprising a member's Funds at Lloyd's; AUTHORISED SIGNATORY means, in relation to an Obligor, any person who is duly authorised (in such manner as may be reasonably acceptable to the Agent) and in respect of whom the Agent has received a certificate signed by a director or another Authorised Signatory of such Obligor setting out the name and signature of such person and confirming such person's authority to act; AVAILABLE COMMITMENT means in relation to a Lender at any time and save as otherwise provided herein its Commitment less the amount of its participation in the LC Exposures at such time PROVIDED THAT such amount shall not be less than zero; AVAILABLE FACILITY means, at any time, the aggregate of the Available Commitments adjusted, in the case of a proposed utilisation pursuant to a Utilisation Request, so as to take into account: (a) any reduction in the Commitment of a Lender pursuant to the terms hereof; and (b) any Letter of Credit which pursuant to any other Utilisation Request is to be issued; on or before the proposed Utilisation Date relating to such utilisation; AVAILABILITY PERIOD means the period from (and including) the Closing Date to (and including) the Commitment Termination Date; BILATERAL LETTER OF CREDIT has the meaning given to it in Clause 4.5(b); BIS QUALIFYING ASSETS means fixed income securities issued or guaranteed by US Government Agencies or by the Central Governments of any OECD country which has not defaulted or re-scheduled its debt obligations in the preceding five years; BOARD means the Board of Governors of the Federal Reserve System of the United States of America; BROCKBANK means XL Brockbank Ltd, a company incorporated under the laws of England and Wales; BUSINESS DAY means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City, London or Bermuda are authorised or required by Law to remain closed; CAPITAL LEASE OBLIGATIONS of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalised amount thereof determined in accordance with GAAP; CENTRAL GOVERNMENT means, without limitation, government departments, ministries and central banks; CHANGE IN CONTROL means the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934 of the United States of America, and the rules and regulations thereunder) shall have become the beneficial owner (as defined in the rules promulgated by the SEC) of more than 40% of the voting securities of the Account Party; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Account Party; or (c) a majority of the members of the Account Party's board of directors are persons who are then serving on the board of directors without having been elected by the board of directors or having been nominated for election by its shareholders; Page 2 CHANGE IN LAW means (a) the adoption of any Law, rule or regulation after the date of this Agreement, (b) any change in any Law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Clause 12.1 and 13, by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of Law) of any Governmental Authority made or issued after the date of this Agreement; CHARGE AGREEMENT means the charge agreement, in substantially the form set out in Schedule 9 that may be required to be entered into by the Account Party as chargor pursuant to the terms hereof and pursuant to which the Account Party will grant cash cover in favour of the Security Trustee; CLOSING DATE means the date on which the conditions set out in Schedule 5 (CONDITIONS PRECEDENT) have, in the reasonable opinion of the Agent, been satisfied; CODE means the Internal Revenue Code of 1986 of the United States of America, as amended from time to time; COMMITMENT means, with respect to each Lender, the commitment of such Lender to participate in the issue of Letters of Credit hereunder. The initial amount of each Lender's Commitment is set forth on Schedule 1, or in the Transfer Certificate pursuant to which such Lender shall have assumed its Commitment, as applicable, but in each case as such Commitment may be: (a) reduced from time to time pursuant to Clause 8 (TERMINATION AND REDUCTION OF THE COMMITMENTS) or Clause 4.5 (b) (REPLACEMENT LETTERS OF CREDIT); and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Clause 26.3 (TRANSFERS BY LENDERS); COMMITMENT LETTER means the letter so titled from the Arranger to the Account Party dated 9 October 2001; COMMITMENT TERMINATION DATE means the earlier of (a) the later of 23 November 2001 and the date which Lloyd's may specify as the Funds Date for 2001; and (b) 1 January 2002; CONSOLIDATED NET WORTH means, at any time, the consolidated shareholders' equity of the Account Party and its Subsidiaries; CONTROL means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. CONTROLLING and CONTROLLED have meanings correlative thereto; COUNTY DOWN means County Down Limited, a company incorporated under the laws of England and Wales; DEFAULT means any event or condition which constitutes an Event of Default or a Potential Event of Default; DEFAULT PERIOD means the period from and including the date on which the Agent makes payment of a Demand Amount to but excluding the date on which the Account Party makes a Page 3 corresponding reimbursement under Clause 6.1(a) and (b) (THE ACCOUNT PARTY'S INDEMNITY TO LENDERS); DEMAND AMOUNT means a principal amount to be paid by the Account Party pursuant to Clause 6.1(a) and (b) (THE ACCOUNT PARTY'S INDEMNITY TO LENDERS); DOLLARS or $ refers to the lawful money of the United States of America from time to time; DORNOCH means Dornoch Limited, a company incorporated under the laws of England and Wales; EFFECTIVE DATE means, in respect of a Letter of Credit, the date upon which a Letter of Credit shall become valid and enforceable, being any date from (and including) the Closing Date to (but excluding) 1 January 2002; ENVIRONMENTAL LAWS means any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Hazardous Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Hazardous Materials or (d) regulation of the manufacture, use or introduction into commerce of Hazardous Materials, including their manufacture, formulation, packaging, labelling, distribution, transportation, handling, storage or disposal; ENVIRONMENTAL LIABILITY means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of an Obligor or any Subsidiary resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract or agreement pursuant to which liability is assumed or imposed with respect to any of the foregoing; EQUITY RIGHTS means, with respect to any Person, any subscriptions, options, warrants, commitments, pre-emptive rights or agreements of any kind (including any shareholders' or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person; ERISA means the Employee Retirement Income Security Act of 1974 of the United States of America, as amended from time to time; ERISA AFFILIATE means any trade or business (whether or not incorporated) that, together with the Account Party, is treated as a single employer under Clause 414(b) or (c) of the Code, or, solely for purposes of Clause 302 of ERISA and Clause 412 of the Code, is treated as a single employer under Clause 414 of the Code; ERISA EVENT means (a) any REPORTABLE EVENT, as defined in Clause 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an ACCUMULATED FUNDING DEFICIENCY (as defined in Clause 412 of the Code or Clause 302 of ERISA), whether or not waived; (c) the filing pursuant to Clause 412(d) of the Code or Clause 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by any Obligor or any of such Obligor's ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt Page 4 by an Obligor or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by any Obligor or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by any Obligor or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from any Obligor or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganisation, within the meaning of Title IV of ERISA; EVENT OF DEFAULT has the meaning assigned to such term in Clause 20; EXPIRY DATE means, in relation to any Letter of Credit, the date on which the maximum aggregate liability thereunder is to be reduced to zero pursuant to this Agreement; FACILITY means the letter of credit facility granted to the Account Party pursuant to this Agreement; FEE LETTER means the letter from the Arranger to the Account Party dated 9 October 2001, relating to the payment of certain fees; FINANCE DOCUMENTS means this Agreement, the Charge Agreement, the Commitment Letter, the Fee Letter, any Letter of Credit and any other document or documents as may be agreed by the Agent and the Account Party; FINAL MATURITY DATE means 31 December 2006, as extended pursuant to Clause 4 (EXTENSION OF LETTERS OF CREDIT); FINANCE PARTIES means the Lenders, the Agent, the Arranger and the Security Trustee; FINANCIAL OFFICER means, with respect to any Obligor, a principal financial officer of such Obligor; FUNDS AT LLOYD'S has the meaning given to it in paragraph 4 of the Membership Bylaw (No. 17 of 1993); FUNDS AT LLOYD'S REQUIREMENTS means, in respect of any member, the amount required to be maintained by that member as Funds at Lloyd's; FUNDS DATE means the date notified by Lloyd's each year as being the latest date in that year by which Funds at Lloyd's can be placed with Lloyd's in order to satisfy Funds at Lloyd's Requirements in respect of the immediately succeeding calendar year being, in respect of the 2001 calendar year, 29 November 2001 or such other date as may be advised by Lloyd's; GAAP means generally accepted accounting principles in the United States of America; GLOBAL CAPITAL means Global Capital Underwriters Limited, a company incorporated under the laws of England and Wales; GOVERNMENTAL AUTHORITY means the government of the United Kingdom, or of any other nation, or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government; Page 5 GUARANTEE means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guarantee hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount of the Indebtedness in respect of which such Guarantee is made. The terms GUARANTEE and GUARANTEED used as a verb shall have a correlative meaning; GUARANTORS means each of the Account Party, XL America, XL Insurance, XL Europe and XL Re; HAZARDOUS MATERIALS means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law; HEDGING AGREEMENT means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement; INDEBTEDNESS means, for any Person, without duplication (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such Person's business as an insurance or reinsurance company (including guaranteed investment contracts) or corporate member of Lloyd's or as a provider of financial or investment services or contracts (in each case other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness): (i) all indebtedness or liability for or on account of money borrowed by, or for or on account of deposits with or advances to (but not including accrued pension costs, deferred income taxes or accounts payable of) such Person; (ii) all obligations (including contingent liabilities) of such Person evidenced by bonds, debentures, notes, banker's acceptances or similar instruments; (iii) all indebtedness or liability for or on account of property or services purchased or acquired by such Person; (iv) any amount secured by a Lien on property owned by such Person (whether or not assumed) and Capital Lease Obligations of such Person (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such capital lease to repossession or sale of such property); (v) the maximum available amount of all standby letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed); and (vi) all Guarantees of such Person; ISSUING LENDER means any Lender in its capacity as an issuer of one or more Letters of Credit hereunder; Page 6 LAW means any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority; LC DISBURSEMENT means a payment made by a Lender pursuant to a Letter of Credit; LC EXPOSURE means the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all Demand Amounts. The LC Exposure of any Lender at any time shall be the sum of its participation in the outstanding Letters of Credit at such time and the Demand Amounts owed to it at such time; LC PROPORTION means, in relation to the Lender in respect of any Letter of Credit and save as otherwise provided herein, the proportion (expressed as a percentage) of such Lender's Available Commitment to the Available Facility immediately prior to the issue of such Letter of Credit; LENDER AFFILIATE means with respect to any Lender, (a) an Affiliate of such Lender or (b) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or an Affiliate of such Lender; LENDERS means any of the Persons listed in Schedule 1 (COMMITMENTS) or any other Person that shall have become a party hereto pursuant to Clause 26.3 (TRANSFERS BY LENDERS), and which has not ceased to be a party hereto in accordance with the terms hereof; LETTERS OF CREDIT means Letters of Credit issued pursuant to the terms of this Agreement; LETTER OF CREDIT FEES means the fees payable by the Account Party pursuant to Clause 9.2 (LETTER OF CREDIT FEES) (as adjusted from time to time in accordance with the provisions of Clause 9.3) (ADJUSTMENT OF LETTER OF CREDIT FEE); LIEN means, with respect to any asset, any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security; LIBOR means, in relation to any unpaid sum: (a) the display rate per annum of the offered quotation for overnight deposits in the currency of the relevant unpaid sum which appears on Telerate Page 3750 or Telerate Page 3740 (as appropriate) at or about 11.00 a.m. on any relevant day; or (b) if the display rate cannot be determined under paragraph (a) above, the rate determined by the Agent to be the arithmetic mean (rounded, if necessary, to the nearest five decimal places with the midpoint rounded upwards) of the rates notified to the Agent by each of the Reference Banks quoting (provided that at least two Reference Banks are quoting) as the rate at which such Reference Bank is offering overnight deposits in the required currency in an amount comparable to that amount to prime banks in the London Interbank Market at or about 11.00 a.m. on any relevant day; and for the purposes of this definition: Page 7 TELERATE PAGE 3750 means the display designated as Page 3750, and TELERATE PAGE 3740 means the display designated as Page 3740, in each case on the Telerate Service (or such other pages as may replace Page 3750 or Page 3740 on that service or such other service as may be nominated by the British Bankers' Association (including the Reuters Screen) as the information vendor for the purposes of displaying British Bankers' Association Interest Settlement Rates for deposits in the currency concerned); LLOYD'S means the society incorporated by Lloyd's Act 1871 by the name of Lloyd's; MAJORITY LENDERS means, at any time, Lenders having Commitments representing more than 50% of the sum of the total Commitments at such time; PROVIDED THAT, if the Commitments have expired or been terminated, MAJORITY LENDERS means Lenders having more than 50% of the aggregate LC Exposure of the Lenders; MANDATORY COSTS means, in relation to any unpaid sum for any period, a rate per annum calculated in accordance with Schedule 4; MARGIN STOCK means MARGIN STOCK within the meaning of Regulations T, U and X of the Board; MATERIAL ADVERSE EFFECT means a material adverse effect on: (a) the assets, business, financial condition or operations of an Obligor and its Subsidiaries taken as a whole; or (b) the ability of an Obligor to perform any of its payment or other material obligations under this Agreement; MID OCEAN means Mid Ocean Limited, a company incorporated under the laws of the Cayman Islands; MULTIEMPLOYER PLAN means a multiemployer plan as defined in Clause 4001(a)(3) of ERISA; NAC REINSURANCE means NAC Reinsurance International Ltd, a company incorporated under the laws of England and Wales; NON-U.S. BENEFIT PLAN means any plan, fund (including any superannuation fund) or other similar program established or maintained outside the United States by any Obligor or any of its Subsidiaries, with respect to which such Obligor or the Subsidiary has an obligation to contribute, for the benefit of employees of such Obligor or such Subsidiary, which plan, fund or other similar program provides, or results in, the type of benefits described in Clause 3(1) or 3(2) of ERISA, and which plan is not subject to ERISA or the Code; OBLIGOR JURISDICTION means (a) Bermuda, (b) the Cayman Islands, (c) the Republic of Ireland, and (d) any other country (i) where any Obligor is licensed or qualified to do business or (ii) from or through which payments hereunder are made by any Obligor; OBLIGORS means each of the Account Party and the Guarantors; OECD COUNTRY means any member of the Organisation for Economic Co-operation and Development; ORIGINAL AGREEMENT means the letter of credit and reimbursement agreement dated 3 November 2000 between, inter alios, the Account Party, the Agent and the lenders thereto; ORIGINAL LETTERS OF CREDIT means the letters of credit issued under the Original Agreement; Page 8 ORIGINAL PARTIES means the parties to the Original Agreement; OTHER TAXES means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement; PBGC means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions; PERSON means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity; PLAN means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Clause 412 of the Code or Clause 302 of ERISA, and in respect of which any Obligor or any ERISA Affiliate is (or, if such plan were terminated, would under Clause 4069 of ERISA be deemed to be) an EMPLOYER as defined in Clause 3(5) of ERISA; POTENTIAL EVENT OF DEFAULT means an event or condition which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default; PRIVATE ACT means separate legislation enacted in Bermuda with the intention that such legislation apply specifically to an Obligor, in whole or in part; QUARTERLY DATES means the last Business Day of March, June, September and December in each year, the first of which shall be the first such day after the date hereof; REFERENCE BANKS means, subject to Clause 26.6 (REFERENCE BANKS), the principal London offices of Citibank, N.A., ING Bank N.V., London Branch, Lloyd's TSB Bank PLC and Barclays Bank PLC; REGISTER has the meaning given to it in Clause 26.11 (MAINTENANCE OF REGISTER BY AGENT); RELATED PARTIES means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates; REPRESENTATIONS means each of the representations and warranties set out in Clause 17 (REPRESENTATIONS AND WARRANTIES); SAP means, as to each Obligor and each Subsidiary that offers insurance products, the statutory accounting practices prescribed or permitted by the relevant Governmental Authority for such Obligor's or such Subsidiary's domicile for the preparation of its financial statements and other reports by insurance corporations of the same type as such Obligor or such Subsidiary in effect on the date such statements or reports are to be prepared, except if otherwise notified by the Account Party as provided in Clause 1.3; SEC means the Securities and Exchange Commission of the United States of America or any successor entity; STERLING or (POUND) refers to the lawful currency of the United Kingdom from time to time; Page 9 STONEBRIDGE UNDERWRITING means Stonebridge Underwriting Limited, a company incorporated under the laws of England and Wales; SUBSIDIARY means, with respect to any Person (the PARENT), at any date, any corporation (or similar entity) of which a majority of the shares of outstanding capital stock normally entitled to vote for the election of directors (regardless of any contingency which does or may suspend or dilute the voting rights of such capital stock) is at such time owned directly or indirectly by the parent or one or more subsidiaries of the parent. Unless otherwise specified, SUBSIDIARY means a Subsidiary of an Obligor; SUBSTITUTE LENDER has the meaning give to it in Clause 4.4(a); TAXES means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. TAXATION and TAX shall be construed accordingly; TERM means, save as otherwise provided herein, in relation to any Letter of Credit, the period from its Effective Date until its Expiry Date; TOTAL COMMITMENTS means, at any time, the aggregate of the Lenders' Commitments (being on the date hereof (pound)324,000,000); TOTAL FUNDED DEBT means, at any time, all Indebtedness of the Account Party and its Subsidiaries which would at such time be classified in whole or in part as a liability on the consolidated balance sheet of the Account Party in accordance with GAAP; TOTAL LC EXPOSURES means, at any time, the aggregate of the Lenders' LC Exposures; TRANSACTIONS means the execution, delivery and performance by the Obligors of this Agreement and the other Finance Documents to which any Obligor is intended to be a party and the issuance of Letters of Credit hereunder; TRANSFER CERTIFICATE means a certificate in the form of Schedule 8 (FORM OF TRANSFER CERTIFICATE) delivered pursuant to Clause 26.4 (TRANSFER PROCEDURE); TRANSFEREE means a Person to which a Lender seeks to transfer by novation all or part of such Lender's rights, benefits and obligations under the Finance Documents; US GOVERNMENT AGENCIES means US government agencies whose debt obligations are fully and explicitly guaranteed as to the timely repayment of principal and interest by the full faith and credit of the US federal government; UTILISATION DATE means the date on which a Letter of Credit is to be issued; UTILISATION REQUEST means a notice substantially in the form set out in Schedule 6 (FORM OF UTILISATION REQUEST); WITHDRAWAL LIABILITY means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA; XL AMERICA means X.L. America, Inc., a company incorporated under the laws of Delaware, USA; Page 10 XL EUROPE means XL Europe Ltd, a company incorporated under the laws of Ireland; XL INSURANCE means XL Insurance (Bermuda) Ltd, a company organised under the laws of Bermuda; XL RE means XL Re Ltd (formerly XL Mid Ocean Reinsurance Ltd), a company organised under the laws of Bermuda. INTERPRETATION 1.2 Any reference in this Agreement to: (a) the AGENT, SECURITY TRUSTEE, ARRANGER, LENDER or any other Person shall be construed so as to include its and any subsequent successors and permitted transferees in accordance with their respective interests; (b) CONTINUING, in the context of an Event of Default shall be construed as a reference to an Event of Default which has not been remedied or waived in accordance with the terms hereof and in relation to a POTENTIAL EVENT OF DEFAULT, one which has not been remedied within the relevant grace period or waived in accordance with the terms hereof; (c) a HOLDING COMPANY of a company or corporation shall be construed as a reference to any company or corporation of which the first-mentioned company or corporation is a subsidiary; (d) the EQUIVALENT on any date in one currency (the FIRST CURRENCY) of an amount denominated in another currency (the SECOND CURRENCY) is a reference to the amount of the first currency which could be purchased with the amount of the second currency at the spot rate quoted by the Agent at or about 11.00 a.m. on such date for the purchase of the first currency with the second currency; (e) a MEMBER shall be construed (as the context may require) as a reference to an underwriting member of Lloyd's; (f) a MONTH is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that, where any such period would otherwise end on a day which is not a Business Day, it shall end on the next succeeding Business Day, unless that day falls in the calendar month succeeding that in which it would otherwise have ended, in which case it shall end on the immediately preceding Business Day, PROVIDED THAT, if a period starts on the last Business Day in a calendar month or if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last Business Day in that later month (and references to MONTHS shall be construed accordingly); (g) a Lender's PARTICIPATION, in relation to a Letter of Credit, shall be construed as a reference to the rights and obligations of such Lender in relation to such Letter of Credit as are expressly set out in this Agreement; (h) a SUCCESSOR shall be construed so as to include an assignee or successor in title of such party and any person who under the laws of its jurisdiction of incorporation or domicile has assumed the rights and obligations of such party under this Agreement or to which, under such laws, such rights and obligations have been transferred; Page 11 (i) an ASSET or PROPERTY shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights; (j) VAT shall be construed as a reference to value added tax including any similar tax which may be imposed in place thereof from time to time; and (k) the WINDING-UP, DISSOLUTION or ADMINISTRATION of a company or corporation shall be construed so as to include any equivalent or analogous proceedings under the Law of the jurisdiction in which such company or corporation is incorporated or any jurisdiction in which such company or corporation carries on business including the seeking of liquidation, winding-up, reorganisation, dissolution, administration, arrangement, adjustment, protection or relief of debtors. (l) unless the contrary intention appears: (i) a Letter of Credit is CANCELLED, REPAID or PREPAID by: (A) providing the Issuing Lender(s) with cash cover (as defined below); or (B) reducing (in accordance with the terms of this Agreement and the Letter of Credit) the amount that may be demanded under the Letter of Credit (or by that amount automatically reducing in accordance with the terms of the Letter of Credit); or (C) cancelling the Letter of Credit by (x) providing written confirmation (in form and substance satisfactory to the Agent or the Issuing Lender) from Lloyd's that the Issuing Lender(s) has no further liability under the Letter of Credit (including by way of a notice specifying that Lloyd's does not accept or unconditionally rejects a Letter of Credit (unless the Agent or the Issuing Lender as the case may be, acting reasonably, considers that Lloyd's remains entitled to make a claim under such Letter of Credit)), and (y) if Lloyd's agrees, by procuring the return of the original to the Agent; (ii) CASH COVER is provided, pursuant to the terms of the Charge Agreement, in respect of a Lender's participation in a Letter of Credit at any time by paying an amount in Sterling equal to the outstanding amount of that participation at that time to such account or accounts as the Agent may specify and creating effective security over such amount in favour of the Security Trustee on behalf of the Finance Parties in form and substance satisfactory to the Security Trustee (together with legal opinions, evidence of corporate authorisation, and similar documentation reasonably required by the Security Trustee), in the name of the Account Party from which the only withdrawals which may be made are withdrawals made with the prior written consent of the Security Trustee in accordance with the terms of the Charge Agreement; (iii) a reference to PRINCIPAL AMOUNT in respect of a Letter of Credit means the maximum amount which is expressed to be capable of being demanded under a Letter of Credit ignoring the aggregate amount of any cash cover held in relation to that Letter of Credit. Page 12 ACCOUNTING TERMS; GAAP AND SAP 1.3 Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP or SAP, as the context requires, each as in effect from time to time; provided that, if the Account Party notifies the Agent that the Obligors request an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or SAP, as the case may be, or in the application thereof on the operation of such provision (or if the Agent notifies the Obligors that the Majority Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or SAP, as the case may be, or in the application thereof, then such provision shall be interpreted on the basis of GAAP or SAP, as the case may be, as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. AGREEMENTS AND STATUTES 1.4 Any reference in this Agreement to: (a) this Agreement or any other agreement or document shall be construed as a reference to this Agreement or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented; (b) a statute or treaty shall be construed as a reference to such statute or treaty as the same may have been, or may from time to time be, amended or, in the case of a statute, re-enacted; and (c) a bylaw shall be construed as a reference to a bylaw made under Lloyd's Acts 1871 to 1982 as the same may have been, or may from time to time be, amended or replaced. HEADINGS 1.5 Clause and Schedule headings are for ease of reference only. TIME 1.6 Any reference in this Agreement to a time of day shall, unless a contrary indication appears, be a reference to London time. THE FACILITY GRANT OF THE FACILITY 2.1 The Lenders, upon the terms and subject to other conditions hereof, grant to the Account Party a letter of credit facility in an aggregate amount of (pound)324,000,000. PURPOSE AND APPLICATION 2.2(a) The Facility is intended to support Funds at Lloyd's for the underwriting business of the Applicants, and, accordingly, the Account Party shall apply all Letters of Credit issued hereunder in or towards satisfaction of such purpose. Page 13 (b) Without prejudice to the Account Party's obligations under Clause 2.2(a) and the remaining provisions of this Agreement, none of the Finance Parties shall be bound to enquire as to, nor shall any of them be responsible for, the purpose of, or application of the proceeds of any Letter of Credit issued hereunder. CONDITIONS PRECEDENT 2.3 Save as the Lenders may otherwise agree, the Account Party may not deliver any Utilisation Request unless the Agent has confirmed to the Account Party and the Lenders that it has waived and/or received all of the documents and other evidence listed in Schedule 5 (CONDITIONS PRECEDENT) and that each is, in form and substance, reasonably satisfactory to the Agent. SEVERAL OBLIGATIONS 2.4 The obligations of each Lender are several and the failure by a Lender to perform its obligations hereunder and/or under any Letter of Credit issued hereunder shall not affect the obligations of either Obligor towards any other party hereto nor shall any other party be liable for the failure by such Lender to perform its obligations hereunder and/or under such Letter of Credit. SEVERAL RIGHTS 2.5 The rights of each Finance Party are several and any debt arising hereunder at any time from an Obligor to any Finance Party shall be a separate and independent debt. Each such party shall be entitled to protect and enforce its individual rights arising out of this Agreement independently of any other party (so that it shall not be necessary for any party hereto to be joined as an additional party in any proceedings for this purpose). CHANGE OF CURRENCY 2.6(a) If, after the date of this Agreement, more than one currency or currency unit denomination are at the same time recognised by the central bank of any country as the lawful currency of that country, then: (i) any reference in the Finance Documents to, and any obligations arising under the Finance Documents in, the currency of that country shall be translated into, or paid in, the currency or currency unit of that country designated by the Agent; and (ii) any translation from one currency or currency unit to another shall be at the official rate of exchange or conversion rate recognised by the central bank for the conversion of that currency or currency unit into the other, rounded up or down by the Agent acting reasonably. Page 14 (b) If a change in any currency of a country occurs, this Agreement will be amended in the manner determined by the Agent (acting reasonably) so as to reflect the change in currency and to place the parties in the same position, so far as possible, that they would have been in if no change in currency had occurred. CANCELLATION OF ORIGINAL AGREEMENT 2.7(a) From the date of this Agreement the Account Party shall not deliver any Utilisation Request (as defined in the Original Agreement) under the Original Agreement. (b) The Original Parties hereby agree that the Original Agreement shall be automatically terminated and the Total Commitments thereunder cancelled upon cancellation of all the Original Letters of Credit in accordance with the terms of the Original Agreement. UTILISATION OF THE FACILITY UTILISATION CONDITIONS FOR THE FACILITY 3.1 Save as otherwise provided herein, a Letter of Credit will be issued at the request of the Account Party on behalf of an Applicant if: (a) no later than 10.00 a.m. two Business Days before the proposed Utilisation Date, the Agent has received a duly completed Utilisation Request from the Account Party; (b) the proposed Utilisation Date is a Business Day falling within the Availability Period; (c) the proposed amount of such Letter of Credit is less than or equal to the Available Facility; (d) the proposed Term of the Letter of Credit is a period ending on or before the Final Maturity Date; (e) the Letter of Credit is substantially in the form set out in Schedule 7 (FORM OF LETTER OF CREDIT) or in such other form requested by the Account Party which is approved by Lloyd's and the Lenders (such approval by the Lenders not to be unreasonably withheld or delayed and shall not be required unless the other form requested differs materially from the form set out in Schedule 7); (f) the beneficiary of such Letter of Credit is Lloyd's; and (g) on and as of the proposed Utilisation Date (a) no Default has occurred and is continuing and (b) the Representations are true in all material respects. REQUEST FOR LETTERS OF CREDIT 3.2 The Account Party may request the issue by the Lenders hereunder of a total of up to six Letters of Credit in respect of the Applicants. A single Utilisation Request may be issued in respect of more than one Letter of Credit. COMPLETION OF LETTERS OF CREDIT 3.3 The Agent is authorised to arrange for the issue of any Letter of Credit pursuant to Clause 3.1 (UTILISATION CONDITIONS FOR THE FACILITY) by: Page 15 (a) completing the Effective Date and the proposed Expiry Date of such Letter of Credit; (b) completing the schedule to such Letter of Credit with the percentage participation of each Lender as allocated pursuant to the terms hereof; (c) executing such Letter of Credit on behalf of each Lender and following such execution delivering such Letter of Credit to Lloyd's on the Utilisation Date; and (d) executing and delivering a "principal private residence letter" in respect of each such Letter of Credit substantially in the form set out in Appendix 3 to Schedule 7 (FORM OF LETTER AS TO PRINCIPAL PRIVATE RESIDENCES OF THE APPLICANTS). EXPIRY DATE 3.4 Each Letter of Credit shall expire at or prior to the close of business on 31 December 2006 (prior to giving effect to the automatic extension pursuant to Clause 4.1) (or, in the case of any renewal or extension thereof (or subsequent renewals or extensions) in accordance with Clause 4 (EXTENSION OF LETTER OF CREDIT), one year after such renewal or extension (or subsequent renewal or extension)). EACH LENDER'S PARTICIPATION IN LETTERS OF CREDIT 3.5 (a) Save as otherwise provided herein, each Lender will participate in each Letter of Credit issued pursuant to this Clause 3 in the proportion borne by its Available Commitment to the Available Facility immediately prior to the issue of such Letter of Credit. (b) No Lender shall participate in or issue any Letter of Credit to the extent that its LC Exposure would exceed its Commitment following the issue of that Letter of Credit. NOTIFICATION TO LENDERS 3.6 On or before each Utilisation Date the Agent shall notify each Lender of the Letter of Credit that is to be issued by the Agent on behalf of the Lenders, the name of the Applicant in respect of whom the Letter of Credit is being issued, the proposed length of the relevant Term and the aggregate principal amount of the relevant Letter of Credit allocated to such Lender pursuant to this Agreement. CANCELLATION OF AVAILABLE COMMITMENTS 3.7 On the expiry of the Availability Period, the Available Facility and each Lender's Available Commitment shall be reduced to zero and accordingly the remaining Commitments of each Lender shall be equal to their respective LC Exposure under any issued Letters of Credit. EXTENSION OF LETTERS OF CREDIT AUTOMATIC EXTENSION 4.1(a) Each Lender acknowledges that, subject to the terms of this Agreement, on 31 December of each year, each issued Letter of Credit shall be extended automatically to 31 December of the year immediately succeeding the year in which its then current Expiry Date falls, unless Lloyd's receives notice to the contrary, so that each Letter of Credit shall on any date be valid for a minimum of four years from Page 16 such date. No Finance Party is entitled to give notice of non-renewal to Lloyd's pursuant to Clause 3 of Schedule 7 except as permitted by this Clause 4. (b) In any year, the Account Party may, by notice to the Agent given no later than 1 October of that year cancel the automatic extension of one or more Letters of Credit, in which case the Agent shall promptly give notice to the Lenders and to Lloyd's of that cancellation. Following the giving of such notice by the Account Party, that Letter of Credit will expire on its then current Expiry Date. LENDERS' RIGHTS TO DECLINE EXTENSIONS OF A LETTER OF CREDIT 4.2 In any year (other than the year 2001), each Lender may in its absolute discretion elect not to participate in the automatic extension of a Letter of Credit which (pursuant to Clause 4.1) is expressed to take place on 31 December of that year. Each Lender undertakes to notify the Agent in writing as soon as reasonably practicable after it has determined that it will not participate in the extension, and in any event by no later than close of business on 1 September of that year. The Agent shall give notice thereof to the Account Party within two Business Days of notification from such Lender. Unless notice is given to the Agent as aforesaid each Lender will be deemed automatically to have agreed to the extension taking place on 31 December of such year. EXTENSION OF A LETTER OF CREDIT 4.3(a) If none of the Lenders have given notice pursuant to Clause 4.2 (LENDER'S RIGHTS) by 1 September of any year the Agent shall promptly notify the Account Party and the Lenders thereof and subject to the provisions of Clause 4.6 (EXTENSION CONDITIONS PRECEDENT), the Letter of Credit shall be automatically extended on 31 December of that year in accordance with the terms thereof. (b) If in any year a Lender gives notice in accordance with the provisions of Clause 4.2 (LENDER'S RIGHTS) that it does not agree to a requested extension of any Letter of Credit the Agent shall notify the Account Party accordingly within two Business Days thereafter, (and shall notify Lloyd's no earlier than 3 Business Days before 1 December and no later than 1 December of that year) and the succeeding provisions of this Clause 4 shall apply. SUBSTITUTE LENDER 4.4(a) If in any year any Lender (a DECLINING LENDER) gives notice in accordance with the provisions of Clause 4.2 (LENDERS' RIGHTS) that it does not agree to the extension scheduled to occur on 31 December of that year, then the Account Party may designate by the date which falls no later than the close of business on the earlier of the date which falls four weeks prior to the Funds Date of that year and the date which falls four weeks prior to 1 December of that year an Approved Credit Institution (which may be an existing Lender or Lenders) (the SUBSTITUTE LENDER) which is willing to assume all of the rights and obligations of the Declining Lender in respect of its participation in the relevant Letter of Credit (the OLD LETTER OF CREDIT). (b) If the Account Party has found a Substitute Lender it shall promptly notify the Agent and the Declining Lender thereof and shall use its best efforts to procure the release by Lloyd's of the Old Letter of Credit from the Funds at Lloyd's of the relevant Applicant. Page 17 (c) The Declining Lender shall as soon as reasonably practicable and in any event no later than the earlier of two weeks prior to the Funds Date of such year and two weeks prior to 1 December of such year transfer its rights and obligations hereunder to the Substitute Lender in accordance with the provisions of Clause 26.3 (TRANSFERS BY LENDERS) provided that such transfer shall not be effective until the Funds Date of such year. (d) The Substitute Lender shall pay to the Declining Lender all amounts then due and owing (and all fees accrued to but excluding the date of such transfer) to the Declining Lender in respect of its participation in the Old Letter of Credit. REPLACEMENT LETTERS OF CREDIT (FOLLOWING EXTENSION) 4.5(a) If a Substitute Lender has become party hereto pursuant to Clause 4.4 (SUBSTITUTE LENDER), then subject to the provisions of Clause 4.6 (EXTENSION CONDITIONS PRECEDENT) the Lenders who are deemed to have agreed to the extension of the Old Letter of Credit (the EXTENDING LENDERS) shall, together with the Substitute Lender, participate in, and issue by the Funds Date of such year, a new Letter of Credit (the NEW LETTER OF CREDIT) which shall (i) replace the Old Letter of Credit, (ii) be in an amount equal to the Old Letter of Credit and (iii) have an Expiry Date calculated pursuant to Clause 4.1. (b) If a Substitute Lender has not been found by the time specified in Clause 4.4(a) then: (i) the Account Party shall use its best efforts to procure the release by Lloyd's of the Old Letter of Credit from the Funds at Lloyd's of the relevant Applicant, (ii) subject to the provisions of Clause 4.6 (EXTENSION CONDITIONS PRECEDENT), the Extending Lenders shall participate in, and issue by the Funds Date of such year, a new Letter of Credit (the REDUCED LETTER OF CREDIT) which shall (x) replace their participation in the Old Letter of Credit, (y) be in an amount equal to the Old Letter of Credit LESS the amount of the Declining Lender's participation and (z) have an Expiry Date calculated pursuant to Clause 4.1; and (iii) the Declining Lender shall participate in a separate Letter of Credit (a BILATERAL LETTER OF Credit) which shall (x) replace its participation in the Old Letter of Credit, (y) be in an amount equal to the Declining Lender's participation in the Old Letter of Credit and (z) have an Expiry Date which is the same as the Expiry Date specified in the Old Letter of Credit (as the same may have been previously extended from time to time with the consent of the Declining Lender). EXTENSION CONDITIONS PRECEDENT 4.6(a) On or prior to close of business on 1 December of any year, the Account Party shall promptly notify the Agent if (as of 1 December of that year): (i) an Event of Default or Potential Event of Default occurs which is continuing; (ii) any of the Representations cease to be correct in all material respects, or become misleading in any material respect; or (iii) the Letter of Credit which is to be automatically extended pursuant to Clause 4.1 ceases solely to be used to support the relevant Applicant's underwriting business at Lloyd's which has been provided in accordance with the requirements of Lloyd's applicable to it. Page 18 (b) Subject to due notification to Lloyd's in accordance with the provisions of the relevant Letter of Credit, the Lenders shall not be obliged to participate in the automatic extension of a Letter of Credit to occur on 31 December of any year if any of the events specified in Clause 4.6(a) above occurs and is continuing as at 1 December of that year, and any Finance Party shall be entitled to give notice to Lloyd's on 1 December of that year to that effect. CANCELLATION OF BILATERAL LETTERS OF CREDIT 4.7 At any time after the issue of a Bilateral Letter of Credit by a Declining Lender the Account Party may give the Agent and the Declining Lender not less than fourteen days' prior written notice of its intention to procure that the liability of the Declining Lender under such Letter of Credit is reduced to zero (whereupon it shall do so). REVISED LETTERS OF CREDIT 4.8 In the event that the Funds at Lloyd's Requirements of an Applicant changes at or around the time of any given Funds Date in terms of amount and/or the identity of the Applicant, subject to the approval of Lloyd's and subject to each Lender's LC Exposures under the Letters of Credit issued hereunder not being increased, the Lenders shall co-operate with the Account Party to ensure to the extent reasonably possible that the Letters of Credit provide for the revised Funds at Lloyd's Requirements of the Applicants. INCREASE TO FACILITY 4.9 If at any time a Bilateral Letter of Credit is outstanding, the Account Party shall have the right to increase the size of the Facility by up to the principal amount of the Bilateral Letter of Credit(s) outstanding by introducing a new lender (which may be an existing Lender) and on terms that one or more outstanding Bilateral Letters of Credit having an aggregate principal amount at least equal to the increase are cancelled at the time the increase takes effect. Each Lender agrees to execute any documentation giving effect to this increase and new lender provided that no such documentation may increase the Commitment of any Lender without the express consent of that Lender at the time such documentation is executed. PAYMENT OF DEMANDS DISBURSEMENT PROCEDURES 5.1(a) The Agent shall, within a reasonable time following its receipt thereof, examine all documents purporting to represent a demand for payment under any Letter of Credit. The Agent shall promptly after such examination (and in any event by 12 noon on the Business Day immediately following receipt of such demand) (i) notify each of the Lenders and the Account Party by facsimile of such demand for payment and (ii) deliver to each Lender and the Account Party a copy of each document purporting to represent a demand for payment under such Letter of Credit. (b) With respect to any drawing properly made under a Letter of Credit, each Lender will make an LC Disbursement in respect of such Letter of Credit in accordance with its liability under such Letter of Credit and this Agreement, such LC Disbursement to be made to the account of the Agent most recently designated by it for such purpose by notice to the Lenders within two Business Days of receipt of a demand for payment under such Letter of Credit by the Agent; Page 19 (c) The Agent will and undertakes to each Lender that it will: (i) make any such LC Disbursement available to Lloyd's as the beneficiary of such Letter of Credit by promptly crediting the amounts so received from the Lenders, in like funds, to the account identified by Lloyd's in connection with such demand for payment on the date following two Business Days after the receipt by the Agent of such demand; and (ii) notify each Lender on the third Business Day after the receipt by the Agent of such demand for payment that it has credited such amounts to the account identified by Lloyd's. (d) Promptly following any LC Disbursement by any Lender in respect of any Letter of Credit, the Agent will notify the Account Party of such LC Disbursement provided that any failure to give or delay in giving such notice shall not relieve the Account Party of their obligation to reimburse the Lenders with respect to any such LC Disbursement. RIGHT TO MAKE PAYMENTS UNDER LETTERS OF CREDIT 5.2 Each Lender shall be entitled to make any payment in accordance with the terms of the relevant Letter of Credit without any reference to or further authority from the Account Party or any other investigation or enquiry. LIABILITY OF LENDERS 5.3 Neither the Agent, nor any Lender nor any of their Related Parties shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond their control; provided that the foregoing shall not be construed to excuse the Agent or a Lender from liability to any Obligor to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Obligors to the extent permitted by applicable Law) suffered by any Obligor that are caused by the gross negligence or wilful misconduct of the Agent or a Lender. The parties hereto expressly agree that: (a) the Agent may accept documents that appear on their face to be in substantial compliance with the terms of a Letter of Credit without responsibility for further investigation, regardless of any notice or information to the contrary, and may make payment upon presentation of documents that appear on their face to be in substantial compliance with the terms of such Letter of Credit; (b) the Agent shall have the right, in its sole discretion, to decline to accept such documents and to make such payment if such documents are not in strict compliance with the terms of such Letter of Credit; and (c) this Clause shall establish the standard of care to be exercised by the Agent when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof (and the parties hereto hereby waive, to the extent permitted by applicable Law, any standard of care inconsistent with the foregoing). Page 20 THE ACCOUNT PARTY'S LIABILITIES IN RELATION TO LETTERS OF CREDIT THE ACCOUNT PARTY'S INDEMNITY TO LENDERS 6.1 The Account Party shall irrevocably and unconditionally as a primary obligation indemnify (on demand by the Agent (and any Lender may require the Agent to make such demand)) each Lender against: (a) any LC Disbursement paid or payable by such Lender in accordance with the terms of any Letter of Credit requested by the Account Party; and (b) all liabilities, reasonable costs (including, without limitation, any costs incurred in funding any amount which falls due from such Lender in connection with such Letter of Credit), claims, losses and reasonable expenses which such Lender may at any time properly incur or sustain in connection with any Letter of Credit. PRESERVATION OF RIGHTS 6.2 Neither the obligations of the Account Party set out in this Clause 6 nor the rights, powers and remedies conferred on any Lender by this Agreement or by Law shall be discharged, impaired or otherwise affected by: (a) the winding-up, dissolution, administration or re-organisation of any Lender or any other person or any change in its status, function, control or ownership; (b) any of the obligations of any Lender or any other person hereunder or under any Letter of Credit or under any other security taken in respect of the Account Party's obligations hereunder or otherwise in connection with any Letter of Credit being or becoming illegal, invalid, unenforceable or ineffective in any respect; (c) time or other indulgence being granted or agreed to be granted to any Lender or any other person in respect of its obligations hereunder or under or in connection with any Letter of Credit or under any such other security; (d) any amendment to, or any variation, waiver or release of, any obligation of any Lender or any other person under any Letter of Credit or this Agreement; (e) any other act, event or omission which, but for this Clause 6 might operate to discharge, impair or otherwise affect any of the obligations of the Account Party set out in this Clause 6 or any of the rights, powers or remedies conferred upon any Lender by this Agreement or by Law. The obligations of the Account Party set out in this Clause 6 shall be in addition to and independent of every other security which any Lender may at any time hold in respect of the Account Party's obligations hereunder. SETTLEMENT CONDITIONAL 6.3 Any settlement or discharge between the Account Party and a Lender shall be conditional upon no security or payment to such Lender by the Account Party or any other person on behalf of the Account Party, being avoided or reduced by virtue of any Laws relating to Bankruptcy, insolvency, liquidation or similar Laws of general application and, if any such security or payment is so avoided or reduced, such Lender shall be entitled to Page 21 recover the value or amount of such security or payment from the Account Party subsequently as if such settlement or discharge had not occurred. DEFAULT INTEREST 7. A Demand Amount shall bear interest during each Default Period in respect thereof, and any other amount unpaid hereunder shall bear interest for so long as it remains outstanding at rate of the sum of (i) two per cent. per annum (ii) the Mandatory Costs in respect thereof at such time, and (iii) LIBOR on each day whilst such amount remains outstanding. Such interest shall be payable by the Account Party on the date on which it reimburses the Lenders under clause 6.1(a) and (b) (THE ACCOUNT PARTY'S INDEMNITY TO LENDERS). TERMINATION AND REDUCTION OF THE COMMITMENTS SCHEDULED TERMINATION 8.1 Unless previously terminated, the unutilised Commitments shall terminate at the close of business on the Commitment Termination Date. VOLUNTARY CANCELLATION OR REDUCTION 8.2 The Account Party may at any time cancel, or from time to time reduce, the Total Commitments; provided that (a) each reduction of the Total Commitments shall be in an amount of (pound)15,000,000 or a larger multiple of (pound)5,000,000 and (b) the Account Party shall not cancel or reduce the Commitments if the Total LC Exposures would exceed the Total Commitments. NOTICE OF VOLUNTARY CANCELLATION OR REDUCTION 8.3 The Account Party shall notify the Agent of any election to cancel or reduce the Total Commitments under Clause 8.2 at least three Business Days prior to the effective date of such cancellation or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Account Party pursuant to this Clause shall be irrevocable; provided that a notice of cancellation of the Commitments delivered by the Account Party may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Account Party (by notice to the Agent on or prior to the specified effective date) if such condition is not satisfied. NO OTHER REPAYMENTS OR CANCELLATION 8.4 The Account Party shall not repay or cancel all or any part of the LC Exposures except at the times and in the manner expressly provided for in this Agreement. EFFECT OF CANCELLATION OR REDUCTION 8.5 Any cancellation or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made rateably among the Lenders in accordance with their respective Commitments. Page 22 FEES PARTICIPATION FEE 9.1 The Account Party shall pay to the Agent for the account of the Lenders the participation fees specified in the Fee Letter. LETTER OF CREDIT FEE 9.2(a) The Account Party shall pay to the Agent for account of each Lender pro rata according to their respective LC Exposures hereunder a letter of credit fee computed at the rate of 0.60 per cent. per annum (as such rate may be adjusted from time to time in accordance with the provisions of Clause 9.3) on the principal amount of each issued Letter of Credit payable from the Utilisation Date until the Expiry Date (as extended) of that Letter of Credit or any earlier cancellation, repayment or prepayment of the Letter of Credit in accordance with Clause 8 (TERMINATION AND REDUCTION OF THE COMMITMENTS) of this Agreement; (b) The Letter of Credit Fees shall be payable quarterly in arrears on each Quarterly Date and on the date on which the Lenders cease to have any LC Exposure. Letter of Credit Fees accrued through and including each Quarterly Date shall be payable on the fifth Business Day following such Quarterly Date, commencing on the first such date to occur after the Effective Date; and (c) The Agent shall notify the Account Party in writing at least ten Business Days prior to each Quarterly Date of (i) the letter of credit fee payable in respect of each Letter of Credit issued and (ii) the aggregate letter of credit fee payable in respect of all Letters of Credit issued. ADJUSTMENT OF LETTER OF CREDIT FEE 9.3 Notwithstanding Clause 9.2(a) above, when the credit rating (as defined below) corresponds to a rating set out in Column 1 below of the fee chart (the FEE CHART), the Letter of Credit Fee payable in accordance with Clause 9.2 shall be the amount set out in the corresponding row in Column 2 of the Fee Chart; provided however, that when the credit rating is less than A, then the Letter of Credit Fee shall be 0.80 per cent. per annum until the provisions of Clause 19.8 (a) or (b) (RATINGS DOWNGRADE) have been complied with (in which case, the Letter of Credit Fee shall be 0.30 per cent. per annum as set forth in Column 2 of the Fee Chart). Once the conditions of Clause 19.8 (i) and (ii) are satisfied, then the Letter of Credit Fee shall once again be payable in accordance with the Fee Chart. Any change to the Letter of Credit Fee described above shall take effect on the day on which the credit rating change is publicly announced by the applicable rating agency; or, in the event either of the conditions set forth in Clause 19.8 (i) or (ii) are not satisfied the day on which the provisions of Clause 19.8 (a) or (b) (RATINGS DOWNGRADE) have been complied with. Page 23 FEE CHART - -------------------------------------- ----------------------------------------- CREDIT RATING - COLUMN 1 LETTER OF CREDIT FEE - COLUMN 2 - -------------------------------------- ----------------------------------------- Greater than or equal to AA+ 0.55 per cent. per annum - -------------------------------------- ----------------------------------------- AA 0.60 per cent. per annum - -------------------------------------- ----------------------------------------- AA- 0.65 per cent. per annum - -------------------------------------- ----------------------------------------- A+ 0.725 per cent. per annum - -------------------------------------- ----------------------------------------- A 0.80 per cent. per annum - -------------------------------------- ----------------------------------------- Less than A 0.30 per cent. per annum - -------------------------------------- ----------------------------------------- In this Clause 9.3, CREDIT RATING means the lower of: (a) the financial strength rating of the Account Party from A.M. Best & Co. (or its successor); and (b) the financial strength rating of XL Insurance from Standard & Poor's Rating Services (or its successor). AGENT FEES 9.4 The Account Party agrees to pay to the Agent, for its own account, the agency fees payable in the amounts and at the times specified in the Fee Letter. PAYMENT OF FEES 9.5 All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Agent for distribution, in the case of the Letter of Credit Fees referred to in Clause 9.2, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances absent manifest error in the calculation or payment of fees due and payable. BASIS OF CALCULATION 9.6 The fees payable pursuant to Clauses 9.1 and 9.2 shall be calculated on the basis of actual days elapsed and a 365 day year. TAXES TAX GROSS-UP 10.1 All payments to be made by an Obligor to any Finance Party hereunder, whether in respect of principal, interest, fees or any other item, shall be made free and clear of and without deduction for or on account of tax unless such Obligor is required to make such a payment subject to the deduction or withholding of tax, in which case the sum payable by such Obligor (in respect of which such deduction or withholding is required to be made) shall be increased to the extent necessary to ensure that such Finance Party receives a sum net of Page 24 any deduction or withholding equal to the sum which it would have received had no such deduction or withholding been made or required to be made. TAX INDEMNITY 10.2 Without prejudice to Clause 10.1 (TAX GROSS-UP), if any Finance Party is required to make any payment of or on account of tax on or in relation to any sum received or receivable hereunder (including any sum deemed for purposes of tax to be received or receivable by such Finance Party whether or not actually received or receivable) or if any liability in respect of any such payment is asserted, imposed, levied or assessed against any Finance Party, the Account Party shall, upon demand of the Agent, promptly indemnify the Finance Party which suffers a loss or liability as a result against such payment or liability, together with any interest, penalties, costs and expenses payable or incurred in connection therewith, PROVIDED THAT this Clause 10.2 shall not apply to: (a) any tax imposed on and calculated by reference to the net income actually received or receivable by such Finance Party by the jurisdiction in which such Finance Party is incorporated; or (b) any tax imposed on and calculated by reference to the net income of the Facility Office of such Finance Party actually received or receivable by such Finance Party by the jurisdiction in which its Facility Office is located. CLAIMS BY LENDERS 10.3 A Lender intending to make a claim pursuant to Clause 10.2 (TAX INDEMNITY) shall promptly notify the Agent of the event giving rise to the claim, whereupon the Agent shall promptly notify the Account Party thereof. TAX RECEIPTS NOTIFICATION OF REQUIREMENT TO DEDUCT TAX 11.1 If, at any time, an Obligor is required by Law to make any deduction or withholding from any sum payable by it hereunder (or if thereafter there is any change in the rates at which or the manner in which such deductions or withholdings are calculated), such Obligor shall promptly, upon becoming aware of the same, notify the Agent. EVIDENCE OF PAYMENT OF TAX 11.2 If an Obligor makes any payment hereunder in respect of which it is required to make any deduction or withholding, it shall pay the full amount required to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable Law and shall deliver to the Agent for each Lender, within thirty days after it has made such payment to the applicable authority, an original receipt (or a certified copy thereof) issued by such authority evidencing the payment to such authority of all amounts so required to be deducted or withheld in respect of that Lender's share of such payment. TAX CREDIT PAYMENT 11.3 If an additional payment is made under Clause 10 (TAXES) by an Obligor for the benefit of any Finance Party and such Finance Party, in its sole discretion, determines that it has obtained (and has derived full use and benefit from) a credit against, a relief or remission Page 25 for, or repayment of, any tax, then, if and to the extent that such Finance Party, in its sole opinion, determines that: (a) such credit, relief, remission or repayment is in respect of or calculated with reference to the additional payment made pursuant to Clause 10 (TAXES); and (b) its tax affairs for its tax year in respect of which such credit, relief, remission or repayment was obtained have been finally settled, such Finance Party shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to such Obligor such amount as such Finance Party shall, in its sole opinion, determine to be the amount which will leave such Finance Party (after such payment) in no worse after-tax position than it would have been in had the additional payment in question not been required to be made by such Obligor. TAX CREDIT CLAWBACK 11.4 If any Finance Party makes any payment to an Obligor pursuant to Clause 11.3 (TAX CREDIT PAYMENT) and such Finance Party subsequently determines, in its sole opinion, that the credit, relief, remission or repayment in respect of which such payment was made was not available or has been withdrawn or that it was unable to use such credit, relief, remission or repayment in full, the Obligor shall reimburse such Finance Party such amount as such Finance Party determines, in its sole opinion, is necessary to place it in the same after-tax position as it would have been in if such credit, relief, remission or repayment had been obtained and fully used and retained by such Finance Party. TAX AND OTHER AFFAIRS 11.5 No provision of this Agreement shall interfere with the right of any Finance Party to arrange its tax or any other affairs in whatever manner it thinks fit, oblige any Finance Party to claim any credit, relief, remission or repayment in respect of any payment under Clause 10.1 (TAX GROSS-UP) in priority to any other credit, relief, remission or repayment available to it nor oblige any Finance Party to disclose any information relating to its tax or other affairs or any computations in respect thereof. INCREASED COSTS INCREASED COSTS 12.1 Subject to Clause 12.2 (EXCEPTIONS), if after the date of this Agreement, the result of: (a) the introduction of or any change in the official or judicial interpretation or application of any Law (having the force of law or if not having the force of law, generally complied with by a Lender in relation to any relevant jurisdiction); and/or (b) compliance (without adopting materially less prudent policies or standards than those previously adopted by it) by any Lender or by the holding company of any Lender with any of the matters mentioned in paragraph (a) above, including in each case, without limitation, those Laws relating to Taxation, any change in currency, any reserve, special deposit, cash ratio, liquidity or capital adequacy requirement or any other form of banking or monetary controls, is that: Page 26 (i) a Lender or its holding company incurs an additional cost as a result of that Finance Party having entered into, or performing, maintaining or funding its obligations under this Agreement; or (ii) a Lender or its holding company incurs an additional cost in making, funding or maintaining any Letters of Credit made or to be made by it under this Agreement; or (iii) any amount payable to a Lender or the effective return to a Lender under this Agreement or the effective return to a Lender or its holding company on its capital is reduced as a result of any change in the amount or nature of the capital resources required to be allocated in respect of a Lender's participation under this Agreement; or (iv) a Lender makes any payment or foregoes any interest or other return on or calculated by reference to any amount received or receivable by it from the Account Party or the Agent under this Agreement; then and in each such case: (A) the Lender shall notify the Account Party through the Agent of the relevant event promptly upon becoming aware of the event giving details of any costs or amount likely to be demanded under paragraph (B); (B) promptly following any demand from time to time by that Lender through the Agent, the Account Party shall pay to the Agent for the account of that Finance Party (or, as the case may be, its holding company) such amount as shall compensate such Finance Party or its holding company for the additional cost, reduction, payment or foregone interest or other return. EXCEPTIONS 12.2 Clause 12.1 shall not apply to or in respect of: (a) any circumstances referred to in Clause 10.2 (TAX INDEMNITY); (b) any circumstances for which a relevant Lender has been compensated for under Clause 12.3. ILLEGALITY 13. If, after the date of this Agreement, any Change in Law or in the official or judicial interpretation or application thereof shall make it unlawful or contrary to an official directive in any jurisdiction for any Lender to make available or fund or maintain or to give effect to its obligations as contemplated by this Agreement or the Letters of Credit (or, by reason only of a Change of Law, the Lender ceases to be an Approved Credit Institution), the Lender shall promptly on becoming aware of the same give notice thereof to the Account Party through the Agent, whereupon: (a) where such change makes it unlawful or contrary to an official directive to maintain or give effect to its obligations under this Agreement, if the Agent on behalf of such Lender so requires, the Account Party shall by no later than the last day of any Page 27 applicable grace period specified by the applicable Law ensure that the liabilities of such Lender under or in respect of each Letter of Credit are cancelled within the meaning of Clause 1.2(l)(i)(A) (or use its best efforts to ensure that such liabilities are cancelled within the meaning of Clause 1.2(l)(i)(C)), the Commitment of that Lender shall forthwith be cancelled and the Account Party shall prepay forthwith fees, costs and expenses due to that Lender hereunder; (b) where such change only makes it unlawful or contrary to an official directive to participate in further Letters of Credit under this Agreement, then upon receipt by the Agent of that notice, the Available Commitment of that Lender shall be reduced to zero, and upon the expiry of each Letter of Credit in which it is participating at such time, its resulting Available Commitment shall also be cancelled, provided that if the Lender subsequently transfers or assigns its rights and obligations under this Agreement to a new lender pursuant to Clause 26.5 (RIGHTS TO SUBSTITUTE A SINGLE BANK), the Account Party may by notice to the Agent increase the Commitment of such new lender by the amount of the Available Commitment that was previously cancelled. MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS. DESIGNATION OF A DIFFERENT LENDING OFFICE 14.1 If any Lender requests compensation under Clause 12 (INCREASED COSTS), or if the Account Party is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Clause 10 (TAXES), then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Letters of Credit hereunder or to transfer its rights and obligations hereunder to another of its offices, branches or Affiliates, if, in the reasonable judgment of such Lender, such designation or assignment (a) would eliminate or reduce amounts payable pursuant to Clause 12 (INCREASED COSTS) or 10 (TAXES), as the case may be, in the future and (b) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Account Party hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. REPLACEMENT OF LENDERS 14.2 If any Lender requests compensation under Clause 12 (INCREASED COSTS), or if any Account Party is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Clause 10 (TAXES), or if any Lender defaults in its obligation to make LC Disbursements hereunder, or if any Lender ceases to be an Approved Credit Institution, then the Account Party may, at its sole expense and effort, upon notice to such Lender and the Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Clause 26.5 (RIGHT TO SUBSTITUTE SINGLE Lender)), all its interests, rights and obligations under this Agreement to an Approved Credit Institution that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that: (a) the Account Party shall have received the prior written consent of the Agent, which consent shall not unreasonably be withheld; (b) such Lender shall have received payment of an amount equal to the outstanding amount of its LC Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding Page 28 principal and accrued interest and fees) or the relevant Account Party (in the case of all other amounts); and (c) in the case of any such assignment resulting from a claim for compensation under Clause 12 (INCREASED COSTS) or payments required to be made pursuant to Clause 10 (TAXES), such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the relevant Account Party to require such assignment and delegation cease to apply. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS. PAYMENTS BY THE ACCOUNT PARTY 15.1(a) The Account Party shall make each payment required to be made by them hereunder or under any other Finance Document (except to the extent otherwise provided therein) in Sterling on the date when due, in immediately available cleared funds, without set-off or counterclaim (and in the case of payments required pursuant to Clause 6, by 11.00 a.m. on the due date). Any amounts received after such time on any date may, in the discretion of the Agent, be deemed to have been received on the next succeeding Business Day for the purposes of calculating interest thereon. All such payments shall be made to the Agent at the account most recently notified by it, except payments pursuant to Clauses 12 (INCREASED Costs), 10 (TAXES), 24 (COSTS AND EXPENSES) and 25 (INDEMNITIES), which shall be made directly to the Persons entitled thereto. The Agent shall distribute any such payments received by it for account of any other Person to the appropriate recipient promptly following receipt thereof. (b) If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. CURRENCY 15.2 All amounts payable under this Agreement in respect of any Letter of Credit shall be payable in Sterling. APPLICATION OF INSUFFICIENT PAYMENTS 15.3 If at any time insufficient funds are received by and available to the Agent to pay fully all Demand Amounts, interest, fees and expenses then due hereunder, such funds shall be applied: (a) FIRST, in or towards payment pro rata of any unpaid fees, costs, expenses, indemnity payments and other amounts due to the Agent and the Security Trustee under the Finance Documents; (b) SECONDLY, in or towards payment pro rata of any unpaid costs and expenses of the Lenders under the Finance Documents; (c) THIRDLY, in or towards payment pro rata of any outstanding fees (other than Letter of Credit Fees) payable to the Lenders under the Finance Documents; Page 29 (d) FOURTHLY, in or towards payment pro rata of all accrued Letter of Credit Fees due to Issuing Lenders but unsatisfied under this Agreement; (e) FIFTHLY, in or towards payment pro rata of any interest on Demand Amounts; (f) SIXTHLY, in or towards payment pro rata of Demand Amounts; (g) SEVENTHLY, in or towards payment pro rata of any principal (other than a Demand Amount) due but unsatisfied under this Agreement (including, for the avoidance of doubt, any cash cover to be provided under a Letter of Credit); and (h) EIGHTHLY, in or towards payment pro rata of any other sum due but unsatisfied under this Agreement. PRO RATA TREATMENT 15.4 Except to the extent otherwise provided herein: (a) each reimbursement of LC Disbursements shall be made to the Lenders, each payment of fees under Clause 9 (FEES) shall be made for account of the Lenders, and each termination or reduction of the Commitments under Clause 8 (TERMINATION AND REDUCTION OF THE COMMITMENTS) shall be applied to the respective Commitments of the Lenders, pro rata according to their respective Commitments; and (b) each payment of interest shall be made for account of the Lenders pro rata in accordance with the amounts of interest then due and payable to the respective Lenders. SHARING OF PAYMENTS BY LENDERS 15.5 If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any LC Exposures resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its LC Exposures and accrued interest thereon then due than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the LC Exposures of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders rateably in accordance with the aggregate amount of LC Exposures; provided that: (a) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and (b) the provisions of this Clause shall not be construed to apply to any payment made by any Obligor pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in LC Disbursements to any assignee or participant, other than to the Account Party or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). Each Obligor consents to the foregoing and agrees, to the extent it may effectively do so under applicable Law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Account Party rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Account Page 30 Party in the amount of such participation and the Obligors authorise the Lenders to exchange Transfer Certificates and any other documentation to give effect to those purchases of participations. PRESUMPTIONS OF PAYMENT 15.6 Unless the Agent shall have received notice from any party prior to the date on which any payment is due to the Agent hereunder that the payor will not make such payment, the Agent may assume that the payor has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the relevant payee the amount due. In such event, if the payor has not in fact made such payment, then each of the payees severally agrees to repay to the Agent forthwith on demand the amount so distributed to that payee with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Agent, at the Agent's cost of funds from such sources as the Agent may reasonably select. CERTAIN DEDUCTIONS BY THE AGENT 15.7 If any Lender shall fail to make any payment required to be made by it pursuant to Clause 15.5 (SHARING OF PAYMENTS BY LENDERS), then the Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Agent for account of such Lender to satisfy such Lender's obligations under such Clauses until all such unsatisfied obligations are fully paid. GUARANTEE AND INDEMNITY GUARANTEE AND INDEMNITY 16.1 The Guarantors, jointly and severally, irrevocably and unconditionally: (a) guarantee to each Finance Party the due and punctual payment from time to time on demand any and every sum or sums of money which the Account Party is at any time liable to pay to any Finance Party under or pursuant to the Finance Documents and which has become due and payable but has not been paid at the time such demand is made (the GUARANTEED OBLIGATIONS); and (b) agree as a primary obligation to indemnify each Finance Party from time to time on demand from and against any loss incurred by any Finance Party as a result of any of the obligations of the Account Party under or pursuant to the Finance Documents being or becoming void, voidable, unenforceable or ineffective as against the Account Party for any reason whatsoever, whether or not known to any Finance Party or any other person, the amount of such loss being the amount which the person or persons suffering it would otherwise have been entitled to recover from the Account Party. ADDITIONAL SECURITY 16.2 The obligations of each Guarantor herein contained shall be in addition to and independent of every other security which any Finance Party may at any time hold in respect of any of the Account Party's obligations under the Finance Documents. Page 31 CONTINUING OBLIGATIONS 16.3 The obligations of each Guarantor herein contained shall constitute and be continuing obligations notwithstanding any settlement of account or other matter or thing whatsoever and shall not be considered satisfied by any intermediate payment or satisfaction of all or any of the obligations of the Account Party under the Finance Documents and shall continue in full force and effect until final payment in full of all amounts owing by the Account Party under this Agreement and total satisfaction of all the Account Party's actual and contingent obligations under the Finance Documents. OBLIGATIONS NOT DISCHARGED 16.4 Neither the obligations of the Guarantors herein contained nor the rights, powers and remedies conferred in respect of the Guarantors upon any Finance Party by the Finance Documents or by Law shall be discharged, impaired or otherwise affected by: (a) the winding-up, dissolution, administration or re-organisation of the Account Party or any other person or any change in its status, function, control or ownership; (b) any of the obligations of the Account Party or any other person under the Finance Documents or under any other security taken in respect of any of its obligations under the Finance Documents being or becoming illegal, invalid, unenforceable or ineffective in any respect; (c) time or other indulgence being granted or agreed to be granted to any Obligor in respect of its obligations under the Finance Documents or under any such other security; (d) any amendment to, or any variation, waiver or release of, any obligation of any Obligor under the Finance Documents or under any such other security; (e) any failure to take, or fully to take, any security contemplated hereby or otherwise agreed to be taken in respect of the Obligors' obligations under the Finance Documents; (f) any failure to realise or fully to realise the value of, or any release, discharge, exchange or substitution of, any security taken in respect of the Obligors' obligations under the Finance Documents; or (g) any other act, event or omission which, but for this Clause 16.4, might operate to discharge, impair or otherwise affect any of the obligations of any Guarantor herein contained or any of the rights, powers or remedies conferred upon any of the Finance Parties by the Finance Documents or by Law. SETTLEMENT CONDITIONAL 16.5 Any settlement or discharge between any Obligor and any of the Finance Parties shall be conditional upon no security or payment to any Finance Party by the Account Party or any other person on behalf of the Account Party being avoided or reduced by virtue of any Laws relating to bankruptcy, insolvency, liquidation or similar Laws of general application and, if any such security or payment is so avoided or reduced, each Finance Party shall be entitled to recover the value or amount of such security or payment from the Account Party subsequently as if such settlement or discharge had not occurred. Page 32 EXERCISE OF RIGHTS 16.6 No Finance Party shall be obliged before exercising any of the rights, powers or remedies conferred upon them in respect of any Guarantor by the Finance Documents or by Law to: (a) make any demand of the Account Party or any other Obligor; (b) take any action or obtain judgment in any court against the Account Party or any other Obligor; (c) make or file any claim or proof in a winding-up or dissolution of the Account Party or any other Obligor; or (d) enforce or seek to enforce any other security taken in respect of any of the obligations of the Account Party or any other Obligor under the Finance Documents. DEFERRAL OF GUARANTOR'S RIGHTS 16.7 Each Guarantor agrees that, so long as any amounts are or may be owed by the Account Party under the Finance Documents or the Account Party is under any actual or contingent obligations under the Finance Documents, it shall not exercise any rights which it may at any time have by reason of performance by it of its obligations under the Finance Documents: (a) to be indemnified by the Account Party; and/or (b) to claim any contribution from any other Guarantor of the Account Party's obligations under the Finance Documents; and/or (c) to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Finance Parties under the Finance Documents or of any other security taken pursuant to, or in connection with, this Agreement by all or any of the Finance Documents. RIGHTS OF CONTRIBUTION 16.8 The Guarantors (other than the Account Party) hereby agree, as between themselves, that if any such Guarantor shall become an Excess Funding Guarantor (as defined below) by reason of the payment by such Guarantor of any Guaranteed Obligations, each other Guarantor (other than the Account Party) shall, on demand of such Excess Funding Guarantor (but subject to the next sentence), pay to such Excess Funding Guarantor an amount equal to such Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, debts and liabilities of such Excess Funding Guarantor) of the Excess Payment (as defined below) in respect of such Guaranteed Obligations. The payment obligation of a Guarantor to any Excess Funding Guarantor under this Clause shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Clause 16 and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes of this Clause, (i) EXCESS FUNDING GUARANTOR means, in respect of any Guaranteed Obligations, a Guarantor that has paid an amount in excess of its Pro Rata Share of such Guaranteed Obligations, (ii) EXCESS PAYMENT means, in respect of any Guaranteed Page 33 Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guaranteed Obligations and (iii) PRO RATA SHARE means, for any Guarantor, the ratio (expressed as a percentage) of (x) the amount by which the aggregate present fair saleable value of all properties of such Guarantor (excluding any shares of stock of any other Guarantor) exceeds the amount of all the debts and liabilities of such Guarantor (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder and any obligations of any other Guarantor that have been Guaranteed by such Guarantor) to (y) the amount by which the aggregate fair saleable value of all properties of all of the Guarantors (other than the Account Party) exceeds the amount of all the debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of the Guarantors under this Clause 16) of all of the Guarantors (other than the Account Party), determined (A) with respect to any Guarantor that is a party hereto on the date hereof, as of the date hereof, and (B) with respect to any other Guarantor, as of the date such Guarantor becomes a Guarantor hereunder. GENERAL LIMITATION ON GUARANTEE OBLIGATIONS 16.9 In any action or proceeding involving any state corporate Law, or any state or Federal bankruptcy, insolvency, reorganisation or other Law in any other jurisdiction affecting the rights of creditors generally, if the obligations of any Guarantor under Clause 16.1 (GUARANTEE AND INDEMNITY) would otherwise, taking into account the provisions of Clause 16.8, be held or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under Clause 16.1 (GUARANTEE AND INDEMNITY), then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by such Guarantor, any Lender, the Agent or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of other creditors as determined in such action or proceeding. REPRESENTATIONS AND WARRANTIES 17.1 Each Obligor represents and warrants to the Lenders on the date of this Agreement, the Closing Date and 1 December of each year unless no extension is to occur on December 31 of such year (with reference to the facts and circumstances subsisting on each such date) as follows. ORGANISATION; POWERS 17.2 It and each of its Subsidiaries is duly organised, validly existing and in good standing under the Laws of the jurisdiction of its organisation, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. AUTHORISATION: ENFORCEABILITY 17.3 The Transactions are within such Obligor's corporate powers and have been duly authorised by all necessary corporate and, if required, by all necessary shareholder action. Each Finance Document to which such Obligor is party has been duly executed and delivered by such Obligor and constitutes a legal, valid and binding obligation of such Obligor, enforceable against such Obligor in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganisation, moratorium or similar Laws of general applicability affecting the enforcement of creditors' rights and (b) the application of Page 34 general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). GOVERNMENTAL APPROVALS; NO CONFLICTS 17.4 The Transactions (a) do not require any consent or approval of (including any exchange control approval), registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable Law or regulation or the charter, by-laws or other organisational documents of such Obligor or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any material indenture, agreement or other instrument binding upon such Obligor or any of its Subsidiaries or assets, or give rise to a right thereunder to require any payment to be made by any such Person, and (d) will not result in the creation or imposition of any Lien on any asset of such Obligor or any of its Subsidiaries. FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE 17.5(a) FINANCIAL CONDITION. The Account Party has heretofore furnished to the Lenders (i) its consolidated balance sheet and statements of income, shareholders' equity and cash flows as of and for the fiscal years ended December 31, 1999 and December 31, 2000, reported on by PricewaterhouseCoopers LLP, independent public accountants (as provided in the Account Party's Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2000); (ii) its consolidated balance sheet and statements of income, shareholders' equity and cash flows as of and for the fiscal quarter ended September 30, 2001, as provided in the Account Party's Report on Form 10-Q filed with the SEC for the fiscal quarter ended September 30, 2001; and (iii) the management financial statements of XL America, XL Insurance, XL Europe, and XL Re for the quarter ended June 30, 2001. Such financial statements (and any further such statements delivered pursuant to Clause 18.1(a) and (b)) present fairly, in all material respects, the financial position and results of operations and cash flows of such Obligor and its respective consolidated Subsidiaries as of such dates and for such periods (or the dates or periods to which any such further statements relate) in accordance with GAAP or (in the case of XL Europe, XL Insurance or XL Re) SAP, subject to year-end audit adjustments and the absence of footnotes in the case of the management financial statements referred to in (iii) hereto. (b) NO MATERIAL ADVERSE CHANGE. Since December 31, 2000, there has been no material adverse change in the assets, business, financial condition or operations of such Obligor and its Subsidiaries, taken as a whole, except for losses caused by or relating to or arising out of the terrorist events of September 11, 2001 provided however that the Account Party remains in compliance with Clause 19.6 hereof. PROPERTIES 17.6(a) PROPERTY GENERALLY. Such Obligor and each of its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, subject only to Liens permitted by Clause 19.3 (LIENS) and except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilise such properties for their intended purposes. (b) INTELLECTUAL PROPERTY. Such Obligor and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by such Obligor and its Subsidiaries does Page 35 not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. LITIGATION AND ENVIRONMENTAL MATTERS 17.7(a) ACTIONS, SUITS AND PROCEEDINGS. Except as disclosed in Schedule 2 Part C or as routinely encountered in claims activity, there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority now pending against or, to the knowledge of such Obligor, threatened against or affecting such Obligor or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect or (ii) that involve the Finance Documents or the Transactions. (b) ENVIRONMENTAL MATTERS. Except as disclosed in Schedule 2 Part D and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither such Obligor nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required for its business under any Environmental Law, (ii) has incurred any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. COMPLIANCE WITH LAWS AND AGREEMENTS 17.8 Such Obligor and each of its Subsidiaries is in compliance with all Laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. INVESTMENT AND HOLDING COMPANY STATUS 17.9 Such Obligor is not (a) an INVESTMENT COMPANY as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a HOLDING COMPANY as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. TAXES 17.10 Such Obligor and each of its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which such Person has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. ERISA 17.11 No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most Page 36 recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan by an amount that could reasonably be expected to result in a Material Adverse Effect. Except as could not reasonably be expected to result in a Material Adverse Effect, (i) all contributions required to be made by any Obligor or any of their Subsidiaries with respect to a Non-U.S. Benefit Plan have been timely made, (ii) each Non-U.S. Benefit Plan has been maintained in compliance with its terms and with the requirements of any and all applicable Laws and has been maintained, where required, in good standing with the applicable Governmental Authority and (iii) neither any Obligor nor any of their Subsidiaries has incurred any obligation in connection with the termination or withdrawal from any Non-U.S. Benefit Plan. DISCLOSURE 17.12 The reports, financial statements, certificates or other information furnished by such Obligor to the Lenders in connection with the negotiation of this Agreement or any other Finance Document or delivered hereunder (taken as a whole) do not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, such Obligor represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. USE OF CREDIT 17.13 Neither such Obligor nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no Letter of Credit will be used in connection with buying or carrying any Margin Stock. SUBSIDIARIES 17.14 Set forth in Schedule 3 is a complete and correct list of all of the Subsidiaries of the Account Party as of 30 September 2001, together with, for each such Subsidiary, (i) the jurisdiction of organisation of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and (iii) the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Schedule 3, (x) each of the Account Party and its Subsidiaries owns, free and clear of Liens, and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Schedule 5, (y) all of the issued and outstanding capital stock of each such Person organised as a corporation is validly issued, fully paid and nonassessable and (z) except as disclosed in filings of the Account Party with the SEC prior to the date hereof, there are no outstanding Equity Rights with respect to any Obligor. WITHHOLDING TAXES 17.15 Based upon information with respect to each Lender provided by each Lender to the Agent, as of the date hereof, the payment of the LC Disbursements and interest thereon, the fees under Clause 9 (FEES) and all other amounts payable hereunder will not be subject, by withholding or deduction, to any Taxes imposed by any Obligor Jurisdiction. Page 37 STAMP TAXES 17.16 To ensure the legality, validity, enforceability or admissibility in evidence of the Finance Documents, it is not necessary that the Finance Documents or any other document be filed or recorded with any Governmental Authority or that any stamp or similar tax be paid on or in respect of any of the Finance Documents, or any other document other than such filings and recordations that have already been made and such stamp or similar taxes that have already been paid. LEGAL FORM 17.17 The Finance Documents are in proper legal form under the Laws of any Obligor Jurisdiction for the admissibility thereof in the courts of such Obligor Jurisdiction. CLAIMS PARI PASSU 17.18 Under the Laws of its jurisdiction of incorporation in force at the date hereof, the claims of the Finance Parties against it under this Agreement or any other Finance Document will rank at least PARI PASSU with the claims of all its other unsecured and unsubordinated creditors save those whose claims are preferred solely by any bankruptcy, insolvency, liquidation or other similar Laws of general application. AFFIRMATIVE COVENANTS 18. Until the Commitments have expired or been terminated and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Obligors covenant and agree with the Lenders that: FINANCIAL STATEMENTS AND OTHER INFORMATION 18.1 Each Obligor will furnish to the Agent and each Lender: (a) within 135 days after the end of each fiscal year of such Obligor (but in the case of the Account Party, within 100 days after the end of each fiscal year of the Account Party), the audited consolidated balance sheet and related statements of operations, shareholders' equity and cash flows of such Obligor and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods) (it being understood that delivery to the Lenders of the Account Party's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (a) to deliver the annual financial statements of the Account Party so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (a)), all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognised national standing (without a GOING CONCERN or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such Obligor and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied; Page 38 (b) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of such Obligor, the consolidated balance sheet and related statements of operations, shareholders' equity and cash flows of such Obligor and its consolidated Subsidiaries as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of such Obligor as presenting fairly in all material respects the financial condition and results of operations of such Obligor and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that delivery to the Lenders of the Account Party's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (b) to deliver the quarterly financial statements of the Account Party so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (b)); (c) concurrently with any delivery of financial statements under Clause 18.1(a) and (b), a certificate signed on behalf of each Obligor by a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Clauses 19.3 (LIENS), 19.5 (RATIO OF TOTAL FUNDED DEBT TO TOTAL CAPITALISATION), 19.6 (CONSOLIDATED NET WORTH) and 19.7 (INDEBTEDNESS) and (iii) stating whether any change in GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP or in the application thereof has occurred since the date of the audited financial statements referred to in Clause 17.5(a) and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with any delivery of financial statements under Clause 18.1(a), a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by such Obligor or any of its respective Subsidiaries with the SEC, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any U.S. or other securities exchange, or distributed by such Obligor to its shareholders generally, as the case may be; (f) concurrently with any delivery of financial statements under Clause 18.1(a) and (b), a certificate of a Financial Officer of the Account Party, setting forth on a consolidated basis for the Account Party and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (i) the aggregate book value of assets which are subject to Liens permitted under Clause 19.3(g) (LIENS) and the aggregate book value of liabilities which are subject to Liens permitted under Clause 19.3(g) (it being understood that the reports required by paragraphs (a) and (b) of this Clause shall satisfy the requirement (i) of this Clause 18.1(f) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate Page 39 book values) and (ii) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of the Account Party; and (g) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Account Party or any of its Subsidiaries, or compliance with the terms of this Agreement, as the Agent or any Lender may reasonably request. NOTICES OF MATERIAL EVENTS 18.2 Each Obligor will furnish to the Agent and each Lender prompt written notice of the following: (a) the occurrence of any Default; and (b) any event or condition constituting, or which could reasonably be expected to have a Material Adverse Effect. Each notice delivered under this Clause shall be accompanied by a statement of a Financial Officer or other executive officer of the relevant Obligor setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken by such Obligor with respect thereto. PRESERVATION OF EXISTENCE AND FRANCHISES 18.3 Each Obligor will, and will cause each of its Subsidiaries to, maintain its corporate existence and its material rights and franchises in full force and effect in its jurisdiction of incorporation except where the failure to maintain such corporate existence and material rights and franchises would not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect; provided that the foregoing shall not prohibit any merger or consolidation permitted under Clause 19.1 (MERGERS) or 19.2 (DISPOSITIONS). Each Obligor will, and will cause each of its Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. INSURANCE 18.4 Each Obligor will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurers, insurance with respect to its properties in such amounts as is customary in the case of corporations engaged in the same or similar businesses having similar properties similarly situated. MAINTENANCE OF PROPERTIES 18.5 Each Obligor will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by and used or useful in its business and will make or cause to be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly conducted at all times except if the failure to do so would not have a Material Adverse Effect, provided, however, that the foregoing shall not impose on such Obligor or any Subsidiary of such Obligor any obligation in respect of any property leased by such Obligor or such Subsidiary Page 40 in addition to such Obligor's obligations under the applicable document creating such Obligor's or such Subsidiary's lease or tenancy. PAYMENT OF TAXES AND OTHER POTENTIAL CHARGES AND PRIORITY CLAIMS PAYMENT OF OTHER CURRENT LIABILITIES 18.6 Each Obligor will, and will cause each of its Subsidiaries to, pay or discharge: (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income; (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property (other than Liens not forbidden by Clause 19.3 (LIENS)) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Obligor in any proceeding under the Bermuda Companies Law or Bermuda Insurance Law, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Obligor or such Subsidiary; provided that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Obligor need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP or SAP, as the case may be, shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. FINANCIAL ACCOUNTING PRACTICES 18.7 Such Obligor will, and will cause each of its consolidated Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Clause 18.1 (FINANCIAL STATEMENTS AND OTHER INFORMATION) in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. COMPLIANCE WITH APPLICABLE LAWS 18.8 Each Obligor will, and will cause each of its Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; provided that such Obligor or any Subsidiary of such Obligor will not be deemed to be in violation of this Clause as a result of any failure to comply with any such Law which would not (i) result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would have a Material Adverse Effect or (ii) otherwise impair the ability of such Obligor to perform its obligations under this Agreement. Page 41 USE OF LETTERS OF CREDIT 18.9 No Letter of Credit will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X. CONTINUATION OF AND CHANGE IN BUSINESSES 18.10 Each Obligor and its Subsidiaries will continue to engage in substantially the same business or businesses it engaged in (or proposes to engage in) on the date of this Agreement and businesses related or incidental thereto. VISITATION 18.11 Each Obligor will permit such Persons as any Lender may reasonably designate to visit and inspect any of the properties of such Obligor, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Obligor at such times as such Lender may reasonably request. Each Obligor hereby authorises its financial management to discuss with any Lender the affairs of such Obligor. NEGATIVE COVENANTS 19. Until the Total Commitments have expired or terminated and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements have been reimbursed, each of the Obligors covenants and agrees with the Lenders that: MERGERS 19.1 No Obligor will merge with or into or consolidate with any other Person, except that if no Default shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto any Obligor may merge or consolidate with any other corporation, including a Subsidiary, if such Obligor shall be the surviving corporation. DISPOSITIONS 19.2 No Obligor will, nor will it permit any of its Subsidiaries to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily (any of the foregoing being referred to in this Clause as a DISPOSITION and any series of related Dispositions constituting but a single Disposition), any of its properties or assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper or general intangibles with or without recourse), except: (a) Dispositions in the ordinary course of business involving current assets or other assets classified on such Obligor's balance sheet as available for sale; (b) sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, provided that any such sales, conveyances or transfers shall not individually, or in the aggregate for the Obligor and their respective Subsidiaries, exceed $500,000,000 in any calendar year; Page 42 (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Obligor or its Subsidiaries; (d) Dispositions between or among the Obligors and their wholly owned Subsidiaries; or (e) Dispositions with Affiliates in accordance with Clause 19.4(c) (TRANSACTIONS WITH AFFILIATES). LIENS 19.3 No Obligor will, nor will it permit any of its Subsidiaries to, create, incur, assume or permit to exist any Lien on any property or assets, tangible or intangible, now owned or hereafter acquired by it, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, provided that the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Part B of Schedule 2; (b) Liens arising from taxes, assessments, charges, levies or claims described in Clause 18.6 (PAYMENT OF TAXES AND OTHER POTENTIAL CHARGES AND PRIORITY CLAIMS, PAYMENTS OF OTHER CURRENT LIABILITIES) that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of Clause 18.6; (c) Liens on property securing all or part of the purchase price thereof to such Obligor and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Obligor (and extension, renewal and replacement Liens upon the same property); provided (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Obligor, as applicable, shall not exceed 100% of the lesser of the fair market value of such property at such time or the actual purchase price of such property; (d) zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other minor Liens that do not in the aggregate materially detract from the value of a property or asset to, or materially impair its use in the business of, such Obligor or any such Subsidiary; (e) Liens securing Indebtedness permitted by Clause 19.7(b) (INDEBTEDNESS) covering assets whose market value is not materially greater than the amount of the Indebtedness secured thereby plus a commercially reasonable margin; (f) Liens on cash and securities of an Obligor or its Subsidiaries incurred as part of the management of its investment portfolio in accordance with the Account Party's Statement of Investment Policy Objectives and Guidelines as in effect on the date hereof or as it may be changed from time to time by a resolution duly adopted by the board of directors of the Account Party (or any committee thereof); (g) Liens on (i) assets received, and on actual or imputed investment income on such assets received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Obligor's or any of their Subsidiary's business as an insurance or reinsurance company (including guaranteed investment contracts) or corporate member of Lloyd's or as a provider of financial or investment Page 43 services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities or (ii) any other assets subject to any trust or other account arising out of or as a result of contractual, regulatory or any other requirements; provided that in no case shall any such Lien secure Indebtedness and any Lien which secures Indebtedness shall not be permitted under this Clause 19.3(g); (h) statutory and common law Liens of materialmen, mechanics, carriers, warehousemen and landlords and other similar Liens arising in the ordinary course of business; and (i) Liens existing on property of a Person immediately prior to its being consolidated with or merged into any Obligor or any of their Subsidiaries or its becoming a Subsidiary, and Liens existing on any property acquired by any Obligor or any of their Subsidiaries at the time such property is so acquired (whether or not the Indebtedness secured thereby shall have been assumed) (and extension, renewal and replacement Liens upon the same property, provided that the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing), provided that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Subsidiary or such acquisition of property and (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such acquired property. TRANSACTIONS WITH AFFILIATES 19.4 No Obligor will, nor will it permit any of its Subsidiaries to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Obligor, or directly or indirectly agree to do any of the foregoing, except: (a) transactions involving guarantees or co-obligors with respect to any Indebtedness described in Part A of Schedule 2; (b) transactions between any Obligor and its wholly-owned Subsidiaries; and (c) transactions with Affiliates in good faith in the ordinary course of such Obligor's business consistent with past practice and on terms no less favorable to such Obligor or any Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person except if any such transaction would not have a Material Adverse Effect. RATIO OF TOTAL FUNDED DEBT TO TOTAL CAPITALISATION 19.5 The Account Party will not permit its ratio of (a) Total Funded Debt to (b) the sum of Total Funded Debt plus Consolidated Net Worth to be greater than 0.35:1.00 at any time. CONSOLIDATED NET WORTH 19.6 The Account Party will not permit its Consolidated Net Worth to be less than the sum of (a) $4,250,000,000 plus (b) 25% of net income (if positive) for each fiscal quarter of the Account Party commencing with the fiscal quarter ending September 30, 2002. Page 44 INDEBTEDNESS 19.7 No Obligor will, nor will it permit any of its Subsidiaries to, at any time create, incur, assume or permit to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness created hereunder and under any other Finance Document; (b) secured Indebtedness (including secured reimbursement obligations with respect to letters of credit) of any Obligor or any Subsidiary in an aggregate principal amount (for all Obligors and their respective Subsidiaries) not exceeding $300,000,000 at any time outstanding; (c) other unsecured Indebtedness, so long as upon the incurrence thereof no Default would occur or exist; (d) Indebtedness consisting of accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Obligor or any Subsidiary; (e) Indebtedness incurred in transactions described in Clause 19.3(f); and (f) Indebtedness existing on the date hereof and described in Part A of Schedule 2 and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof. RATINGS DOWNGRADE 19.8 If at any time one of the following conditions is not satisfied: (i) the Account Party has a financial strength rating of at least "A" from A.M. Best & Co. (or its successor); and (ii) XL Insurance has a financial strength rating of at least "A" from Standard & Poor's Rating Services (or its successor); then the Agent may (and if so instructed by the Majority Lenders shall) require the Account Party within 5 Business Days of the failure to satisfy either condition, either: (a) to provide cash cover in an amount equal to the aggregate LC Exposures for the time being; or (b) to deposit BIS Qualifying Assets with a custodian acceptable to the Agent, and enter into custodian and other relevant documentation, together with documentation required by the Security Trustee to give the Security Trustee (for the benefit of itself and the other Finance Parties) an effective and perfected security interest in respect of those BIS Qualifying Assets, in an aggregate amount equal to 105% of the aggregate LC Exposures for the time being. Notwithstanding any of the foregoing provisions of this Clause 19.8, if at any time subsequent to compliance by the Account Party with (a) or (b) above, both of the conditions in (i) and (ii) above are satisfied, the Security Trustee will instruct a bank holding any cash cover or otherwise take all necessary actions to release and return any cash cover or BIS Qualifying Page 45 Assets to the Account Party and the Letter of Credit Fee shall be determined by reference to Clause 9.3. PRIVATE ACT 19.9 No Obligor will become subject to a Private Act other than the X.L. Insurance Company, Ltd. Act, 1989. EVENTS OF DEFAULT 20.1 If any of the following events (EVENTS OF DEFAULT) shall occur: (a) FAILURE TO PAY: (i) any Obligor shall fail to pay any Demand Amount when and as the same shall become due and payable; or (ii) any Obligor shall fail to pay any interest or any fee payable under this Agreement or any other Finance Document or any other amount (other than an amount referred to in Clause 20.1(a)(i)) payable under this Agreement or any other Finance Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of 3 or more days; (b) MISREPRESENTATION: any representation or warranty made or deemed made by any Obligor in or in connection with this Agreement or any other Finance Document or any amendment or modification hereof, or in any certificate or financial statement furnished pursuant to the provisions hereof, shall prove to have been false or misleading in any material respect as of the time made (or deemed made) or furnished; (c) BREACH OF OBLIGATIONS: (i) any Obligor shall fail to observe or perform any covenant, condition or agreement contained in Clause 19 (NEGATIVE COVENANTS); and (ii) any Obligor shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Finance Document (other than those specified in Clause 20.1(a) or (c)(i)) and such failure shall continue unremedied for a period of 20 or more days after notice thereof from the Agent (given at the request of any Lender) to such Obligor; (d) CROSS DEFAULT: any Obligor or any of its Subsidiaries shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $50,000,000 or more, or any payment of any principal amount of $50,000,000 or more under Hedging Agreements, in each case beyond any period of grace provided with respect thereto, or (ii) in the performance of any other agreement, term or condition contained in any such agreement (other than Hedging Agreements) under which any such obligation in principal amount of $50,000,000 or more is created, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement, provided that this Clause 20.1(d) shall not apply to secured Page 46 Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (e) WINDING-UP: a decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Obligor a bankrupt or insolvent, or approving as properly filed a petition seeking reorganisation of such Obligor under the Bermuda Companies Law or the Cayman Islands Companies Law (2000 Revision) or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of 60 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Obligor or a substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 60 days; (f) INSOLVENCY AND RESCHEDULING: any Obligor shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganisation under the Bermuda Companies Law or the Cayman Islands Companies Law (2000 Revision) or any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate or other action shall be taken by such Obligor in furtherance of any of the aforesaid purposes; (g) MATERIAL UNSATISFIED JUDGMENT OR ORDER: one or more judgments for the payment of money in an aggregate amount in excess of $100,000,000 shall be rendered against any Obligor or any of its Subsidiaries or any combination thereof and the same shall not have been vacated, discharged, stayed (whether by appeal or otherwise) or bonded pending appeal within 45 days from the entry thereof; (h) ERISA EVENT: an ERISA Event (or similar event with respect to any Non-U.S. Benefit Plan) shall have occurred that, in the opinion of the Majority Lenders, when taken together with all other ERISA Events and such similar events that have occurred, could reasonably be expected to result in liability of the Obligors and their Subsidiaries in an aggregate amount exceeding $100,000,000; (i) CHANGE OF CONTROL: a Change in Control shall occur; (j) CHANGE IN OWNERSHIP: the Account Party shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of capital stock of XL Insurance, XL Re, XL America or XL Europe (except, in the case of any company organised under the laws of Bermuda, for a nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law); or (k) ILLEGALITY: at any time it is or becomes unlawful for any Obligor to perform or comply with any or all of its obligations hereunder or any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of the Finance Documents is invalid or unenforceable in any material respect, or any Obligor shall so assert in writing; (l) DEFAULT UNDER GUARANTEE: the guarantee contained in Clause 16 (GUARANTEE AND INDEMNITY) shall terminate or cease, in whole or material part, to be a legally valid Page 47 and binding obligation of each Guarantor or any Guarantor or any Person acting for or on behalf of any of such parties shall contest such validity or binding nature of such guarantee itself or the Transactions, or any other Person shall assert any of the foregoing; then, and in every such event (other than an event with respect to any Obligor described in Clause 20.1.(e) or 20.1(f)), and at any time thereafter during the continuance of such event, the Agent may, and at the request of the Majority Lenders shall, by notice to the Account Party, take any of the following actions, at the same or different times: (i) terminate the Total Commitments, and thereupon the Total Commitments shall terminate immediately; (ii) require the Account Party forthwith to provide cash cover in respect of any LC Exposure pursuant to a Letter of Credit; and (iii) declare all fees and other obligations of the Account Party accrued hereunder to be due and payable in whole (or in part, in which case any fees and other obligations not so declared to be due and payable may thereafter be declared to be due and payable) and thereupon such fees and other obligations, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Account Party; and in case of any event with respect to any Obligor described in Clause 20.1(e) or 20.1(f): (x) the Commitments shall automatically terminate; and (y) the Account Party shall automatically be required to provide cash cover in respect of any LC Exposure pursuant to a Letter of Credit; and (z) all fees and other obligations of the Account Party accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Account Party. THE AGENT, THE ARRANGER AND THE LENDERS APPOINTMENT OF THE AGENT 21.1 The Arranger and each of the Lenders hereby appoints the Agent to act as its agent in connection herewith and authorises the Agent to exercise such rights, powers, authorities and discretions as are specifically delegated to the Agent by the terms hereof together with all such rights, powers, authorities and discretions as are reasonably incidental thereto. AGENT'S DISCRETIONS 21.2 The Agent may: (a) assume, unless it has, in its capacity as agent for the Lenders, received notice to the contrary from any other party hereto, that (a) any representation made or deemed to be made by an Obligor in connection with the Finance Documents is true, (b) no Event of Default or Potential Event of Default has occurred, (c) no Obligor is in breach of or default under its obligations under the Finance Documents and (d) any Page 48 right, power, authority or discretion vested therein upon the Majority Lenders, the Lenders or any other person or group of persons has not been exercised; (b) assume that the Facility Office of each Lender is that notified to it by such Lender in writing prior to the date hereof (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) until it has received from such Lender a notice designating some other office of such Lender to replace its Facility Office and act upon any such notice until the same is superseded by a further such notice; (c) engage and pay for the advice or services of any lawyers, accountants, surveyors or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained; (d) rely as to any matters of fact which might reasonably be expected to be within the knowledge of an Obligor upon a certificate signed by or on behalf of such Obligor; (e) rely upon any communication or document believed by it to be genuine; (f) refrain from exercising any right, power or discretion vested in it as agent hereunder unless and until instructed by the Majority Lenders as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised; (g) refrain from acting in accordance with any instructions of the Majority Lenders to begin any legal action or proceeding arising out of or in connection with the Finance Documents until it shall have received such security as it may require (whether by way of payment in advance or otherwise) for all costs, claims, losses, expenses (including legal fees) and liabilities together with any VAT thereon which it will or may expend or incur in complying with such instructions; and (h) assume (unless it has specific notice to the contrary) that any notice or request made by the Account Party is made on behalf of the Obligors. AGENT'S OBLIGATIONS 21.3 The Agent shall: (a) promptly inform each Lender of the contents of any notice or document received by it in its capacity as Agent from an Obligor under the Finance Documents and shall promptly deliver to each Lender a copy of each Letter of Credit delivered to Lloyd's pursuant to Clause 3.3 (COMPLETION OF LETTERS OF CREDIT); (b) promptly notify each Lender of the occurrence of any Event of Default or any default by an Obligor in the due performance of or compliance with its obligations under the Finance Documents of which the Agent has notice from any other party hereto; (c) save as otherwise provided herein, act as agent under the Finance Documents in accordance with any instructions given to it by an Majority Lenders, which instructions shall be binding on the Arranger and the Lenders; and (d) if so instructed by the Majority Lenders, refrain from exercising any right, power or discretion vested in it as agent under the Finance Documents. Page 49 The Agent's duties under the Finance Documents are solely mechanical and administrative in nature. EXCLUDED OBLIGATIONS 21.4 Notwithstanding anything to the contrary expressed or implied herein, neither the Agent nor the Arranger shall: (a) be bound to enquire as to (i) whether or not any representation made or deemed to be made by an Obligor in connection with the Finance Documents is true, (ii) the occurrence of any Default, (iii) the performance by an Obligor of its obligations under the Finance Documents or (iv) any breach of or default by an Obligor of or under its obligations under the Finance Documents; (b) be bound to account to any Lender for any sum or the profit element of any sum received by it for its own account; (c) be bound to disclose to any other person any information relating to any Obligor or any Related Party if (i) such person, on providing such information, expressly stated to the Agent or, as the case may be, the Arranger, that such information was confidential or (ii) such disclosure would or might in its opinion constitute a breach of any Law or be otherwise actionable at the suit of any person; (d) be under any obligations other than those for which express provision is made herein; or (e) be or be deemed to be a fiduciary for any other party hereto. INDEMNIFICATION 21.5 Each Lender shall, pro rata according to its respective Commitment, from time to time on demand by the Agent, indemnify the Agent against any and all costs, claims, losses, expenses (including legal fees) and liabilities together with any value added tax thereon (or equivalent) which the Agent may incur, otherwise than by reason of its own gross negligence or wilful misconduct, in acting in its capacity as agent hereunder. EXCLUSION OF LIABILITIES 21.6 Except in the case of gross negligence or wilful default, neither the Agent nor the Arranger accepts any responsibility: (a) for the adequacy, accuracy and/or completeness of any information supplied by the Agent or the Arranger, by an Obligor or by any other person in connection with the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; (b) for the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; or (c) for the exercise of, or the failure to exercise, any judgement, discretion or power given to any of them by or in connection with the Finance Documents or any other Page 50 agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents. Accordingly, neither the Agent nor the Arranger shall be under any liability (whether in negligence or otherwise) in respect of such matters, save in the case of gross negligence or wilful misconduct. NO ACTIONS 21.7 Each of the Lenders agree that it will not assert or seek to assert against any director, officer or employee of the Agent or the Arranger any claim it might have against any of them in respect of the matters referred to in Clause 21.6 (EXCLUSION OF LIABILITIES). BUSINESS WITH THE GROUP 21.8 The Agent and the Arranger may accept deposits from, lend money to and generally engage in any kind of banking or other business with any of the Obligors or their Subsidiaries. RESIGNATION 21.9 The Agent may resign its appointment hereunder at any time without assigning any reason therefor by giving not less than thirty days' prior notice to that effect to each of the other parties hereto, PROVIDED THAT no such resignation shall be effective until a successor for the Agent is appointed in accordance with the succeeding provisions of this Clause 21. SUCCESSOR AGENT 21.10 If the Agent gives notice of its resignation pursuant to Clause 21.9 (RESIGNATION) then any reputable and experienced Lender or other financial institution may be appointed as a successor to the Agent by the Majority Lenders (with the approval of the Account Party, not to be unreasonably withheld or delayed,) during the period of such notice (with the co-operation of the Agent) but, if no such successor is so appointed, the Agent may appoint such a successor itself. RIGHTS AND OBLIGATIONS 21.11 If a successor to the Agent is appointed under the provisions of Clause 21.10 (SUCCESSOR AGENT), then (a) the retiring Agent shall be discharged from any further obligation hereunder but shall remain entitled to the benefit of the provisions of this Clause 21 and (b) its successor and each of the other parties hereto shall have the same rights and obligations amongst themselves as they would have had if such successor had been a party hereto. OWN RESPONSIBILITY 21.12 It is understood and agreed by each Lender that at all times it has itself been, and will continue to be, solely responsible for making its own independent appraisal of and investigation into all risks arising under or in connection with this Agreement including, but not limited to: (a) the financial condition, creditworthiness, condition, affairs, status and nature of each member of the Group; Page 51 (b) the legality, validity, effectiveness, adequacy and enforceability of the Finance Documents and any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; (c) whether such Lender has recourse, and the nature and extent of that recourse, against an Obligor or any other person or any of its assets under or in connection with the Finance Documents, the Transactions or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; and (d) the adequacy, accuracy and/or completeness of any information provided by the Agent or the Arranger, an Obligor or by any other person in connection with the Finance Documents, the Transactions or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents. Accordingly, each Lender acknowledges to the Agent and the Arranger that it has not relied on and will not hereafter rely on the Agent and the Arranger or either of them in respect of any of these matters. AGENCY DIVISION SEPARATE 21.13 In acting as agent hereunder for the Lenders, the Agent shall be regarded as acting through its agency division which shall be treated as a separate entity from any other of its divisions or departments and, notwithstanding the foregoing provisions of this Clause 21, any information received by some other division or department of the Agent may be treated as confidential and shall not be regarded as having been given to the Agent's agency division. DECLARATION OF AGENT AS SECURITY TRUSTEE 21.14 The Agent hereby declares that it shall hold: (a) all rights, titles and interests that may hereafter be mortgaged, charged, assigned or otherwise secured in favour of the Agent by or pursuant to the Finance Documents; (b) the benefit of all representations, covenants, guarantees, indemnities and other contractual provisions given in favour of the Agent (other than any such benefits given to the Agent solely for its own benefit) by or pursuant to the Finance Documents (other than this Agreement); and (c) all proceeds of the security referred to in paragraph (a) above and of the enforcement of the benefits referred to in paragraph (b) above, on trust for itself and the other Finance Parties from time to time. Such declaration shall remain valid notwithstanding that the Agent may on the date hereof or at any other time be the sole Finance Party; for the avoidance of doubt, however, such declaration shall, in such case, be deemed repeated on each date on which the Agent ceases to be the sole Finance Party. Each of the parties hereto agrees that the obligations, rights and benefits vested or to be vested in the Agent as trustee as aforesaid by the Finance Documents or any document entered into pursuant thereto shall (as well before as after enforcement) be performed and (as the case may be) exercised by the Agent in accordance with the provisions of this Clause 21. Page 52 POWERS AND DISCRETIONS 21.15 The Agent shall have all the powers and discretions conferred upon trustees by the Trustee Act 1925 (to the extent not inconsistent herewith) and by way of supplement it is expressly declared as follows: (a) the Agent shall be at liberty to place any of the Finance Documents and any other instruments, documents or deeds delivered to it pursuant thereto or in connection therewith for the time being in its possession in any safe deposit, safe or receptacle selected by the Agent or with any Lender, any company whose business includes undertaking the safe custody of documents or any firm of lawyers of good repute; (b) the Agent may, whenever it thinks fit, delegate by power of attorney or otherwise to any person or persons or fluctuating body of persons all or any of the rights, trusts, powers, authorities and discretions vested in it by any of the Finance Documents and such delegation may be made upon such terms and subject to such conditions (including the power to sub-delegate) and subject to such regulations as the Agent may think fit and the Agent shall not be bound to supervise, or be in any way responsible for any loss incurred by reason of any misconduct or default on the part of, any such delegate (or sub-delegate); (c) notwithstanding anything else herein contained, the Agent may refrain from doing anything which would or might in its opinion be contrary to any Law of any jurisdiction or any directive or regulation of any agency of any state or which would or might otherwise render it liable to any person and may do anything which is, in its opinion, necessary to comply with any such Law, directive or regulation; (d) save in the case of gross negligence or wilful misconduct, the Agent and every attorney, agent, delegate, sub-delegate and any other person appointed by any of them under any of the Finance Documents may indemnify itself or himself out of the security held by the Agent against all liabilities, costs, fees, charges, losses and expenses incurred by any of them in relation to or arising out of the taking or holding of any of the security constituted by, or any of the benefits provided by, any of the Finance Documents, in the exercise or purported exercise of the rights, trusts, powers and discretions vested in any of them or in respect of any other matter or thing done or omitted to be done in any way relating to any of the Finance Documents or pursuant to any Law or regulation; and (e) without prejudice to the provisions of any of the Finance Documents, the Agent shall not be under any obligation to insure any property or to require any other person to maintain any such insurance and shall not be responsible for any loss which may be suffered by any person as a result of the lack of or inadequacy or insufficiency of any such insurance. LIABILITY 21.16 The Agent shall not be liable for any failure: (a) to require the deposit with it of any deed or document certifying, representing or constituting the title of the Account Party to any of the property mortgaged, charged, assigned or otherwise encumbered by or pursuant to any of the Finance Documents; Page 53 (b) to obtain any licence, consent or other authority for the execution, delivery, validity, legality, adequacy, performance, enforceability or admissibility in evidence of any of the Finance Documents; (c) to register or notify any deed or document mentioned at paragraph (a) above in accordance with the provisions of any of the documents of title of the Account Party; (d) to effect or procure registration of or otherwise protect any of the security created by any of the Finance Documents by registering the same under any applicable registration Laws in any territory or otherwise by registering any notice, caution or other entry prescribed by or pursuant to the provisions of relevant Laws; (e) to take or to require the Account Party to take any steps to render the security created or purported to be created by or pursuant to any of the Finance Documents effective or to secure the creation of any ancillary charge under the Laws of any jurisdiction; or (f) to require any further assurances in relation to any of the Finance Documents. TITLE TO SECURITY ETC. 21.17 The Agent may accept without enquiry, requisition or objection such right and title as the Account Party may have to the property belonging (or purportedly belonging) to it (or any part thereof) which is the subject matter of any of the Finance Documents and shall not be bound or concerned to investigate or make any enquiry into the right or title of the Account Party to such property (or any part thereof) or, without prejudice to the foregoing, to require the Account Party to remedy any defect in the Account Party's right or title as aforesaid. NEW SECURITY TRUSTEE 21.18 The Agent may at any time appoint any person (whether or not a trust corporation) to act either as a separate trustee or as a co-trustee jointly with the Agent: (a) if the Agent considers such appointment to be in the interests of the Lenders; or (b) for the purposes of conforming to any legal requirements, restrictions or conditions which the Agent deems relevant for the purposes of the Finance Documents and the Agent shall give prior notice to the Account Party and the Lenders of any such appointment. Any person so appointed shall (subject to the provisions of the Finance Documents) have such powers, authorities and discretions and such duties and obligations as shall be conferred or imposed or such person by the instrument of appointment and shall have the same benefits under this Clause 21 as the Agent. The Agent shall have power in like manner to remove any person so appointed. Such reasonable remuneration as the Agent may pay to any person so appointed, and any costs, charges and expenses incurred by such person in performing its functions pursuant to such appointment, shall for the purposes hereof be treated as costs, charges and expenses incurred by the Agent under the Finance Documents. Page 54 PERPETUITY PERIOD 21.19 The perpetuity period under the rule against perpetuities if applicable to the trusts constituted in this Clause 21 and the other Finance Documents shall be the period of eighty years from the date of this Agreement and, subject thereto, if the Agent determines that all of the obligations of the Account Party under any of the Finance Documents have been fully and unconditionally discharged, such trusts shall be wound up. LENDER REPRESENTATIONS 21.20 Each Lender represents to the Agent on the date of issue of each Letter of Credit that: (a) the execution and delivery of each Letter of Credit by the Agent on the Lender's behalf has been duly authorised by all necessary action on the part of the Lender; (b) the obligations of the Lender under each Letter of Credit constitute its legal, valid and binding obligations; and (c) it has not participated in such Letter of Credit on the basis that the collateral securing the repayment of any amounts payable by it under the Letter of Credit comprises directly or indirectly a security interest over a principal private residence. LETTERS OF CREDIT 21.21 Each Lender shall, (a) pro rata according to its respective Commitment, indemnify the Agent against any and all liabilities, costs and expenses which the Agent may incur otherwise than by reason of its own gross negligence or wilful misconduct (in its capacity as Agent) as a result of the execution and delivery of any Letter of Credit and any documents executed and delivered by the Agent in connection therewith; and (b) inform the Agent promptly if at any time the collateral securing the repayment of any amounts payable under any Letter of Credit comprises directly or indirectly a security interest over a principal private residence. NOTICES 22. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to any Obligor, to: XL Capital Ltd XL House One Bermudiana Road Hamilton HM 11 Bermuda, Attention: Roddy Gray (Telecopy No. (441) 2966399); with a copy to Paul S. Giordano Esq., General Counsel, at the same address and telecopy number; Page 55 (b) if to the Agent: P O Box 242 336 The Strand London WC2R 1HB Tel: 44 207 500 4194 Fax: 44 207 500 4482/4484 Attention: Loans Agency (c) if to a Lender, to it at its address (or telecopy number) on the signature pages of this Agreement, or such other address as it shall notify to the Agents and the Account Party. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto (or, in the case of any such change by a Lender, by notice to the Account Party and the Agent). All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. WAIVERS AND AMENDMENTS NO DEEMED WAIVERS 23.1 No failure or delay by any Finance Party in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No waiver of any provision of this Agreement or consent to any departure by an Obligor therefrom shall in any event be effective unless the same shall be permitted by Clause 23.3 (Amendments), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Agent or any Lender may have had notice or knowledge of such Default at the time. REMEDIES CUMULATIVE 23.2 The rights and remedies of the Finance Parties hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. AMENDMENTS 23.3 Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Obligors and the Majority Lenders or by the Obligors and the Agent with the consent of the Majority Lenders; PROVIDED that no such agreement shall: (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the amount of any reimbursement obligation of the Account Party in respect of any LC Disbursement or reduce the rate of interest thereon, or Page 56 reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date for reimbursement of any LC Disbursement, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment or any Letter of Credit (other than an extension thereof pursuant to Clause 4), without the written consent of each Lender affected thereby, (iv) change Clause 15.4 (PRO RATA TREATMENT) or 15.5 (SHARING OF PAYMENTS BY LENDERS) without the consent of each Lender affected thereby, (v) release any of the Guarantors from any of their guarantee obligations under Clause 16 (GUARANTEE AND INDEMNITY) without the written consent of each Lender, (vi) release any security granted by the Account Party pursuant to Clause 19.8 (RATINGS DOWNGRADE) or 20.1 (EVENTS OF DEFAULT) without the written consent of each Lender, and (vii) change any of the provisions of this Clause or the percentage in the definition of the term MAJORITY LENDERS or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; and PROVIDED FURTHER that no such agreement shall amend, modify or otherwise affect the rights or duties of the Agent hereunder without the prior written consent of the Agent. COSTS AND EXPENSES 24.1 The Account Party shall pay: (a) all reasonable out-of-pocket expenses and charges incurred by the Agent and/or the Arranger (together with VAT or any similar tax thereon and including the reasonable fees, charges and disbursements of counsel for the Agent) in connection with the syndication of the credit facilities provided for herein, the negotiation, preparation, execution and administration of the Finance Documents (subject to the terms of the Commitment Letter) or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated); (b) all reasonable out-of-pocket expenses incurred by the Agent, the Security Trustee or any Lender, (together with VAT or any similar tax thereon and including the reasonable fees, charges and disbursements of one legal counsel for the Agent and one legal counsel for the Lenders), in connection with the preservation and/or enforcement or protection of its rights in connection with the Finance Documents, including its rights under this Clause, or in connection with Letters of Credit issued hereunder, including in connection with any workout, restructuring or negotiations in respect thereof. Page 57 STAMP DUTY 24.2 The Account Party shall pay all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any other document referred to herein. INDEMNITIES CURRENCY INDEMNITY 25.1(a) If: (i) any amount payable by the Account Party under or in connection with this Agreement is received by any Finance Party in a currency (the PAYMENT CURRENCY) other than that agreed in this Agreement (the AGREED CURRENCY) whether as a result of any judgement or order or the enforcement thereof, the liquidation of the payer or otherwise; and (ii) the amount produced by converting the Payment Currency so received into the Agreed Currency is less than the relevant amount of the Agreed Currency. then the Account Party shall, as an independent obligation, indemnify such Finance Party for the deficiency and any loss sustained as a result. Such conversion shall be made at such prevailing rate of exchange, on such date and in such market as is determined by such Finance Party (acting reasonably) as being most appropriate for the conversion. The Account Party shall in addition pay the costs of the conversion. (b) The Account Party waives any right it may have in any jurisdiction to pay any amount under this Agreement in a currency other than that in which it is expressed to be payable in this Agreement. OTHER INDEMNITIES 25.2 The Obligors shall indemnify the Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an INDEMNITEE) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of: (a) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby; (b) any Letter of Credit or the use of any thereof (including any refusal by any Lender to honour a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit); (c) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as Page 58 to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses result from or arise out of the gross negligence or wilful misconduct of such Indemnitee. REIMBURSEMENT BY LENDERS 25.3 To the extent that the Obligors fail to pay any amount required to be paid by them to the Agent under Clauses 25 (COSTS AND EXPENSES) or 25.1 (CURRENCY INDEMNITY) and 25.2 (OTHER INDEMNITIES), each Lender severally agrees to pay to the Agent such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; PROVIDED that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Agent in its capacity as such. ALTERATION TO THE PARTIES SUCCESSORS 26.1 The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby. ASSIGNMENTS AND TRANSFERS BY THE ACCOUNT PARTY 26.2 The Account Party shall not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Account Party without such consent shall be null and void). TRANSFERS BY LENDERS. 26.3(a) Any Lender (the TRANSFEROR) may at any time transfer to another Approved Credit Institution (the TRANSFEREE) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment) and under any Letter of Credit to which it is a party; PROVIDED THAT: (i) except in the case of an transfer to a Lender or a Lender Affiliate, each of the Account Party and the Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed); (ii) except in the case of an transfer to a Lender or a Lender Affiliate or a transfer of the entire remaining amount of the Transferor's Commitment, the amount of the Commitment of the Transferor subject to each such transfer (determined as of the date of the Transfer Certificate) shall not be less than (pound)3,000,000 unless each of the Account Party and the Agent otherwise consent; (iii) a transfer of obligations shall only be effective if the Transferee has confirmed to the Agent and the Account Party prior to the transfer taking effect that it undertakes to be bound by the terms of this Agreement as Lender in form and substance reasonably satisfactory to the Agent and the Account Party; and on any such transfer being made the Transferor shall be relieved of its obligations to the extent they are transferred to the Transferee; (iv) the Transferee, if it shall not be a Lender, shall deliver relevant contact, notice and account details to the Agent (with a copy to the Account Party); Page 59 PROVIDED FURTHER that any consent of the Account Party otherwise required under this paragraph shall not be required if an Event of Default under Clause 20.1(a), (e) or (f) has occurred and is continuing. Upon transfer pursuant to Clause 26.4, from and after the last to occur of (i) the effective date specified in each Transfer Certificate; and (ii) the cancellation of a Letter of Credit and the issue of a new Letter of Credit with the Transferee identified as an Issuing Lender, the Transferee thereunder shall be a party hereto and, to the extent of the lesser of the interest assigned by such Transfer Certificate and the Transferee's participation as an Issuing lender of a re-issued Letter of Credit (the TRANSFERRED INTEREST), have the rights and obligations of a Lender under this Agreement, and the Transferor thereunder shall, to the extent of the Transferred Interest, be released from its obligations under this Agreement (and, in the case of Transfer Certificate covering all of the Transferor's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Clauses 12 (INCREASED COSTS), 10 (TAXES) 24 (COSTS AND EXPENSES) and 25 (INDEMNITIES)). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Clause 26.7 (PARTICIPATIONS). Notwithstanding anything to the contrary contained herein, any Lender (a GRANTING LENDER) may grant to a special purpose vehicle (an SPV) of such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Agent and the Account Party, the option to provide to the Account Party all or any part of any LC Disbursement that such Granting Lender would otherwise be obligated to make to the Account Party pursuant to Clause 2.1, PROVIDED that (i) nothing herein shall constitute a commitment by any SPV to make any LC Disbursement, (ii) if an SPV elects not to exercise such option or otherwise fails to provide all or any part of such LC Disbursement, the Granting Lender shall be obligated to make such LC Disbursement pursuant to the terms hereof and (iii) the Account Party may bring any proceeding against either or both the Granting Lender or the SPV in order to enforce any rights of the Account Party hereunder; and (iv) the SPV shall agree to the terms of Clause 30.2 (CONFIDENTIALITY). The making of an LC Disbursement by an SPV hereunder shall utilise the Commitment of the Granting Lender to the same extent, and as if, such LC Disbursement were made by the Granting Lender. Each party hereto hereby agrees that no SPV shall be liable for any payment under this Agreement for which a Lender would otherwise be liable, for so long as, and to the extent, the related Granting Lender makes such payment. In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPV, it will not institute against, or join any other person in instituting against, such SPV any bankruptcy, reorganisation, arrangement, insolvency or liquidation proceedings or similar proceedings under the Laws of the United States or any State thereof arising out of any claim against such SPV under this Agreement. In addition, notwithstanding anything to the contrary contained in this Clause, any SPV may with notice to, but without the prior written consent of, the Account Party or the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Letter of Credit to its Granting Lender or to any financial institutions (consented to by the Account Party and the Agent) providing liquidity and/or credit support (if any) with respect to commercial paper issued by such SPV to issue such Letters of Credit and such SPV may disclose, on a confidential basis, confidential information with respect to any Account Party and its Page 60 Subsidiaries to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit liquidity enhancement to such SPV. This paragraph may not be amended without the consent of any SPV at the time holding LC Disbursements under this Agreement. (b) On each occasion a Transferor assigns, transfers or novates any of its rights and/or obligations under this Agreement, the Transferee (unless it is already a Lender or a Lender Affiliate immediately prior to the transfer) shall ensure that the Agent has notice of the same and shall, on the date the assignment, transfer and/or novation takes effect, pay to the Agent for its own account a fee of (pound)1,000. (c) Neither a Transferor nor any other Finance Party is responsible to a Transferee for: (i) the execution, genuineness, validity, enforceability or sufficiency of any Finance Documents or any other document; (ii) the collectability of amounts payable under any Finance Documents or the financial condition of or the performance of its obligations under the Finance Documents by any Obligor; or (iii) the accuracy of any statements or information (whether written or oral) made in or in connection with or supplied in connection with any Finance Documents. (d) Each Transferee confirms to the Transferor and the other Finance Parties that it: (i) has made its own independent investigation and assessment of the financial condition and affairs of each Obligor and its related entities in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the Transferor or any other Finance Party in connection with any Finance Documents; and (ii) will continue to make its own independent appraisal of the creditworthiness of each Obligor and its related entities for so long as there are any Commitments or LC Exposures under this Agreement. (e) Nothing in any Finance Document obliges a Transferor to: (i) accept a re-transfer from an Transferee of any of the rights and/or obligations assigned, transferred or novated under this clause; or (ii) support any losses incurred by the Transferee by reason of the non-performance by any Obligor of its obligations under any Finance Document or otherwise. 26.4 TRANSFER PROCEDURE: (a) A novation is effected if: (i) the Transferor and the Transferee deliver to the Agent a duly completed Transfer Certificate executed by the Transferor and the Transferee; and (ii) the Agent executes it. Page 61 (b) Each Party (other than the Transferor and the Transferee) irrevocably authorises the Agent to execute any duly completed Transfer Certificate on its behalf. (c) To the extent that they are expressed to be the subject of the novation in the Transfer Certificate: (i) the Transferor and the other Parties (the EXISTING PARTIES) will be released from their obligations to each other under the Finance Documents (the DISCHARGED OBLIGATIONS); (ii) the Transferee and the existing Parties will assume obligations towards each other under the Finance Documents which differ from the discharged obligations only insofar as they are owed to or assumed by the Transferee instead of the Transferor; (iii) the rights of the Transferor against the existing Parties under the Finance Documents and vice versa (the DISCHARGED RIGHTS) will be cancelled; and (iv) the Transferee and the existing Parties will acquire rights against each other under the Finance Documents which differ from the discharged rights only insofar as they are exercisable by or against the Transferee instead of the Transferor, all on the date specified in the proviso to Clause 26.3(a). RIGHT TO SUBSTITUTE SINGLE LENDER 26.5 If: (a) any sum payable to any Finance Party by the Account Party is required to be increased under Clause 10 (TAXES); or (b) any Lender claims indemnification from the Account Party under Clause 12.1 (INCREASED COSTS); or (c) a Lender's Available Commitment has been reduced to zero pursuant to Clause 13(b) (ILLEGALITY), the Account Party may give the Agent notice of its intention to arrange the substitution of that Lender with a new bank or financial institution. On receipt of a notice from the Account Party referred to above, the Lender shall use its best endeavours to promptly assign or transfer all of its rights and obligations under this Agreement to an Approved Credit Institution nominated by the Account Party. Such transfer will be effected in accordance with Clause 26.4 (TRANSFER PROCEDURE) and the consideration for such transfer shall be an amount equal to the sum of all amounts accrued and owing by the Account Party to the transferring Lender as calculated on the date of transfer. REFERENCE BANKS 26.6 If a Reference Bank ceases to be one of the Lenders, the Agent shall (in consultation with the Account Party) appoint another Lender or an affiliate of a Lender to replace that Reference Bank. Page 62 PARTICIPATIONS 26.7 Any Lender may sell participations to one or more Lenders or other entities (a PARTICIPANT) in all or a portion of such Lender's rights and obligations under this Agreement and the other Credit Documents (including all or a portion of its Commitment); PROVIDED that: (i) any such participation sold to a Participant which is not a Lender or a Lender Affiliate shall be made only with the consent (which in each case shall not be unreasonably withheld) of the Account Party and the Agent, unless an Event of Default under Clause 20.1(a), (e) or (f) has occurred and is continuing, in which case the consent of the Account Party shall not be required; (ii) such Lender's obligations under this Agreement and the other Finance Documents shall remain unchanged; (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iv) the Account Party, the Agent, the Security Trustee and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Finance Documents; and (v) the Participant shall agree to the terms of Clause 30.2 (CONFIDENTIALITY). Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and the other Finance Documents and to approve any amendment, modification or waiver of any provision of this Agreement or the other Finance Documents; PROVIDED that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Clause 23.3 (AMENDMENTS) that affects such Participant. Subject to Clause 26.8 (NO INCREASED COSTS), the Obligors agree that each Participant shall be entitled to the benefits of Clauses 12 (INCREASED COSTS) and 10 (TAXES) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Clause 26.3 (TRANSFERS BY LENDERS). NO INCREASED COSTS 26.8 No Participant or Transferee shall be entitled to receive any greater payment under Clause 12 (INCREASED COSTS) and 10 (TAXES) than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant or the Lender interest transferred. CERTAIN PLEDGES 26.9 Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, and this Clause shall not apply to any such pledge or assignment of a security interest; PROVIDED that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. Page 63 NO TRANSFERS TO ANY ACCOUNT PARTY OR AFFILIATES 26.10 Anything in this Clause to the contrary notwithstanding, no Lender may assign or participate any interest in any LC Exposure held by it hereunder to any Obligor or any of its Affiliates or Subsidiaries without the prior consent of each Lender. MAINTENANCE OF REGISTER BY THE AGENT 26.11 The Agent, acting for this purpose as an agent of the Account Party, shall maintain at one of its offices in London a copy of each Transfer Certificate delivered to it and a register of the names and addresses of the Lenders, and the Commitment of, and principal amount of the LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the REGISTER). The entries in the Register shall be conclusive, and the Account Party, the Agent, the Security Trustee and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by any Account Party and any Lender, at any reasonable time and from time to time upon reasonable prior notice. SET OFF RIGHT OF SET-OFF 27. If an Event of Default shall have occurred and be continuing, each Finance Party is hereby authorised at any time and from time to time, to the fullest extent permitted by Law, to set off and apply any and all deposits in any currency (general or special, time or demand, provisional or final) at any time held and other indebtedness in any currency at any time owing by such Finance Party to or for the credit or the account of any Obligor against any of and all the obligations of such Obligor now or hereafter existing under this Agreement held by such Finance Party, irrespective of whether or not such Finance Party shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Finance Party under this Clause are in addition to other rights and remedies (including other rights of set-off) which such Finance Party may have. The relevant Finance Party may effect any appropriate currency exchanges to implement such set-off. MISCELLANEOUS PROVISIONS CERTIFICATES 28.1 Any determination or notification by the Agent or any other Finance Party concerning any rate or amount under the Finance Documents shall, in the absence of manifest error, be conclusive evidence as to that matter. SURVIVAL 28.2 All covenants, agreements, representations and warranties made by the Account Party herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so Page 64 long as the Commitments have not expired or terminated. The provisions of Clauses 12 (INCREASED COSTS), 10 (TAXES), 24 (COSTS AND EXPENSES), 25 (INDEMNITIES) and 21 (AGENT) shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. COUNTERPARTS 28.3 This Agreement may be executed in counterparts (and by different parties hereto on separate counterparts), each of which shall constitute an original, but all of which when taken together shall constitute one and the same instrument. ENTIRE AGREEMENT 28.4 This Agreement and the other Finance Documents constitute the entire contract between the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. SEVERABILITY 28.5 Any provision of this Agreement or any other Finance Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof. The invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. To the extent permitted by applicable Law, each Obligor hereby waives any provision of Law which renders any provision of the Finance Documents prohibited or unenforceable in any respect. GOVERNING LAW AND JURISDICTION GOVERNING LAW 29.1 This Agreement shall be construed in accordance with and governed by English law. JURISDICTION 29.2(a) All the parties agree that the courts of England are, subject to Clause 29.2(b) and (c) below, to have jurisdiction to settle any disputes which may arise in connection with the creation, validity, effect, interpretation or performance of, or the legal relationships established by, this Agreement (including, without limitation, claims for set-off or counterclaim) or otherwise arising in connection with this Agreement and for such purposes irrevocably submit to the jurisdiction of the English courts; (b) notwithstanding the agreement in (a) above, each of the Finance Parties shall retain the right to bring proceedings in any other court which has jurisdiction whether by virtue of the Convention on Jurisdiction and the Enforcement of Judgments signed on 27 September 1968 (as from time to time amended and extended) or by virtue of the Convention on Jurisdiction and the Enforcement of Judgments signed on 16 September 1988 (from time to time amended and extended) or otherwise; (c) with respect to the courts agreed in paragraphs (a) and (b) above, each of the Parties irrevocably waives any objections on the ground of venue or forum non conveniens or any similar ground; Page 65 (d) each of the Parties irrevocably agrees that a judgment or order of any court referred to in this clause in connection with this Agreement is conclusive and binding on it and may be enforced against it in the courts of any other jurisdiction; and (e) each of the Parties irrevocably consents to service of process by mail or in any other manner permitted by the relevant Law. AGENT FOR SERVICE OF PROCESS 29.3 Each Obligor shall at all times maintain an agent for service of process and any other documents in proceedings in England or any other proceedings in connection with this Agreement. Such agent shall be XL Brockbank Limited of Fitzwilliam House, 10 St. Mary Axe, London EC3A 8NL and any writ, judgment or other notice of legal process shall be sufficiently served on the relevant Obligor if delivered to such agent marked for the attention of the Finance Director at its address for the time being. Each Obligor undertakes not to revoke the authority of the above agent without promptly appointing a successor and notifying the Agent thereof. WAIVER OF IMMUNITIES 29.4 To the extent that any Obligor has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution or execution, on the ground of sovereignty or otherwise) with respect to itself or its property, it hereby irrevocably waives, to the fullest extent permitted by applicable Law, such immunity in respect of its obligations under the Finance Documents. TREATMENT OF CERTAIN INFORMATION; CONFIDENTIALITY TREATMENT OF CERTAIN INFORMATION 30.1 Each of the Obligors acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to any Obligor or one or more of their Subsidiaries (in connection with this Agreement or otherwise) by any Lender or by one or more subsidiaries or affiliates of such Lender and each of the Obligors hereby authorises each Lender to share any information delivered to such Lender by such Obligor and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Lender to enter into this Agreement, to any such subsidiary or affiliate, it being understood that (a) any such information shall be used only for the purpose of advising the Obligor or preparing presentation materials for the benefit of the Obligor and (b) any such subsidiary or affiliate receiving such information shall be bound by Clause 30.2 (CONFIDENTIALITY) as if it were a Lender hereunder. Such authorisation shall survive the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. CONFIDENTIALITY 30.2 Each of the Finance Parties agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed: (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); Page 66 (b) to the extent requested by any regulatory authority having jurisdiction over the Agent or any Lender; (c) to the extent required by applicable Laws or regulations or by any subpoena or similar legal process; (d) to any other party to this Agreement; (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder; (f) subject to an agreement in writing containing provisions substantially the same as those of this paragraph and for the benefit of the Obligor, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to any Obligor and its obligations; (g) with the consent of the Obligor; or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Clause 30.2 or (ii) becomes available to the Agent or any Lender on a non-confidential basis from a source other than an Obligor. For the purposes of this Clause, INFORMATION means all information received from an Obligor relating to an Obligor or its business, other than any such information that is available to the Finance Parties on a non-confidential basis prior to disclosure by such Obligor; PROVIDED that, in the case of information received from an Obligor after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Clause shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. Notwithstanding the foregoing, each of the Finance Parties agree that they will not trade the securities of any of the Obligors based upon non-public Information that is received by them. THIRD PARTY RIGHTS 31. A person who is not a party to this Agreement shall have no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms. IN WITNESS whereof the parties hereto have caused this Agreement to be duly executed on the date first written above. Page 67 Page 68 IN WITNESS WHEREOF, XL CAPITAL LTD has caused this Agreement to be duly executed as a Deed by an authorised officer on the day and year first above written. ACCOUNT PARTY EXECUTED as a DEED for and on behalf of XL CAPITAL LTD By: MICHAEL SIESE In the presence of: KIRSTIN ROMANN GUARANTORS EXECUTED as a DEED for and on behalf of XL CAPITAL LTD By: MICHAEL SIESE In the presence of: KIRSTIN ROMANN SIGNED for and on behalf of X.L. AMERICA, INC. By: RICHARD H MILLER Title: SENIOR VICE PRESIDENT, CFO & TREASURER SIGNED for and on behalf of XL INSURANCE (BERMUDA) LTD By: CHRISTOPHER COELHO Title: SENIOR VICE PRESIDENT & CHIEF FINANCIAL OFFICER SIGNED for and on behalf of XL EUROPE LTD By: FIONA MULDOON 20/11/01 Title: CHIEF FINANCIAL OFFICER & COMPANY SECRETARY SIGNED for and on behalf of XL RE LTD By: HENRY KEELING Title: PRESIDENT & CHIEF EXECUTIVE OFFICER Page 69 AGENT SIGNED for and on behalf of CITIBANK INTERNATIONAL PLC By: PAUL GIBBS Address: Citigroup Centre 33 Canada Square Canary Wharf London E14 5LB Fax: 020 7986 8275 Tel: 020 7986 7160 Attention: Paul Gibbs ARRANGER SIGNED for and on behalf of SALOMON BROTHERS INTERNATIONAL LIMITED By: PAREEJAT SINGHAL Address: Citigroup Centre 33 Canada Square Canary Wharf London E14 5LB Fax: 020 7986 8275 Tel: 020 7986 7569 Attention: Pareejat Singhal SECURITY TRUSTEE SIGNED for and on behalf of CITIBANK INTERNATIONAL PLC By: PAUL GIBBS Address: Citigroup Centre 33 Canada Square Canary Wharf London E14 5LB Fax: 020 7986 8275 Tel: 020 7986 7166 Attention: Paul Gibbs Page 70 LENDERS SIGNED for and on behalf of CITIBANK, N.A. By: PAREEJAT SINGHAL Address: Citigroup Centre 33 Canada Square Canary Wharf London E14 5LB Fax: 020 7986 8275 Tel: 020 7986 7569 Attention: Pareejat Singhal SIGNED for and on behalf of BARCLAYS BANK PLC By: PAUL JOHNSON (RELATIONSHIP DIRECTOR) Address: 1st Floor 54 Lombard Street London EC3V 9EX Fax: 020 7699 2407 Tel: 020 7699 3121 Attention: Paul Johnson SIGNED for and on behalf of ING BANK, N.V, LONDON BRANCH By: NICK MARCHANT (DIRECTOR) MIKE SHARMAN (MANAGING DIRECTOR) Address: 60 London Wall London EC2M 5TQ Fax: 020 7767 7507 Tel: 020 7767 5902/5904 Attention: Nick Marchant/Mike Sharman SIGNED for and on behalf of CREDIT LYONNAIS NEW YORK BRANCH By: PETER RASMUSSEN (FIRST VICE PRESIDENT) Address: 1301 Avenue of the Americas NY 10019 USA Page 71 Fax: 001 212 261 3438 Tel: 001 212 261 7718/7794 Attention: Peter Rasmussen/Roy Rodriguez SIGNED for and on behalf of NATIONAL WESTMINSTER BANK PLC By: JOHN MALLETT (SENIOR CORPORATE MANAGER) Address: Corporate Commercial Banking PO Box 12264 3rd Floor 1 Princes Street London EC2R 8PB Fax: 020 7551 1094 Tel: 020 7714 5893 Attention: John Mallet Copy to: The Manager, Commercial Loans National Westminster Bank plc 2nd Floor Regents House 42 Islington High Street N1 8XL Fax: 020 7615 5070 Tel: 020 7615 5023 SIGNED for and on behalf of LLOYDS TSB BANK PLC By: J H SMITH (MANAGER) Address: St George's House 6-8 Eastcheap Monument EC3M 1AE Fax: 020 7661 4981 Tel: 020 7661 4953 Attention: Harvey Smith Page 72 EX-10.53 5 c23420_ex10-53.txt LETTER OF CREDIT 12/31/01 EXECUTION COPY $150,000,000 LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT AMONG XL CAPITAL LTD, X.L. AMERICA, INC., XL INSURANCE (BERMUDA) LTD, XL EUROPE LTD and XL RE LTD, as Account Parties and Guarantors, THE BANKS PARTIES HERETO FROM TIME TO TIME AND MELLON BANK, N.A., as Issuing Bank, as Agent and as Arranger DATED AS OF December 31, 2001 TABLE OF CONTENTS SECTION TITLE PAGE ARTICLE I DEFINITIONS; CONSTRUCTION ...................................... 1 1 1.01 Certain Definitions ............................................ 1 1.02 Construction ................................................... 13 1.03 Accounting Principles .......................................... 13 ARTICLE II THE LETTER OF CREDIT FACILITY .................................. 14 2.01 Syndicated Letters of Credit ................................... 14 2.02 Procedure for Issuance and Amendment of Syndicated Letters of Credit ...................................................... 14 2.03 Reimbursement of LC Disbursements in Respect of Syndicated Letters of Credit, Etc ......................................... 16 2.04 Participated Letters of Credit ................................. 18 2.05 Procedure for Issuance and Amendment of Participated Letters of Credit ...................................................... 19 2.06 Letter of Credit Participating Interests ....................... 20 2.07 Participated Letter of Credit Drawings and Reimbursements ...... 21 2.08 Equalization ................................................... 22 2.09 Obligations Absolute ........................................... 22 2.10 Certain Provisions Relating to the Issuing Bank ................ 23 2.11 Fees ........................................................... 25 2.12 Reduction of the Committed Amounts ............................. 25 2.13 Purpose of Letters of Credit ................................... 26 2.14 Further Assurances ............................................. 26 2.15 Letter of Credit Applications .................................. 26 2.16 Payments Generally; Interest and Interest on Overdue Amounts................................................. 26 2.17 Additional Compensation in Certain Circumstances ............... 27 2.18 Taxes .......................................................... 28 2.19 Extensions of Expiration Date .................................. 30 2.20 Tranches ....................................................... 30 2.21 Benchmark Credit Rating ........................................ 33 ARTICLE III REPRESENTATIONS AND WARRANTIES ................................. 33 3.01 Organization; Powers ........................................... 33 3.02 Authorization; Enforceability .................................. 34 3.03 Governmental Approvals; No Conflicts ........................... 34 3.04 Financial Condition; No Material Adverse Change ................ 34 3.05 Properties ..................................................... 34 3.06 Litigation and Environmental Matters ........................... 35 3.07 Compliance with Laws and Agreements ............................ 35 3.08 Investment and Holding Company Status .......................... 35 3.09 Taxes .......................................................... 35 i 3.10 ERISA .......................................................... 35 3.11 Disclosure ..................................................... 36 3.12 Use of Credit .................................................. 36 3.13 Subsidiaries ................................................... 36 3.14 Withholding Taxes .............................................. 36 3.15 Stamp Taxes .................................................... 36 3.16 Legal Form ..................................................... 36 ARTICLE IV CONDITIONS ..................................................... 37 4.01 Effectiveness .................................................. 37 4.02 Issuance of Letters of Credit .................................. 38 ARTICLE V AFFIRMATIVE COVENANTS .......................................... 38 5.01 Financial Statements and Other Information ..................... 39 5.02 Notices of Material Events ..................................... 40 5.03 Preservation of Existence and Franchises ....................... 40 5.04 Insurance ...................................................... 41 5.05 Maintenance of Properties ...................................... 41 5.06 Payment of Taxes and Other Potential Charges and Priority Claims; Payment of Other Current Liabilities ................... 41 5.07 Financial Accounting Practices ................................. 41 5.08 Compliance with Applicable Laws ................................ 41 5.09 Use of Letters of Credit ....................................... 42 5.10 Continuation of and Change Business ............................ 42 5.11 Visitation ..................................................... 42 ARTICLE VI NEGATIVE COVENANTS ............................................. 42 6.01 Mergers ........................................................ 42 6.02 Dispositions ................................................... 42 6.03 Liens .......................................................... 43 6.04 Transactions with Affiliates ................................... 44 6.05 Ratio of Total Funded Debt to Total Capitalization ............. 44 6.06 Consolidated Net Worth ......................................... 44 6.07 Indebtedness ................................................... 45 6.08 Claims-Paying Ratings .......................................... 45 6.09 Private Act .................................................... 45 ARTICLE VII EVENTS OF DEFAULT .............................................. 45 7.01 Events of Default .............................................. 45 ARTICLE VIII THE AGENT ...................................................... 47 8.01 Appointment .................................................... 47 8.02 General Nature of Agent's Duties ............................... 48 8.03 Exercise of Powers ............................................. 49 ii 8.04 General Exculpatory Provisions ................................. 49 8.05 Administration by the Agent .................................... 50 8.06 Bank Not Relying on Agent or Other Banks ....................... 50 8.07 Indemnification ................................................ 51 8.08 Agent in its Individual Capacity ............................... 51 8.09 Successor Agent ................................................ 51 8.10 Additional Agents .............................................. 52 8.11 Calculations ................................................... 52 8.12 Agent's Fee .................................................... 52 ARTICLE IX MISCELLANEOUS .................................................. 52 9.01 No Implied Waiver, etc ......................................... 52 9.02 Set-Off ........................................................ 53 9.03 Survival of Provisions ......................................... 53 9.04 Expenses and Fees; Indemnity ................................... 53 9.05 Severability ................................................... 54 9.06 Holidays ....................................................... 54 9.07 Notices, etc ................................................... 54 9.08 Forum Selection and Consent to Jurisdiction .................... 55 9.09 Waiver of Jury Trial ........................................... 55 9.10 Governing Law .................................................. 55 9.11 Validity and Enforceability .................................... 55 9.12 Counterparts ................................................... 55 9.13 Successors and Assigns; Participations; Assignments ............ 56 9.14 Amendments and Waivers ......................................... 58 9.15 Judgment Currency .............................................. 59 9.16 Records ........................................................ 59 9.17 Confidentiality ................................................ 60 9.18 Sharing of Collections ......................................... 60 ARTICLE X GUARANTEE ...................................................... 60 10.01 The Guarantee .................................................. 60 10.02 Obligations Unconditional ...................................... 61 10.03 Reinstatement .................................................. 62 10.04 Remedies ....................................................... 62 10.05 Continuing Guarantee ........................................... 62 10.06 No Restrictions ................................................ 62 iii Exhibit A Form of Continuing Letter of Credit Agreement Exhibit B Form of Transfer Supplement Exhibit C Contents of Opinions of Counsel Exhibit D Form of Letter of Credit Application Exhibit E Form of Account Party Accession Instrument Schedule 2.01(b) Form of Evergreen Provision Schedule 3.06 Litigation and Environmental Matters Schedule 3.13 Subsidiaries Schedule 6.03 Liens Schedule 6.07 Indebtedness iv LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of December 31, 2001, by and among XL CAPITAL LTD, a company organized under the laws of the Cayman Islands, British West Indies ("XL Capital"), X.L. AMERICA, INC., a Delaware corporation ("XL America"), XL INSURANCE (BERMUDA) LTD, a Bermuda limited liability company ("XL Insurance"), XL EUROPE LTD, a company incorporated under the laws of Ireland ("XL Europe") and XL RE LTD, a Bermuda limited liability company ("XL Re"), as Account Parties and Guarantors; the Banks (as defined further below) parties hereto from time to time; and MELLON BANK, N.A., a national banking association, as Issuing Bank, as Agent for the Banks hereunder and as Arranger. PRELIMINARY STATEMENT WHEREAS, the Banks have agreed to make available to the Account Parties a letter of credit facility in an aggregate face amount not exceeding $150,000,000 at any one time outstanding, upon all of the terms and conditions herein set forth; NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Account Parties and Guarantors, the Issuing Bank and each Bank agree as follows. ARTICLE I DEFINITIONS: CONSTRUCTION 1.01. CERTAIN DEFINITIONS. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "ACCOUNT PARTIES" shall mean XL Capital, XL America, XL Insurance, XL Europe, XL Re and any Other Account Parties, together with their respective successors as permitted by this Agreement, and "ACCOUNT PARTY" shall mean any one of them. "ACCOUNT PARTY ACCESSION INSTRUMENT" shall mean an Account Party Accession Instrument in the form attached hereto as EXHIBIT E, as amended, modified or supplemented from time to time. "AFFILIATE" shall mean, with respect to any Person, an entity which is directly or indirectly controlled by such Person or which controls such Person or which is under common control with such Person. "AGGREGATE LETTER OF CREDIT UNDRAWN AVAILABILITY" at any time shall mean the aggregate amount of the Letter of Credit Undrawn Availability for all Letters of Credit at such time. "AGGREGATE LETTER OF CREDIT UNREIMBURSED DRAWS" at any time shall mean the aggregate amount of Letter of Credit Unreimbursed Draws for all Letters of Credit at such time. "AGREEMENT" shall mean this Letter of Credit Facility and Reimbursement Agreement as amended, modified or supplemented from time to time. "APPLICABLE INTEREST RATE" as used herein shall mean the Prime Rate plus 2%. "ASSETS" at any time shall mean the assets of any Credit Party, as the context requires, at such time, determined in accordance with GAAP or SAP, as appropriate. "BANK PARTIES" shall mean the Banks, the Issuing Bank, the Arranger and the Agent. "BANKS" shall mean the parties (other than the Credit Parties but including the Issuing Bank) listed on the signature pages hereof, subject to the provisions of Section 9.13 hereof pertaining to Persons becoming or ceasing to be Banks, and "BANK" shall mean any of them. "BERMUDA COMPANIES LAW" shall mean the Companies Act of 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "BERMUDA INSURANCE LAW " shall mean the Insurance Act of 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "BOARD" means the Board of Governors of the Federal Reserve System of the United States of America. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania, of Bermuda, of the Cayman Islands or of Ireland, or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania, Bermuda, the Cayman Islands or Dublin, Ireland. "CAPITAL LEASE OBLIGATIONS" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. "CHANGE IN CONTROL" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the Securities and Exchange Commission) of more than 40% of the voting securities of XL Capital; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of XL Capital; or (c) a majority of the members of XL Capital's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated for election by its shareholders. "CLOSING DATE" shall mean December 31, 2001 or such later date as the parties may agree. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 2 "COMMITMENT BANKS" shall have the meaning assigned to that term in Section 2.20 hereof. "COMMITMENT FEE" shall have the meaning assigned to that term in Section 2.11(c) hereof. "CONSOLIDATED NET WORTH" means, at any time, the consolidated stockholders' equity of XL Capital and its Subsidiaries. "CONSOLIDATED SUBSIDIARIES" of a Person shall mean those Subsidiaries of such Person the accounts of which are consolidated with the accounts of such Person in accordance with GAAP. "CONTINUING LETTER OF CREDIT AGREEMENTS" shall mean the letter of credit agreements executed and delivered by the Account Parties, each substantially in the form of EXHIBIT A hereto, and "CONTINUING LETTER OF CREDIT AGREEMENT" shall mean one of them. "CONVERSION TO TRANCHE SYSTEM" shall have the meaning assigned to that term in Section 2.20 hereof. "CREDIT PARTIES" means the Account Parties and the Guarantors, and "CREDIT PARTY" means any of them. "CREDIT PARTY JURISDICTION" means (a) Bermuda, (b) the Cayman Islands, (c) the Republic of Ireland and (d) any other country (i) where any Credit Party is licensed or qualified to do business or (ii) from or through which payments hereunder are made by any Credit Party. "CURRENT EXPIRATION DATE" shall have the meaning assigned to that term in Section 2.19 hereof. "CUSTODIAN" shall mean Mellon Bank, N.A., or any successor, in its capacity as Custodian pursuant to the Master Custody Agreement, dated June 30, 1998, among XL Capital Ltd (f/k/a/ EXEL Limited), the Principals named therein and Mellon Bank, N.A., as custodian, as it may be amended, restated or otherwise modified from time to time, or any successor custodian appointed in accordance with Section 6.11 of the Pledge Agreement. "CUSTODIAN'S ACKNOWLEDGEMENT" shall mean the Control and Consent Acknowledgement and Agreement Concerning Designated Accounts, dated as of January 24, 2002, among XL Investments, XL Re, XL Europe, Mellon Bank, N.A., in its capacity as Agent, and Mellon Bank, N.A., in its capacity as securities intermediary. "DESIGNATED ACCOUNTS" shall have the meaning given that term in the Pledge Agreement. "DOLLAR," "DOLLARS" and the symbol $ shall mean lawful money of the United States of America. "DOLLAR EQUIVALENT" of an amount of a currency other than Dollars shall mean the amount of Dollars which such amount of such currency could purchase at 11:00 o'clock a.m., Pittsburgh time on the date of determination, based upon the quoted spot rates of the Agent at which its applicable branch or office offers to exchange Dollars for such currency in the foreign exchange market and "DOLLAR EQUIVALENT" of an amount denominated in Dollars shall mean such amount of Dollars. 3 "DOLLAR EQUIVALENT AMOUNT" of any Qualifying Security shall mean (i) with respect to any Qualifying Security denominated in a currency other than Dollars, the Dollar Equivalent of the market value of such Qualifying Security as most recently determined at the time in question in accordance with the Pledge Agreement and (ii) with respect to a Qualifying Security denominated in Dollars, the market value of such Qualifying Security as most recently determined at the time in question in accordance with the Pledge Agreement. "EFFECTIVE DATE" shall mean December 31, 2001. "ENVIRONMENTAL LAWS" means any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Hazardous Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Hazardous Materials or (d) regulation of the manufacture, use or introduction into commerce of Hazardous Materials, including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. "ENVIRONMENTAL LIABILITY" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of an Account Party or any Subsidiary resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract or agreement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "EQUITY RIGHTS" means, with respect to any Person, any subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including any shareholders' or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that, together with any Credit Party, is treated as a single employer under Section 414(b) or (c) of the Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by any Credit Party or any of such Credit Party's ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by any Credit Party or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by any Credit Party or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; 4 or (g) the receipt by any Credit Party or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from any Credit Party or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "EVENT OF DEFAULT" shall mean any of the Events of Default described in Article VII hereof. "EXPIRATION DATE" shall mean the Business Day immediately preceding the first anniversary of the Closing Date, as the same may be extended in accordance with Section 2.19 hereof. "EXTENSION REQUEST" shall have the meaning set forth in Section 2.19 hereof. "FINANCIAL OFFICER" means, with respect to any Credit Party, a principal financial officer of such Credit Party. "GAAP" shall have the meaning set forth in Section 1.03 hereof. "GICS" shall mean guaranteed investment contracts. "GOVERNMENTAL AUTHORITY" means the government of the United States of America, or of any other nation, or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "GUARANTEE" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guarantee hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount of the Indebtedness in respect of which such Guarantee is made. The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a correlative meaning. "GUARANTEED OBLIGATIONS" shall have the meaning assigned to that term in Section 10.01 hereof. "GUARANTORS" shall mean XL Capital, XL America, XL Insurance, XL Europe and XL Re, and "GUARANTOR" shall mean any one of them. 5 "HAZARDOUS MATERIALS" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "HEDGING AGREEMENT" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "INDEBTEDNESS" means, for any Person, without duplication (it being understood, for the avoidance of doubt, that insurance payment liabilities, as such, and liabilities arising in the ordinary course of such Person's business as an insurance or reinsurance company (including GICs) or corporate member of The Council of Lloyd's or as a provider of financial or investment services or contracts (in each case other than in connection with the provision of financing to such Person or any of such Person's Affiliates) shall not be deemed to constitute Indebtedness): (i) all indebtedness or liability for or on account of money borrowed by, or for or on account of deposits with or advances to (but not including accrued pension costs, deferred income taxes or accounts payable of) such Person; (ii) all obligations (including contingent liabilities) of such Person evidenced by bonds, debentures, notes, banker's acceptances or similar instruments; (iii) all indebtedness or liability for or on account of property or services purchased or acquired by such Person; (iv) any amount secured by a Lien on property owned by such Person (whether or not assumed) and Capital Lease Obligations of such Person (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such capital lease to repossession or sale of such property); (v) the maximum available amount of all standby letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed); and (vi) all Guarantees of such Person. "INSURANCE SUBSIDIARY" means any, present or future, direct or indirect Subsidiary of any Account Party that offers insurance products, including but not limited to certain of the Account Parties. "ISSUING BANK" means Mellon Bank, N.A., in its capacity as Issuing Bank hereunder. "LAW" means any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority. "LC DISBURSEMENT" means (a) with respect to any Participated Letter of Credit, a payment made by the Issuing Bank pursuant thereto and (b) with respect to any Syndicated Letter of Credit, a payment made by a Bank pursuant thereto. "LETTERS OF CREDIT" shall mean all Participated Letters of Credit and Syndicated Letters of Credit issued for the account of one or more of the Account Parties pursuant to this Agreement, each as amended, modified or supplemented from time to time, and "LETTER OF CREDIT" shall mean any of them, whether a Participated Letter of Credit or a Syndicated Letter of Credit. "LETTER OF CREDIT APPLICATION" shall have the meaning given that term in Section 2.02(a)(ii) hereof. 6 "LETTER OF CREDIT COMMITMENTS" of a Bank shall mean its Syndicated Letter of Credit Commitment and its Participated Letter of Credit Participating Interest Commitment. "LETTER OF CREDIT EXPOSURE" at any time shall mean the sum at such time of (a) the Aggregate Letter of Credit Unreimbursed Draws (determined as a Dollar Equivalent), (b) the Aggregate Letter of Credit Undrawn Availability and (c) the aggregate Stated Amount (determined as a Dollar Equivalent) of Letters of Credit which have been requested by an Account Party to be issued hereunder but are not yet so issued. "LETTER OF CREDIT FEE" shall have the meaning given that term in Section 2.11(a) hereof. "LETTER OF CREDIT COMMITTED AMOUNT" of a Bank at any time shall be equal to the amount set forth as its "INITIAL LETTER OF CREDIT COMMITTED AMOUNT" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.12 hereof at such time, and subject to transfer to or from another Bank as provided in Section 9.13 hereof. "LETTER OF CREDIT COMMITMENT PERCENTAGE" for each Bank shall mean a fraction, expressed as percentage, the numerator of which is such Bank's Letter of Credit Committed Amount and the denominator of which is the aggregate Letter of Credit Committed Amounts of all of the Banks. "LETTER OF CREDIT INTERESTS" of a Bank shall mean its Participated Letter of Credit Participating Interest and its Syndicated Letter of Credit Interest. "LETTER OF CREDIT REIMBURSEMENT OBLIGATION" means (a) with respect to any Participated Letter of Credit, the obligation of the applicable Account Party to reimburse the Issuing Bank for LC Disbursements on such Participated Letter of Credit, together with interest thereon, and (b) with respect to a Syndicated Letter of Credit, the obligation of the applicable Account Party to reimburse each Bank for LC Disbursements made by such Bank on such Syndicated Letter of Credit, together with interest thereon, and "LETTER OF CREDIT REIMBURSEMENT OBLIGATIONS" shall mean all such obligations with respect to all Letters of Credit. "LETTER OF CREDIT UNDRAWN AVAILABILITY" with respect to a Letter of Credit at any time shall mean the maximum amount (determined as a Dollar Equivalent) available to be drawn under such Letter of Credit at such time or thereafter, regardless of the existence or satisfaction of any conditions or limitations on drawing (including, without limitation, the amount of drafts presented but not yet paid). "LETTER OF CREDIT UNREIMBURSED DRAW" with respect to a Letter of Credit at any time shall mean the amount at such time of LC Disbursements made under such Letter of Credit, to the extent not repaid by the applicable Account Party. "LEVEL ONE DAY" shall mean each day during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities and Twenty Percent Risk-Capital Securities included in the Required Qualifying Securities is 100% of the market value (determined as a Dollar Equivalent Amount) of the Required Qualifying Securities. "LEVEL TWO DAY" shall mean each day (which is not a Level One Day) during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if 7 on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities and Twenty Percent Risk-Capital Securities included in the Required Qualifying Securities is at least 50% of the market value (determined as a Dollar Equivalent Amount) of the Required Qualifying Securities. "LEVEL THREE DAY" shall mean each day which is not a Level One Day or a Level Two Day. "LIEN" means, with respect to any asset, any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "LISTED CORPORATE BONDS" means corporate bonds having a rating by Moody's of at least Baa1 or by Standard & Poor's of at least BBB+ listed on a national securities exchange in the United States. "MARGIN STOCK" means "margin stock" within the meaning of Regulations T, U and X of the Board. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the assets, business, financial condition or operations of a Credit Party and its Subsidiaries taken as a whole or (b) the ability of a Credit Party or a Pledgor to perform any of its payment or other obligations under this Agreement or the Pledge Agreement. "MOODY'S" shall mean Moody's Investors Service (or its successor). "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NONEXTENDING BANK" shall have the meaning assigned to that term in Section 2.19 hereof. "NON-U.S. BENEFIT PLAN" means any plan, fund (including any superannuation fund) or other similar program established or maintained outside the United States by any Credit Party or any of their Subsidiaries, with respect to which such Credit Party or such Subsidiary has an obligation to contribute, for the benefit of employees of such Credit Party or such Subsidiary, which plan, fund or other similar program provides, or results in, the type of benefits described in Section 3(1) or 3(2) of ERISA, and which plan is not subject to ERISA or the Code. "OBLIGATIONS" shall mean, collectively, the Letter of Credit Reimbursement Obligations and the obligations of each and every Account Party to pay all fees, indemnities and all other liabilities of such Account Party arising pursuant to the terms of this Agreement or the other Transaction Documents. "OFFICE," when used in connection with the Agent, shall mean its office located at One Mellon Center, Pittsburgh, Pennsylvania 15258, or at such other office or offices of the Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Agent to the Account Parties and the Banks. 8 "OTHER ACCOUNT PARTIES" means each Wholly-Owned Subsidiary of XL Capital which has become a party to this Agreement by the execution and delivery by such Wholly-Owned Subsidiary and XL Capital to the Agent of an Account Party Accession Instrument and the other documentation referred to in such Account Party Accession Instrument. "PARTICIPATED LETTER OF CREDIT PARTICIPATING INTEREST" shall have the meaning given that term in Section 2.06(a) hereof. "PARTICIPATED LETTER OF CREDIT PARTICIPATING INTEREST COMMITMENT" shall have the meaning given that term in Section 2.06(a) hereof. "PARTICIPATED LETTERS OF CREDIT" means letters of credit issued under Section 2.04, and "PARTICIPATED LETTER OF CREDIT" shall mean any of them. "PERMITTED LIENS" shall mean the Liens described in paragraphs (a) through (j) of Section 6.03. "PERSON" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), Governmental Authority or agency, or any other entity. "PLAN" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which any Account Party or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PLEDGE AGREEMENT" shall mean the Pledge Agreement, dated as of January 24, 2002, made by XL Investments, XL Europe and XL Re in favor of the Agent, as amended or modified from time to time. "PLEDGED SECURITIES AVAILABLE AMOUNT" at any time shall mean the amount which is equal to the sum of (i) the value of Qualifying Securities described in clauses (i) and (ii) of the definition of Qualifying Securities (determined as a Dollar Equivalent Amount at such time) divided by 111% and (ii) the value of Qualifying Securities described in clause (iii) of the definition of Qualifying Securities (determined as a Dollar Equivalent Amount at such time) divided by 125%. "PLEDGORS" shall mean XL Investments, XL Europe and XL Re, and "PLEDGOR" shall mean any one of them. "POTENTIAL DEFAULT" shall mean any event or condition referenced in Article VII hereof which with notice, passage of time or both would constitute an Event of Default. "PRIME RATE" shall mean the interest rate per annum announced from time to time by the Agent as its prime rate, such rate to change automatically effective as of the effectiveness of each announced change in such prime rate (it being understood that such Prime Rate may be greater or less than other interest rates charged by the Agent to other borrowers and is not solely based or dependent upon the interest rate which the Agent may charge any particular borrower or class of borrower). 9 "PRIVATE ACT" means separate legislation enacted in Bermuda with the intention that such legislation apply specifically to a Credit Party, in whole or in part. "PRO RATA" shall have the meaning assigned to that term in Section 2.20 hereof. "PURCHASING BANK" shall have the meaning assigned to that term in Section 9.13(c) hereof. "QUALIFYING SECURITIES" shall mean securities in a Designated Account which are not subject to any security interest or lien in favor of any Person other than the security interest of the Agent under the Pledge Agreement and the Custodian's Acknowledgment (as defined in the Pledge Agreement) and which consist of: (i) direct claims (including securities, loans and leases) on, and the portions of claims that are directly and unconditionally guaranteed by, any U.S. Government Agency, as such terms are used in Appendix A, Section III(C), Category I to Regulation H, as promulgated by the Board of Governors of the Federal Reserve System, which have a zero percent risk capital weighting under such Regulation H, as amended from time to time; (ii) claims on, and the portions of claims that are guaranteed by, U. S. Government-sponsored agencies and claims on, and the portions of claims guaranteed by, certain multilateral lending institutions in which the U. S. Government is a shareholder or contributing member or shares of money market mutual funds investing solely in U.S. Government Securities, as such terms are used in Appendix A, Section III(C), Category II to such Regulation H, which have a twenty percent or lower risk capital weighting under such Regulation H, as amended from time to time; and (iii) Listed Corporate Bonds. "REGISTER" shall have the meaning given that term in Section 9.13(d) hereof. "REGULAR PAYMENT DATE" shall mean the last day of each March, June, September and December after the date hereof, or, if such last day is not a Business Day, the next succeeding Business Day. "RELATED PARTIES" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "REPLACEMENT BANK" shall have the meaning assigned to that term in Section 2.19 hereof. "REQUIRED BANKS" shall mean at any time Banks which have at least 51% of the aggregate Letter of Credit Interests outstanding at such time. "REQUIRED COMMITMENT BANKS" shall have the meaning assigned to that term in Section 2.20 hereof. "REQUIRED QUALIFYING SECURITIES" shall mean at any time Qualifying Securities the market value of which (expressed as a Dollar Equivalent Amount) when divided by 111%, with respect to Qualifying Securities described in clauses (i) and (ii) of the definition of Qualifying Securities, and when divided by 125%, with respect to Qualifying Securities described in clause (iii) of such definition, is equal to, but not greater than, the sum of the Aggregate Letter of Credit Unreimbursed Draws at such time and the Aggregate Letter of Credit Undrawn Availability at such time; provided that there shall not at any time be included in Required Qualifying Securities (a) any Listed Corporate Bonds of any single issuer to the extent the inclusion of such securities would cause the market value (expressed as a Dollar Equivalent Amount) of all Listed Corporate Bonds of such 10 issuer which are included in Required Qualifying Securities to exceed 10% of the sum of the Aggregate Letter of Credit Unreimbursed Draws at such time and the Aggregate Letter of Credit Undrawn Availability at such time or (b) any Listed Corporate Bonds to the extent the inclusion of such securities would cause the market value (expressed as a Dollar Equivalent Amount) of all Listed Corporate Bonds which are included in Required Qualifying Securities to exceed 75% of the Aggregate Letter of Credit Unreimbursed Draws at such time and the Aggregate Letter of Credit Undrawn Availability at such time. "SAP" shall mean, as to each Credit Party and each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Governmental Authority for such Credit Party's or such Insurance Subsidiary's domicile for the preparation of Annual Statements and other Event of Default reports by insurance corporations of the same type as such Credit Party or such Insurance Subsidiary in effect on the date such statements or reports are to be prepared. "SEC" means the Securities and Exchange Commission or any successor entity. "STANDARD & POOR'S" shall mean Standard & Poor's Ratings Services (or its successor). "STANDARD NOTICE" shall mean an irrevocable notice provided to the Agent at no later than 10:00 o'clock a.m., Pittsburgh time, on a Business Day. Standard Notice shall be in writing (including facsimile or cable communication) or by telephone (to be subsequently confirmed in writing) in any such case, effective upon receipt by the Agent. "STATED AMOUNT" shall mean, with respect to a Letter of Credit, the maximum face or stated amount of such Letter of Credit, irrespective of whether such maximum amount is available for drawing at the time in question. "SUBSIDIARY" means, with respect to any Person (the "PARENT"), at any date, any corporation (or similar entity) of which a majority of the shares of outstanding capital stock normally entitled to vote for the election of directors (regardless of any contingency which does or may suspend or dilute the voting rights of such capital stock) is at such time owned directly or indirectly by the parent or one or more subsidiaries of the parent. Unless otherwise specified, "SUBSIDIARY" means a Subsidiary of an Account Party. "SYNDICATED LETTER OF CREDIT INTEREST" of a Bank means its interest in the Syndicated Letters of Credit issued hereunder and the related Reimbursement Obligations. "SYNDICATED LETTERS OF CREDIT" means letters of credit issued under Section 2.01. "SYNDICATED LETTER OF CREDIT COMMITMENT" has the meaning assigned to such term in Section 2.01(a). "TAXES" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "TOTAL FUNDED DEBT" means, at any time, all Indebtedness of XL Capital and its Subsidiaries which would at such time be classified in whole or in part as a liability on the consolidated balance sheet of XL Capital in accordance with GAAP. 11 "TRANCHE 1 BANK", "TRANCHE 1 LETTER OF CREDIT", "TRANCHE 1 LETTER OF CREDIT COMMITMENT PERCENTAGE", "TRANCHE 2 BANK", "TRANCHE 2 LETTER OF CREDIT", "TRANCHE 2 LETTER OF CREDIT COMMITMENT PERCENTAGE", "TRANCHE 2 LETTER OF CREDIT COMMITMENT", "TRANCHE 2 LETTER OF CREDIT COMMITTED AMOUNT", "TRANCHE 2 LETTER OF CREDIT COMMITMENT PERCENTAGE", "TRANCHE 3 LETTER OF CREDIT", "TRANCHE 4 LETTER OF CREDIT" and "TRANCHE X" shall have the respective meanings assigned to those terms in Section 2.20 hereof. "TRANSACTIONS" means the execution, delivery and performance by the Credit Parties of this Agreement, the execution, delivery and performance by the Credit Parties and the Pledgors of the other Transaction Documents to which any Credit Party or Pledgor is intended to be a party and the issuance of Letters of Credit hereunder. "TRANSACTION DOCUMENT" OR "TRANSACTION DOCUMENTS" shall mean this Agreement, the Pledge Agreement, each Letter of Credit and any other documents or instruments executed and delivered in connection herewith or therewith. "TRANSFER SUPPLEMENT" shall have the meaning given that term in Section 9.13(c)(iv) hereof. "TWENTY PERCENT RISK-CAPITAL SECURITIES" means Qualifying Securities which have a 20% risk-capital weighting for bank regulatory capital purposes. "VALUATION DATE" shall mean the last Business Day of each month. "WHOLLY-OWNED SUBSIDIARY" of a Person means (a) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (b) any partnership, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "XL AMERICA" has the meaning set forth in the preamble hereof. "XL CAPITAL" has the meaning set forth in the preamble hereof. "XL EUROPE" has the meaning set forth in the preamble hereof. "XL INSURANCE" has the meaning set forth in the preamble hereof. "XL INVESTMENTS" means XL Investments Ltd, a Bermuda limited liability company. "XL RE" has the meaning set forth in the preamble hereof. "ZERO PERCENT RISK-CAPITAL SECURITIES" means Qualifying Securities which have a 0% risk-capital weighting for bank regulatory capital purposes. 12 1.02. CONSTRUCTION. Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular the plural, and the part the whole; the neuter case includes the masculine and feminine cases; and "or" has the inclusive meaning represented by the phrase "and/or." In this Agreement, any references to property (and similar terms) include an interest in such property (or other item referred to); "include," "includes," "including" and similar terms are not limiting; and "hereof," "herein," "hereunder" and similar terms refer to this Agreement as a whole and not to any particular provision. References in this Agreement to "determination" by the Agent include estimates by the Agent in good faith, without gross negligence and without manifest error (in the case of quantitative determinations) and beliefs held by the Agent in good faith and without gross negligence (in the case of qualitative determinations). The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. This Agreement has been fully negotiated between the applicable parties, each party having the benefit of legal counsel, and accordingly no doctrine of construction of ambiguities against the party controlling the drafting, shall apply to this Agreement. For the avoidance of doubt, the parties hereby confirm their intention that the Dollar amounts referenced in Articles VI and VII of this Agreement are deemed to include the equivalent amounts in any other currency. 1.03. ACCOUNTING PRINCIPLES. (a) As used herein, "GAAP" shall mean generally accepted accounting principles as such principles shall be in effect in the United States of America, or with respect to XL Europe, the Republic of Ireland, at the Relevant Date, subject to the other provisions of this Section 1.03. As used herein, "Relevant Date" shall mean the date a relevant computation or determination is to be made or the date of relevant financial statements, as the case may be. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP or SAP, as the context requires (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP or SAP, as appropriate. (c) If any change in GAAP or SAP after the date of this Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more financial covenants of this Agreement shall have occurred (or in the opinion of the Required Banks would be likely to occur) which would not have occurred or be likely to occur if no change in accounting principles had taken place, the parties agree in such event to negotiate in good faith an amendment of this Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in GAAP or SAP, as appropriate. (d) Without in any manner limiting the provisions of this Section 1.03, if any change in GAAP or SAP occurs after the date of this Agreement and such change in GAAP or SAP would have materially changed an Account Party's reported financial results or position from that reflected in such Account Party's financial statements most recently prepared prior to such change, such Account Party shall notify the Agent as soon as practicable. 13 ARTICLE II THE LETTER OF CREDIT FACILITY 2.01. SYNDICATED LETTERS OF CREDIT. (a) SYNDICATED LETTER OF CREDIT COMMITMENTS. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Banks agree (such agreement of each Bank being referred to herein as such Bank's "Syndicated Letter of Credit Commitment") to issue Syndicated Letters of Credit for the account of an Account Party at any time or from time to time on or after the Effective Date and to but not including the Expiration Date (it being understood that Syndicated Letters of Credit may be outstanding for the account of one or more of the Account Parties at any time). The Banks shall have no obligation to issue any Syndicated Letters of Credit if, after such Syndicated Letters of Credit are issued, the Letter of Credit Exposure upon such issuance would exceed the lesser of (x) the aggregate of the Banks' Letter of Credit Committed Amounts and (y) the Pledged Securities Available Amount. Each Bank's "Letter of Credit Committed Amount" at any time shall be equal to the amount set forth as its "Initial Letter of Credit Committed Amount" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.12 hereof at such time, and subject to transfer to or from another Bank as provided in Section 9.13 hereof. (b) TERMS OF SYNDICATED LETTERS OF CREDIT. The Account Parties shall not request to be issued, and the Banks shall have no obligation to issue, any Syndicated Letter of Credit except within the following limitations: (i) each Syndicated Letter of Credit shall have an expiration date no later than 12 months after the date of issuance thereof; PROVIDED, HOWEVER, that any Syndicated Letter of Credit may have an "evergreen" provision having substantially the effect set forth on Schedule 2.01(b) hereof, (ii) each Syndicated Letter of Credit shall be denominated in Dollars and (iii) each Syndicated Letter of Credit shall be payable only against sight drafts (and not time drafts). (c) FORM OF SYNDICATED LETTERS OF CREDIT. The Banks shall have no obligation to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to the Agent in the exercise of its reasonable judgment consistent with its customary practice; PROVIDED that, without the prior consent of each Bank, no Syndicated Letter of Credit may be issued that would vary the several and not joint nature of the obligations of the Banks thereunder as provided in the next succeeding sentence. Each Syndicated Letter of Credit shall be issued by all of the Banks, acting through the Agent, at the time of issuance as a single multi-bank letter of credit, but the obligation of each Bank thereunder shall be several and not joint, based upon its Letter of Credit Commitment Percentage. It is contemplated that one or more Letters of Credit which are requested to be issued by, and which are issued for the account of, XL Capital, XL Insurance or XL Re, respectively, may be stated to be issued for the account of XL Reinsurance America Inc., ECS, Inc., or XL Re Latin America Ltd, in which XL Capital, XL Insurance or XL Re, as the case may be, has a direct or indirect ownership interest, provided that, notwithstanding the fact that the name of XL Capital, XL Insurance or XL Re, as the case may be, may not appear on the face of any such Letter of Credit, XL Capital, XL Insurance or XL Re, as the case may be, shall be the Account Party with respect to such Letter of Credit and shall have all Letter of Credit Reimbursement Obligations and other obligations hereunder with respect thereto. 2.02. PROCEDURE FOR ISSUANCE AND AMENDMENT OF SYNDICATED LETTERS OF CREDIT. (a) REQUEST FOR ISSUANCE. An Account Party may from time to time request, upon at least three (3) Business Days' notice, the issuance of a Syndicated Letter of Credit by: 14 (i) delivering to the Agent a written request to such effect, specifying the date on which such Syndicated Letter of Credit is to be issued, the expiration date thereof, and the Stated Amount thereof, and (ii) delivering to the Agent a completed application, in the form annexed hereto as EXHIBIT D, or in such other form as is from time to time be required by the Agent in accordance with its customary practice with respect to its customers generally (a "Letter of Credit Application"), together with such other certificates, documents and other papers as are specified in such application. Upon receiving any such notice, the Agent shall notify the Banks of such proposed Syndicated Letter of Credit (which notice shall specify the Stated Amount and term of such proposed Syndicated Letter of Credit), and shall determine, as of the close of business on the Business Day before such proposed issuance, whether such proposed Letter of Credit complies with the limitations set forth in Section 2.01 hereof. If such limitations set forth in Section 2.01 are not satisfied or if the Required Banks have given notice to the Agent to cease executing and delivering Syndicated Letters of Credit pursuant to Section 2.02(d)(i) hereof, the Agent shall not be authorized to execute and deliver such Syndicated Letter of Credit. If the Agent executes and delivers a Syndicated Letter of Credit, it shall deliver the original of such Syndicated Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct. (b) ISSUANCE AND ADMINISTRATION. Each Syndicated Letter of Credit shall be executed and delivered by the Agent in the name and on behalf of, and as attorney-in-fact for, each Bank party to such Syndicated Letter of Credit, and the Agent shall act under each Syndicated Letter of Credit, and each Syndicated Letter of Credit shall expressly provide that the Agent shall act, as the agent of each Bank to (a) receive drafts, other demands for payment and other documents presented by the beneficiary under such Syndicated Letter of Credit, (b) determine whether such drafts, demands and documents are in compliance with the terms and conditions of such Syndicated Letter of Credit and (c) notify such Bank and the Account Parties that a valid drawing has been made and the date that the related LC Disbursement is to be made; PROVIDED that the Agent shall have no obligation or liability for any LC Disbursement under such Syndicated Letter of Credit, and each Syndicated Letter of Credit shall expressly so provide. Each Bank hereby irrevocably appoints and designates the Agent as its attorney-in-fact, acting through any duly authorized officer of the Agent, to execute and deliver in the name and on behalf of such Bank each Syndicated Letter of Credit to be issued by such Bank hereunder. Promptly upon the request of the Agent, each Bank will furnish to the Agent such powers of attorney or other evidence as any beneficiary of any Syndicated Letter of Credit may reasonably request in order to demonstrate that the Agent has the power to act as attorney-in-fact for such Bank to execute and deliver such Syndicated Letter of Credit. (c) REQUEST FOR EXTENSION OR INCREASE. An Account Party may from time to time request by providing a notice to the Agent the extension of the expiration date of an outstanding Syndicated Letter of Credit or increase (or, with the consent of the beneficiary, decrease) the Stated Amount of or the amount available to be drawn on such Syndicated Letter of Credit. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of a replacement Syndicated Letter of Credit (except only that the Agent may, if it elects, execute and deliver a notice of extension or increase (or, with the consent of the beneficiary, decrease) in lieu of executing and delivering a new Syndicated Letter of Credit in substitution for the outstanding Syndicated Letter of Credit). (d) LIMITATIONS ON ISSUANCE, EXTENSION AND AMENDMENT. 15 (i) As between the Agent, on the one hand, and the Banks, on the other hand, the Agent shall not execute and deliver any Syndicated Letter of Credit if the Agent shall have received, at least two (2) Business Days before such execution and delivery, from the Required Banks an unrevoked written notice that any condition precedent set forth in Section 4.02 will not be satisfied as of the time of such execution and delivery and expressly requesting that the Agent cease to execute and deliver Syndicated Letters of Credit. Absent such notice, or unless the Agent determines that the applicable limitations set forth in Section 2.01 hereof are not satisfied, the Agent shall be justified and fully protected, as against the Banks, in executing and delivering such Syndicated Letter of Credit, notwithstanding any subsequent notices to the Agent, any knowledge of an Event of Default or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Agent, or any other event, condition or circumstance whatsoever. (ii) The Agent may amend, modify or supplement Syndicated Letters of Credit or Letter of Credit Applications, or waive compliance with any condition of issuance or payment, without the consent of, and without liability to, any Bank; PROVIDED that any such amendment, modification or supplement that extends the expiration date or increases the Stated Amount of or the amount available to be drawn on an outstanding Syndicated Letter of Credit shall be subject to Section 2.01; and PROVIDED FURTHER that, without the prior consent of each Bank, no such amendment, modification or supplement of a Syndicated Letter of Credit may be made that would vary the several and not joint nature of the obligations of the Banks thereunder as provided in Section 2.01(c). (iii) If any Syndicated Letter of Credit shall provide for the automatic extension of the expiry date thereof, the Agent shall give notice that such expiry date shall not be extended if the Required Banks request the Agent provide such notice by giving notice to the Agent not more than 60 days, but not less than 45 days, prior to the current expiry date of such Syndicated Letter of Credit. (iv) No Syndicated Letter of Credit may be issued nor may the expiration date of any Syndicated Letter of Credit be extended at any time after the Conversion to Tranche System has been implemented. 2.03. REIMBURSEMENT OF LC DISBURSEMENTS IN RESPECT OF SYNDICATED LETTERS OF CREDIT, ETC. (a) REIMBURSEMENT. If any Bank shall make any LC Disbursement in respect of any Syndicated Letter of Credit, regardless of the identity of the Account Party of such Syndicated Letter of Credit, the Account Parties jointly and severally agree that they shall reimburse such Bank in respect of such LC Disbursement by paying to the Agent an amount equal to such LC Disbursement on the date of such LC Disbursement (or, if later, the date which is one (1) Business Day after notice of such LC Disbursement or of the drawing giving rise to such LC Disbursement is given to XL Capital), without, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. (b) REIMBURSEMENT OBLIGATIONS ABSOLUTE. The Account Parties' joint and several obligations to reimburse LC Disbursements as provided in paragraph (a) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Syndicated Letter of Credit, or any term or provision therein, (ii) any draft or other document presented under a Syndicated Letter of Credit proving to 16 be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment under a Syndicated Letter of Credit against presentation of a draft or other document that does not comply strictly with the terms of such Syndicated Letter of Credit, (iv) at any time or from time to time, without notice to any Account Party, the time for any performance of or compliance with any of such reimbursement obligations of any other Account Party shall be waived, extended or renewed, (v) any of such reimbursement obligations of any other Account Party shall be amended or otherwise modified in any respect, or any guarantee of any of such reimbursement obligations shall be released, substituted or exchanged in whole or in part or otherwise dealt with, (vi) the occurrence of any Event of Default, (vii) the existence of any proceedings of the type described in clause (g) or (h) of Section 7.01 with respect to any other Account Party or any guarantor of any of such reimbursement obligations, (viii) any lack of validity or enforceability of any of such reimbursement obligations against any other Account Party or any guarantor of any of such reimbursement obligations, or (ix) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the obligations of any Account Party hereunder. Neither the Agent, nor any Bank nor any of their Related Parties shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Syndicated Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Syndicated Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond their control; provided that the foregoing shall not be construed to excuse the Agent or a Bank from liability to any Account Party to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Account Parties to the extent permitted by applicable law) suffered by any Account Party that are caused by the gross negligence or willful misconduct of the Agent or a Bank. The parties hereto expressly agree that: (i) the Agent may accept documents that appear on their face to be in substantial compliance with the terms of a Syndicated Letter of Credit without responsibility for further investigation, regardless of any notice or information to the contrary, and may make payment upon presentation of documents that appear on their face to be in substantial compliance with the terms of such Syndicated Letter of Credit; (ii) the Agent shall have the right, in its sole discretion, to decline to accept such documents and to make such payment if such documents are not in strict compliance with the terms of such Syndicated Letter of Credit; and (iii) this sentence shall establish the standard of care to be exercised by the Agent when determining whether drafts and other documents presented under a Syndicated Letter of Credit comply with the terms thereof (and the parties hereto hereby waive, to the extent permitted by applicable law, any standard of care inconsistent with the foregoing). (c) DISBURSEMENT PROCEDURES. The Agent shall, within a reasonable time following its receipt thereof, examine all documents purporting to represent a demand for payment under any Syndicated Letter of Credit. The Agent shall promptly after such examination (i) notify each of the Banks and the Account Parties by telephone (confirmed by telecopy) of such demand for payment and (ii) deliver to each Bank a copy of each document purporting to represent a demand for payment under such Syndicated Letter of Credit. With respect to any drawing properly made under a Syndicated Letter of Credit, each Bank will make an LC Disbursement in respect of such Syndicated Letter of Credit in accordance with its liability under such Syndicated Letter of Credit and this Agreement, such LC Disbursement to be made to the account of the Agent most recently 17 designated by it for such purpose by notice to the Banks. The Agent will make any such LC Disbursement available to the beneficiary of such Syndicated Letter of Credit by promptly crediting the amounts so received, in like funds, to the account identified by such beneficiary in connection with such demand for payment. Promptly following any LC Disbursement by any Bank in respect of any Syndicated Letter of Credit, the Agent will notify the Account Parties of such LC Disbursement; provided that any failure to give or delay in giving such notice shall not relieve the Account Parties of their obligation to reimburse the Banks with respect to any such LC Disbursement. (d) INTERIM INTEREST. If any LC Disbursement with respect to a Syndicated Letter of Credit is made, then, unless the Account Parties shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Account Parties reimburse such LC Disbursement, at the rate per annum equal to the Applicable Interest Rate. 2.04. PARTICIPATED LETTERS OF CREDIT. (a) GENERAL. Subject to the terms and conditions set forth herein, in addition to the issuance of Syndicated Letters of Credit provided for in Section 2.01, any Account Party may request the Issuing Bank to issue Participated Letters of Credit for the account of an Account Party at any time or from time to time on or after the Effective Date and to but not including the Expiration Date (it being understood that Participated Letters of Credit may be outstanding for the account of one or more of the Account Parties at any time). The Issuing Bank shall have no obligation to issue any Participated Letters of Credit if, after such Participated Letters of Credit are issued, the Letter of Credit Exposure upon such issuance would exceed the lesser of (x) the aggregate of the Banks' Letter of Credit Committed Amounts and (y) the Pledged Securities Available Amount. (b) TERMS OF PARTICIPATED LETTERS OF CREDIT. The Account Parties shall not request to be issued, and the Issuing Bank shall have no obligation to issue, any Participated Letter of Credit except within the following limitations: (i) each Participated Letter of Credit shall have an expiration date no later than 12 months after the date of issuance thereof; PROVIDED, HOWEVER, that any Participated Letter of Credit may have an "evergreen" provision having substantially the effect set forth on Schedule 2.01(b) hereof, (ii) each Participated Letter of Credit shall be denominated in Dollars and (iii) each Participated Letter of Credit shall be payable only against sight drafts (and not time drafts). (c) FORM OF PARTICIPATED LETTERS OF CREDIT. The Issuing Bank shall have no obligation to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to the Issuing Bank in the exercise of its reasonable judgment consistent with its customary practice. It is contemplated that one or more Letters of Credit which are requested to be issued by, and which are issued for the account of, XL Capital, XL Insurance or XL Re, respectively, may be stated to be issued for the account of XL Reinsurance America Inc., ECS, Inc., or XL Re Latin America Ltd, in which XL Capital, XL Insurance or XL Re, as the case may be, has a direct or indirect ownership interest, provided that, notwithstanding the fact that the name of XL Capital, XL Insurance or XL Re, as the case may be, may not appear on the face of any such Letter of Credit, XL Capital, XL Insurance or XL Re, as the case may be, shall be the Account Party with respect to such Letter of Credit and shall have all Letter of Credit Reimbursement Obligations and other obligations hereunder with respect thereto. 18 2.05. PROCEDURE FOR ISSUANCE AND AMENDMENT OF PARTICIPATED LETTERS OF CREDIT. (a) REQUEST FOR ISSUANCE. An Account Party may from time to time request, upon at least three (3) Business Days' notice, the Issuing Bank to issue a Participated Letter of Credit by: (i) delivering to the Issuing Bank and the Agent a written request to such effect, specifying the date on which such Participated Letter of Credit is to be issued, the expiration date thereof, and the Stated Amount thereof, and (ii) delivering to the Issuing Bank a completed Letter of Credit Application, together with such other certificates, documents and other papers as are specified in such application. Upon receiving any such notice, the Issuing Bank shall promptly notify the Agent (by telephone or otherwise), and furnish the Agent with the proposed form of Participated Letter of Credit to be issued. The Agent shall, promptly upon receiving such notice, notify the Banks of such proposed Participated Letter of Credit (which notice shall specify the Stated Amount and term of such proposed Participated Letter of Credit), and shall determine, as of the close of business on the Business Day before such proposed issuance, whether such proposed Participated Letter of Credit complies with the limitations set forth in Section 2.04 hereof. If such limitations set forth in Section 2.04 are not satisfied or if the Required Banks have given notice to the Agent to cease issuing Participated Letters of Credit pursuant to Section 2.05(c)(ii) hereof, the Agent shall notify the Issuing Bank (in writing or by telephone promptly confirmed in writing) that the Issuing Bank is not authorized to issue such Participated Letter of Credit. If the Issuing Bank issues a Participated Letter of Credit, it shall deliver the original of such Participated Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct, and shall promptly notify the Agent thereof and furnish a copy thereof to the Agent. (b) REQUEST FOR EXTENSION OR INCREASE. An Account Party may from time to time request the Issuing Bank to extend the expiration date of an outstanding Participated Letter of Credit or increase (or, with the consent of the beneficiary, decrease) the Stated Amount of or the amount available to be drawn on such Participated Letter of Credit. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of a replacement Participated Letter of Credit (except only that the Issuing Bank may, if it elects, issue a notice of extension or increase (or, with the consent of the beneficiary, decrease) in lieu of issuing a new Participated Letter of Credit in substitution for the outstanding Participated Letter of Credit). (c) LIMITATIONS ON ISSUANCE, EXTENSION AND AMENDMENT. (i) As between the Issuing Bank, on the one hand, and the Agent and the Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing a Participated Letter of Credit after receiving authorization from the Agent as provided in Section 2.05(a) hereof, notwithstanding any subsequent notices to the Issuing Bank, any knowledge of an Event of Default (unless the Issuing Bank shall have received a notice specifying that such Event of Default is an "Event of Default" under this Agreement) or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Issuing Bank, or any other event, condition or circumstance whatsoever. The Issuing Bank may amend, modify or supplement Participated Letters of Credit or Letter of Credit Applications, or waive compliance with any condition of issuance or payment, without the consent of, and without liability to, the Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases 19 the Stated Amount of or the amount available to be drawn on an outstanding Participated Letter of Credit shall be subject to Section 2.04. (ii) As between the Agent, on the one hand, and the Banks, on the other hand, the Agent shall not authorize issuance of any Participated Letter of Credit if the Agent shall have received, at least two (2) Business Days before authorizing such issuance, from the Required Banks an unrevoked written notice that any condition precedent set forth in Section 4.02 will not be satisfied as of the time of such issuance and expressly requesting that the Agent direct the Issuing Bank to cease to issue Participated Letters of Credit. Absent such notice, or unless the Agent determines that the applicable limitations set forth in Section 2.04 hereof are not satisfied, the Agent shall be justified and fully protected, as against the Banks, in authorizing the Issuing Bank to issue such Participated Letter of Credit, notwithstanding any subsequent notices to the Agent, any knowledge of an Event of Default or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Agent, or any other event, condition or circumstance whatsoever. 2.06. LETTER OF CREDIT PARTICIPATING INTERESTS. (a) GENERALLY. Concurrently with the issuance of each Participated Letter of Credit, the Issuing Bank automatically shall be deemed, irrevocably and unconditionally, to have sold, assigned, transferred and conveyed to each other Bank, and each other Bank automatically shall be deemed, irrevocably and unconditionally, severally to have purchased, acquired, accepted and assumed from the Issuing Bank, without recourse to, or representation or warranty by, the Issuing Bank, an undivided interest, in a proportion equal to such Bank's Pro Rata share, in all of the Issuing Bank's rights and obligations in, to or under such Participated Letter of Credit, the related Letter of Credit Application, the related Letter of Credit Reimbursement Obligations, and all collateral, guarantees and other rights from time to time directly or indirectly securing the foregoing (such interest of each Bank being referred to herein as a "Participated Letter of Credit Participating Interest", it being understood that the Participated Letter of Credit Participating Interest of the Issuing Bank is the interest not otherwise attributable to the Participated Letter of Credit Participating Interests of the other Banks). Each Bank irrevocably and unconditionally agrees to the immediately preceding sentence, such agreement being herein referred to as such Bank's "Participated Letter of Credit Participating Interest Commitment". Amounts other than Letter of Credit Reimbursement Obligations and Letter of Credit Fees payable from time to time under or in connection with a Participated Letter of Credit or related Letter of Credit Application shall be for the sole account of the Issuing Bank. On the date that any Purchasing Bank becomes a party to this Agreement in accordance with Section 9.13(c) hereof, Participated Letter of Credit Participating Interests in all outstanding Participated Letters of Credit held by the Bank from which such Purchasing Bank acquired its interest hereunder shall be proportionately reallocated between such Purchasing Bank and such transferor Bank (and, to the extent such transferor Bank is the Issuing Bank, the Purchasing Bank shall be deemed to have acquired a Participated Letter of Credit Participating Interest from the Issuing Bank to such extent). (b) MAXIMUM AMOUNTS OF FUNDING OF PARTICIPATIONS. (i) This Section 2.06(b)(i) is applicable if the Conversion to Tranche System has not occurred. No Bank will be obligated to fund its Letter of Credit Commitment Percentage of a drawing on a Participated Letter of Credit if such funding would cause the aggregate amount of outstanding unreimbursed LC Disbursements by such Bank of drawings on Letters of Credit to exceed such Bank's Letter of Credit Committed Amount. 20 (ii) This Section 2.06(b)(ii) is applicable if the Conversion to Tranche System has occurred. No Tranche 1 Bank, Tranche 2 Bank or Tranche X Bank, as the case may be, will be obligated to fund its Letter of Credit Commitment Percentage of a drawing on a Tranche 1 Letter of Credit, Tranche 2 Letter of Credit or Tranche X Letter of Credit, as the case may be, if such funding would cause the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit under such applicable Tranche to exceed such Bank's Letter of Credit Committed Amount under such applicable Tranche. (c) OBLIGATIONS ABSOLUTE. Notwithstanding any other provision hereof, each Bank hereby agrees that its obligation to participate in each Participated Letter of Credit issued in accordance herewith, its obligation to make the payments specified in Section 2.07 hereof, and the right of the Issuing Bank to receive such payments in the manner specified therein, are each absolute, irrevocable and unconditional and shall not be affected by any event, condition or circumstance whatever. The failure of any Bank to make any such payment shall not relieve any other Bank of its funding obligation hereunder on the date due, but no Bank shall be responsible for the failure of any other Bank to meet its funding obligations hereunder. 2.07. PARTICIPATED LETTER OF CREDIT DRAWINGS AND REIMBURSEMENTS. (a) ACCOUNT PARTY'S REIMBURSEMENT OBLIGATION. Each Account Party hereby agrees to reimburse the Issuing Bank, by making payment to the Agent for the account of the Issuing Bank in accordance with Section 2.16(a) hereof on the date of each LC Disbursement made by the Issuing Bank under any Participated Letter of Credit issued for such Account Party's account (or, if later, the date which is one (1) Business Day after notice of such LC Disbursement or of the drawing giving rise to such LC Disbursement is given to XL Capital), without, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. Each Account Party agrees that it will make such payment to the Agent for the account of the Issuing Bank in the same currency as the currency of the payment by the Issuing Bank under such Participated Letter of Credit. To the extent such payment is not timely made, such Account Party hereby agrees to pay to the Agent, for the account of the Issuing Bank, on demand, interest on any Letter of Credit Unreimbursed Draws for each day from and including the date of such payment by the Issuing Bank until paid (before and after judgment) in accordance with Section 2.16(a) hereof, at the rate per annum set forth in Section 2.16(b) hereof. (b) PAYMENT BY BANKS ON ACCOUNT OF UNREIMBURSED DRAWS. If the Issuing Bank makes an LC Disbursement under any Participated Letter of Credit and is not reimbursed in full therefor on such payment date in accordance with Section 2.07(a) hereof, the Issuing Bank will promptly notify the Agent thereof (which notice may be by telephone), and the Agent shall forthwith notify each Bank (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Agent's close of business on the date such notice is given (if notice is given by 2:00 o'clock p.m., Pittsburgh time) or 10:00 o'clock a.m., Pittsburgh time the following day (if notice is given after 2:00 o'clock p.m., Pittsburgh time) , each Bank will pay to the Agent, for the account of the Issuing Bank, in immediately available funds, an amount equal to such Bank's Pro Rata share of the unreimbursed portion of such LC Disbursement by the Issuing Bank, PROVIDED such notice is given no later than 2:00 o'clock p.m., Pittsburgh time and subject to Section 2.06(b). Each Bank agrees that such payment to the Agent for the account of the Issuing Bank shall be in the same currency as the currency of the payment by the Issuing Bank under the Participated Letter of Credit. If and to the extent that any Bank fails to make such payment to the Issuing Bank on such date, such Bank shall pay such amount on demand, together with interest, for the Issuing Bank's own account, for each day from and including the date of the Issuing Bank's payment to and including the date of repayment to the Issuing Bank 21 (before and after judgment) at rate per annum for each day from and including the date of such payment by the Issuing Bank to and including the second Business Day thereafter equal to the Applicable Interest Rate. (c) DISTRIBUTIONS TO BANKS. If, at any time, after there occurs a Letter of Credit Unreimbursed Draw with respect to a Participated Letter of Credit and the Issuing Bank has received from any Bank such Bank's share of such Letter of Credit Unreimbursed Draw, and the Issuing Bank receives any payment or makes any application of funds on account of the Letter of Credit Reimbursement Obligation arising from such Letter of Credit Unreimbursed Draw, the Issuing Bank will pay to the Agent, for the account of such Bank , such Bank's Pro Rata share of such payment. (d) RESCISSION. If any amount received by the Issuing Bank on account of any Letter of Credit Reimbursement Obligation under a Participated Letter of Credit shall be avoided, rescinded or otherwise returned or paid over by the Issuing Bank for any reason at any time, whether before or after the termination of this Agreement (or the Issuing Bank believes in good faith that such avoidance, rescission, return or payment is required, whether or not such matter has been adjudicated), each such Bank will, promptly upon notice from the Agent or the Issuing Bank, pay over to the Agent for the account of the Issuing Bank its Pro Rata share of such amount, together with its Pro Rata share of any interest or penalties payable with respect thereto. 2.08. EQUALIZATION. If any Bank receives any payment or makes any application on account of its Letter of Credit Participating Interest, such Bank shall forthwith pay over to the Issuing Bank, in Dollars and in like kind of funds received or applied by it the amount in excess of such Bank's ratable share of the amount so received or applied. 2.09. OBLIGATIONS ABSOLUTE. The Account Parties' obligations to reimburse LC Disbursements in respect of any Participated Letter of Credit as provided herein shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Participated Letter of Credit, or any term or provision therein, (ii) any draft or other document presented under a Participated Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Participated Letter of Credit against presentation of a draft or other document that does not comply strictly with the terms of such Participated Letter of Credit, (iv) at any time or from time to time, without notice to any Account Party, the time for any performance of or compliance with any of such reimbursement obligations of any other Account Party shall be waived, extended or renewed, (v) any of such reimbursement obligations of any other Account Party shall be amended or otherwise modified in any respect, or any guarantee of any of such reimbursement obligations shall be released, substituted or exchanged in whole or in part or otherwise dealt with, (vi) the occurrence of any Default, (vii) the existence of any proceedings of the type described in clause (g) or (h) of Section 7.01 with respect to any other Account Party or any guarantor of any of such reimbursement obligations, (viii) any lack of validity or enforceability of any of such reimbursement obligations against any other Account Party or any guarantor of any of such reimbursement obligations, or (ix) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the obligations of any Account Party hereunder. Neither the Agent, the Banks nor the Issuing Bank, nor any of their respective Related Parties, shall have any liability or responsibility by reason of or in connection with the payment or failure to make any payment under a Participated Letter of Credit (irrespective of any of the circumstances referred to in the preceding sentence) as a result of determining whether drafts 22 or other documents presented under a Participated Letter of Credit comply with the terms thereof, or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Participated Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; PROVIDED that the foregoing shall not be construed to excuse the Issuing Bank from sole and exclusive liability to the Account Parties to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Account Parties to the extent permitted by applicable law) suffered by the Account Parties that are caused by the Issuing Bank's gross negligence or willful misconduct when determining whether drafts and other documents presented under a Participated Letter of Credit comply with the terms thereof. The parties hereto expressly agree that: (i) the Issuing Bank may accept documents that appear on their face to be in substantial compliance with the terms of a Participated Letter of Credit without responsibility for further investigation, regardless of any notice or information to the contrary, and may make payment upon presentation of documents that appear on their face to be in substantial compliance with the terms of such Participated Letter of Credit; (ii) the Issuing Bank shall have the right, in its sole discretion, to decline to accept such documents and to make such payment if such documents are not in strict compliance with the terms of such Participated Letter of Credit; and (iii) this sentence shall establish the standard of care to be exercised by the Issuing Bank when determining whether drafts and other documents presented under a Participated Letter of Credit comply with the terms thereof (and the parties hereto hereby waive, to the extent permitted by applicable law, any standard of care inconsistent with the foregoing). 2.10. CERTAIN PROVISIONS RELATING TO THE ISSUING BANK. (a) GENERAL. The Issuing Bank shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or any Transaction Document or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the other Bank Parties under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Bank Party or any other Person. The Issuing Bank shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Account Party, (ii) the business, operations, condition (financial or otherwise) or prospects of the Account Parties or any other Person, or (iii) the existence of any Event of Default or Potential Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide the Agent or any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. The Issuing Bank shall not be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document to the extent dependent upon any Person other than the Issuing Bank. (b) ADMINISTRATION. The Issuing Bank may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such 23 notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Issuing Bank shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Issuing Bank may consult with legal counsel (including, without limitation, in-house counsel for the Issuing Bank or in-house or other counsel for the Account Parties), independent public accountants and any other experts selected by it from time to time, and the Issuing Bank shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever the Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to any Account Party or Bank Party, such matter may be established by a certificate of such Account Party or Bank Party, as the case may be, and the Issuing Bank may conclusively rely upon such certificate. The Issuing Bank shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Issuing Bank has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Issuing Bank receives such a notice, the Issuing Bank shall give prompt notice thereof to the Agent. (c) INDEMNIFICATION OF ISSUING BANK BY BANKS. Each Bank hereby agrees to reimburse and indemnify the Issuing Bank and each of its directors, officers, employees and agents (to the extent not reimbursed by the Account Parties and without limitation of the obligations of the Account Parties to do so), Pro Rata, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel (other than in-house counsel) for the Issuing Bank or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Issuing Bank or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Issuing Bank, in its capacity as such, or such other Person, as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Participated Letter of Credit, PROVIDED, that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting from the gross negligence or willful misconduct of the Issuing Bank or such other Person, as finally determined by a court of competent jurisdiction. (d) ISSUING BANK IN ITS INDIVIDUAL CAPACITY. With respect to its commitment hereunder and the Obligations owing to it, the Issuing Bank shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the term "Banks" and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Issuing Bank were not the Issuing Bank hereunder. 2.11. FEES. (a) LETTER OF CREDIT FEE. Each Account Party shall pay or cause to be paid to the Agent for the account of each Bank, in accordance with its Letter of Credit Commitment Percentage , a fee (the "Letter of Credit Fee") for Letters of Credit (based on a year of 360 days and actual days 24 elapsed), for each Letter of Credit issued for the account of such Account Party for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.20% for each Level One Day, 0.30% for each Level Two Day and 0.40% for each Level Three Day. Such Letter of Credit Fee shall be due and payable for the preceding period for which such fee has not been paid on each of the following dates: (i) each Regular Payment Date, (ii) the date of each drawing on such Letter of Credit, and (iii) the date of expiration or termination of such Letter of Credit. If any Letter of Credit Fee payment is made on a day which is not a Valuation Date, the amount of such Letter of Credit Fee attributable to the period from the preceding Valuation Date until such day shall be determined by reference to the rate applicable on such preceding Valuation Date, subject to retroactive adjustment on the next succeeding Valuation Date. The Agent shall provide to XL Capital on a monthly basis a certificate, showing in reasonable detail (with reference to the valuation report as of the last business day of the applicable month provided by the Custodian to the Agent pursuant to the Custodian's Acknowledgments (as defined in the Pledge Agreement)) the Agent's calculation of the Letter of Credit Fee. (b) ADMINISTRATION FEES. Each Account Party shall pay to the Agent, for the sole account of the Issuing Bank, such other administration, maintenance, amendment, drawing and negotiation fees as are customarily charged by the Issuing Bank to its customers generally at the time in question (a list of which customary charges as of the date of this Agreement has been provided by the Issuing Bank to XL Capital) or are otherwise agreed between the Issuing Bank and the Account Parties. (c) COMMITMENT FEE. XL Capital agrees to pay to the Agent for the account of each Bank a commitment fee (the "Commitment Fee") for each day during the period from the Effective Date to and including the Expiration Date calculated (based on a year of 360 days and actual days elapsed) at a per annum rate equal to 0.06% payable on the unused portion of such Bank's Letter of Credit Committed Amount in effect on such day. Such fee shall be payable on each Regular Payment Date and on the Expiration Date for the preceding period for which such fee has not been paid. (d) FACING FEE FOR PARTICIPATED LETTERS OF CREDIT. Each Account Party shall pay or cause to be paid to the Agent, for the sole account of the Issuing Bank, a letter of credit facing fee (the "Facing Fee") for each Participated Letter of Credit issued for the account of such Account Party for each day including the date of issuance thereof to and including the date of expiration or termination thereof, on the aggregate Letter of Credit Undrawn Availability of all of such Letters of Credit at a rate per annum, based on a year of 360 days and actual days elapsed, agreed to by the Agent and XL Capital prior to the Closing Date. Such Facing Fee shall be due and payable on each Regular Payment Date and on the Expiration Date for the preceding period for which such fee has not been paid. (e) INITIAL FEE. XL Capital agrees to pay on the Closing Date to the Agent for the account of each Bank an initial fee equal to five basis points, payable on such Bank's Committed Amount on the date hereof. 2.12. REDUCTION OF THE COMMITTED AMOUNTS. XL Capital may at any time or from time to time reduce Pro Rata the Letter of Credit Committed Amounts of the Banks to an aggregate amount (which may be zero) not less than the Letter of Credit Exposure. Any reduction of the Letter of Credit Committed Amounts shall be in an aggregate minimum amount of $25,000,000 and in an amount which is an integral multiple of $5,000,000. Reduction of the Letter of Credit Committed Amounts shall be made by providing not less than five (5) Business Days' notice (which notice shall be irrevocable) to such effect to the Agent, which will promptly advise the Banks of such notice. After the date specified in such notice, the Commitment Fee shall be calculated upon the Letter of Credit Committed Amounts as so reduced. 25 2.13. PURPOSE OF LETTERS OF CREDIT. The Account Parties agree that each Letter of Credit shall be used by the Account Party for whom it is issued as a standby letter of credit for general corporate purposes in the ordinary course of business of such Account Party. The provisions of this Section 2.13 represent only an obligation of the Account Parties to the Agent and the Banks; neither the Agent nor the Issuing Bank shall have any obligation to the Banks to ascertain the purpose of any Letter of Credit, and, without limiting the generality of the provisions of Section 2.06(b) hereof, the rights and obligations of the Banks and the Agent among themselves shall not be impaired or affected by a breach of this Section 2.13. 2.14. FURTHER ASSURANCES. Each Account Party and each Guarantor hereby agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments reasonably requested by the Issuing Bank more fully to effect the purposes of this Agreement and the issuance of the Letters of Credit hereunder. 2.15. LETTER OF CREDIT APPLICATIONS. The representations, warranties and covenants by the Account Parties under, and the rights and remedies of the Issuing Bank under, the Continuing Letter of Credit Agreements and any Letter of Credit Application relating to any Letter of Credit are in addition to, and not in limitation or derogation of, representations, warranties and covenants by the Account Parties under, and rights and remedies of the Issuing Bank and the Banks under, this Agreement, the Transaction Documents, and applicable Law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Application shall inure to the benefit of each Bank to the extent of its Letter of Credit Commitment Percentage as fully as if such Bank was a party to such Letter of Credit Application. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Application, this Agreement shall prevail. 2.16. PAYMENTS GENERALLY; INTEREST AND INTEREST ON OVERDUE AMOUNTS. (a) PAYMENTS GENERALLY. All payments to be made by an Account Party in respect of fees, indemnity, expenses or other amounts due from such Account Party hereunder or under any Transaction Document shall be payable in Dollars at 12:00 o'clock Noon, Pittsburgh time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature. Except for payments under Sections 2.17, 2.18 and 9.04 hereof, such payments shall be made to the Agent at its Office in Dollars in funds immediately available at such Office. Payments under Sections 2.17, 2.18 and 9.04 hereof shall be made to the applicable Bank at such domestic account as it shall specify to the Account Parties from time to time in funds immediately available at such account. Any payment or prepayment received by the Agent or such Bank after 12:00 o'clock Noon, Pittsburgh time, on any day shall be deemed to have been received on the next succeeding Business Day. The Agent shall distribute to the Banks all such payments received by it from an Account Party as promptly as practicable after receipt by the Agent. (b) INTEREST AND INTEREST ON OVERDUE AMOUNTS. Interest on Letter of Credit Reimbursement Obligations shall accrue at a rate per annum (based on a year of 360 days and actual days elapsed) which for each day shall be equal to the then-current Applicable Interest Rate beginning on the day that the related Letter of Credit payment is made and shall be due and payable on the day that the Letter of Credit Reimbursement Obligation is due and payable in accordance with Section 2.03(a) or 2.07(a) hereof. To the extent permitted by law, after there shall have become due (by acceleration or otherwise) fees, indemnity, expenses or any other amounts due from the Account Parties hereunder or under any other Transaction Document, such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days 26 and actual days elapsed) which for each day shall be equal to 2% above the then-current Applicable Interest Rate. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any Transaction Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. 2.17. ADDITIONAL COMPENSATION IN CERTAIN CIRCUMSTANCES. If the introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by any Governmental Authority charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Governmental Authority (whether or not having the force of law): (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Letters of Credit or payments by the Account Parties of fees or other amounts due from the Account Parties hereunder or under the other Transaction Documents (except for taxes on the overall net income or overall gross receipts of such Bank imposed by the jurisdictions (federal, state and local) in which the Bank's principal office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, such Bank, (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Bank or (B) otherwise applicable to the obligations of any Bank under this Agreement, or (iv) imposes upon any Bank any other condition or expense with respect to this Agreement or the issuance of any Letter of Credit, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank or, in the case of clause (iii) hereof, any Person controlling a Bank, with respect to this Agreement or the issuance of any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Bank's or controlling Person's capital, taking into consideration such Bank's or controlling Person's policies with respect to capital adequacy so long as such policies are reasonable in light of prevailing market practice at the time) by an amount which such Bank deems to be material, such Bank may from time to time notify the Account Parties of the amount determined in good faith (using any averaging and attribution methods) by such Bank (which determination shall be conclusive) to be necessary to compensate such Bank for such increase, reduction or imposition. Such amount shall be due and payable by any applicable Account Party to such Bank five (5) Business Days after such notice is given, together with an amount equal to interest on such amount from the date two (2) Business Days after the date demanded until such due date at the Prime Rate. A certificate by such Bank as to the amount due and payable under this Section 2.17 from time to time and the method of calculating such amount shall be conclusive. Each Bank agrees that it will use good faith efforts to notify the Account Parties of the occurrence of any event that would give rise to a payment under this Section 2.17; PROVIDED, however that, so long as such notice is given within a reasonable period after the occurrence of such event, any failure of such Bank to give any such notice shall have no effect on the Account Parties' obligations hereunder. 27 2.18. TAXES. (a) PAYMENTS NET OF TAXES. All payments made by the Account Parties under this Agreement or any other Transaction Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, and all liabilities with respect thereto, excluding (i) in the case of the Agent and each Bank, income or franchise taxes imposed on the Agent or such Bank by the jurisdiction under the laws of which the Agent or such Bank is organized or any political subdivision or taxing authority thereof or therein or as a result of a connection between such Bank and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and (ii) in the case of each Bank, income or franchise taxes imposed by any jurisdiction in which such Bank's lending offices which issue Letters of Credit are located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Non-Excluded Taxes"), unless an Account Party is required to withhold or deduct Non-Excluded Taxes. If any Non-Excluded Taxes are required to be withheld or deducted from any amounts payable to the Agent or any Bank under this Agreement or any other Transaction Document, the applicable Account Party shall pay the relevant amount of such Non-Excluded Taxes and the amounts so payable to the Agent or such Bank shall be increased to the extent necessary to yield to the Agent or such Bank (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Transaction Documents. Whenever any Non-Excluded Taxes are paid by an Account Party with respect to payments made in connection with this Agreement or any other Transaction Document, as promptly as possible thereafter, such Account Party shall send to the Agent for its own account or for the account of such Bank, as the case may be, a certified copy of an original official receipt received by such Account Party showing payment thereof. If the Agent or a Bank determines in its sole discretion in good faith that it has received a refund in respect of any Non-Excluded Taxes as to which it has been indemnified by an Account Party, or with respect to which an Account Party has paid additional amounts pursuant to this Section 2.18, the Agent or such Bank shall promptly after the date of such receipt pay over the amount of such refund to such Account Party (but only to the extent of indemnity payments made, or additional amounts paid, by an Account Party under this Section 2.18 with respect to Non-Excluded Taxes giving rise to such refund and only to the extent that the Agent or such Bank has determined that the amount of any such refund is directly attributable to payments made under this Agreement), net of all reasonable expenses of the Agent or such Bank (including additional Non-Excluded Taxes attributable to such refund, as determined by the Agent or such Bank) and without interest (other than interest, if any, paid by the relevant Governmental Authority with respect to such refund). An Account Party receiving any such payment from the Agent or a Bank shall, upon demand, pay to the Agent or such Bank any amount paid over to such Account Party by the Agent or such Bank (plus penalties, interest or other charges) in the event the Agent or such Bank is required to repay any portion of such refund to such Governmental Authority. Nothing in this Section 2.18(a) shall entitle an Account Party to have access to the records of the Agent or any Bank, including, without limitation, tax returns. (b) INDEMNITY. Each Account Party hereby indemnifies the Agent and each of the Banks for the full amount of all Non-Excluded Taxes attributable to payments by or on behalf of such Account 28 Party hereunder or under any of the other Transaction Documents, any Non-Excluded Taxes paid by the Agent or such Bank, as the case may be, any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Non-Excluded Taxes (including any incremental Non-Excluded Taxes, interest or penalties that may become payable by the Agent or such Bank as a result of any failure to pay such Non-Excluded Taxes, except by reason of unreasonable delay by the Agent or Bank in notifying an Account Party or in making payment after payment was received from an Account Party), whether or not such Non-Excluded Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date such Bank or the Agent, as the case may be, makes written demand therefor. (c) WITHHOLDING AND BACKUP WITHHOLDING. Each Bank that is incorporated or organized under the laws of any jurisdiction other than the United States or any State thereof agrees that, on or prior to the date the first payment is due to be made to it hereunder or under any other Transaction Document, it will furnish to the Account Parties and the Agent (i) two (2) valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the other Transaction Documents without deduction or withholding of any United States federal income taxes and (ii) a valid, duly completed Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Bank which so delivers to the Account Parties and the Agent a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, agrees to deliver to the Account Parties and the Agent two (2) further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from withholding tax, or after the occurrence of any event requiring a change in the most recent form previously delivered by it, and such extensions or renewals thereof as may reasonably be requested by the Account Parties and the Agent, certifying in the case of a Form 1001 or Form 4224 that such Bank is entitled to receive payments under this Agreement or any other Transaction Document without deduction or withholding of any United States federal income taxes, unless in any such cases an event (including any changes in Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Account Parties and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, in which case Section 2.13(a) and (b) shall apply to all further payments. 2.19. EXTENSIONS OF EXPIRATION DATE. XL Capital may, at its option, give the Agent and the Issuing Bank written notice (an "EXTENSION REQUEST") at any time not more than ninety (90) days, nor less than forty-five (45) days, prior to the Expiration Date in effect at such time (the "CURRENT EXPIRATION DATE") of XL Capital's desire to extend the Expiration Date to a date which is not later than 364 days after the Current Expiration Date. The Agent shall promptly inform the Banks of such Extension Request. Each Bank which agrees to such Extension Request shall deliver to the Agent its express written consent thereto no later than thirty (30) days prior to the Current 29 Expiration Date. No extension shall become effective unless the express written consent thereto by the Required Commitment Banks and the Issuing Bank is received by the Agent on or before the thirtieth (30th) day prior to the Current Expiration Date. If the Issuing Bank and the Required Commitment Banks, but not all Commitment Banks, have expressly consented in writing to such Extension Request by such thirtieth (30th) day, then the Agent shall so notify XL Capital and XL Capital may, effective as of the Current Expiration Date, take one or both of the following actions: (i) replace any Commitment Bank which has not agreed to such Extension Request (a "NONEXTENDING BANK") with another commercial lending institution satisfactory to the Issuing Bank (a "REPLACEMENT BANK") by giving notice of the name of such Replacement Bank to the Agent and the Issuing Bank not later than five (5) Business Days prior to the then Current Expiration Date and by securing the agreement, in form and substance satisfactory to the Issuing Bank, of each beneficiary under each outstanding Syndicated Letter of Credit to the substitution of such Replacement Bank for such Nonextending Bank under each such Syndicated Letter of Credit, and (ii) elect to implement a Conversion to Tranche System as contemplated by Section 2.20 hereof (or, if the Conversion to Tranche System has previously been implemented, elect to implement a Supplement to Tranche System as contemplated by Section 2.20 hereof). In the event that a Nonextending Bank is to be replaced by a Replacement Bank, such Nonextending Bank shall, upon payment to it of all amounts owing to it on the date of its replacement, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. If the Issuing Bank and the Required Commitment Banks shall have consented to such Extension Request, then, on the Current Expiration Date, the Expiration Date shall be deemed to have been extended to, and shall be, the date specified in such Extension Request; PROVIDED that if the Required Commitment Banks, but not all Commitment Banks, shall have consented to such Extension Request and XL Capital has elected to implement a Conversion to Tranche System, then the Expiration Date shall be deemed to have been so extended only with respect to Participated Letters of Credit and not with respect to Syndicated Letters of Credit. The Agent shall promptly after any such extension advise the Banks of any changes in the Letter of Credit Committed Amounts and the Letter of Credit Commitment Percentages, as well as any changes effected by the election of the Conversion to Tranche System or a Supplement to Tranche System. 2.20. TRANCHES. (a) CERTAIN DEFINITIONS. As used in this Agreement the following terms have the meanings ascribed thereto: "COMMITMENT BANKS" at any time means Banks which have Letter of Credit Commitments at such time and "Commitment Bank" means any one of them. "CONVERSION TO TRANCHE SYSTEM" means the election by XL Capital, at a time when XL Capital has made an Extension Request pursuant to Section 2.19 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify Letters of Credit as Tranche 1 Letters of Credit and Tranche 2 Letters of Credit, all in accordance with Section 2.20(b) hereof. "L/C TERMINATION DATE" means, with respect to a Letter of Credit, the date which is stated therein to be the last day on which the beneficiary thereof may draw thereon. "PRO RATA" means: (i) until the first Special Expiration Date, from and to the Banks in accordance with their respective Letter of Credit Commitment 30 Percentages and (ii) thereafter, (x) with respect to Tranche 1 Letters of Credit, from and to the Tranche 1 Banks in accordance with their respective Tranche 1 Letter of Credit Commitment Percentages, (y) with respect to Tranche 2 Letters of Credit and Tranche 2 Letter of Credit Commitments, from and to the Tranche 2 Banks in accordance with their respective Tranche 2 Letter of Credit Commitment Percentages and (z) with respect to each additional Tranche of Letters of Credit (i.e., Tranche 3 Letters of Credit, Tranche 4 Letters of Credit, and so on), if any, from and to the Banks which have Letter of Credit Commitments or Letter of Credit Interests, as applicable, with respect to such Tranche in accordance with their respective related Letter of Credit Commitment Percentages. "REQUIRED COMMITMENT BANKS" at any time means Commitment Banks which have, in the aggregate, Letter of Credit Committed Amounts in excess of 50% of the total outstanding Letter of Credit Committed Amounts at such time. "SPECIAL EXPIRATION DATE" means the Expiration Date which is in effect at a time when each of the following has occurred: (i) XL Capital has made an Extension Request pursuant to Section 2.19 hereof, (ii) such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, and (iii) XL Capital has elected to implement a Conversion to Tranche System or a Supplement to Tranche System. "SUPPLEMENT TO TRANCHE SYSTEM" means the election by XL Capital, at a time when the Conversion to Tranche System has been previously made and when XL Capital has made an Extension Request pursuant to Section 2.19 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify additional Letters of Credit as Tranche X Letters of Credit. "TRANCHE 1 BANK" shall mean each Bank which is a Bank immediately prior to the first Special Expiration Date. "TRANCHE 1 LETTER OF CREDIT" means each Letter of Credit which is issued prior to the first Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such first Special Expiration Date. "TRANCHE 1 LETTER OF CREDIT COMMITMENT PERCENTAGE" for each Tranche 1 Bank means such Bank's Letter of Credit Commitment Percentage immediately prior to the first Special Expiration Date. "TRANCHE 2 BANK" shall mean each Bank which has a Tranche 2 Letter of Credit Commitment. "TRANCHE 2 LETTER OF CREDIT" means each Participated Letter of Credit which is issued prior to the second Special Expiration Date, but shall not include any such Participated Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such second Special Expiration Date and shall not include any Tranche 1 Letter of 31 Credit (it being understood that a Participated Letter of Credit may change from a Tranche 1 Letter of Credit to a Tranche 2 Letter of Credit as a result of the extension, after the first Special Expiration Date, of its L/C Termination Date). "TRANCHE 3 LETTER OF CREDIT" and "TRANCHE 4 LETTER OF CREDIT" have the meanings set forth in the definition of the term "Tranche X". "TRANCHE X" shall mean Tranche 3 if there are existing Tranche 2 Letters of Credit but not Tranche 3 Letters of Credit, Tranche 4 if there are existing Tranche 3 Letters of Credit but not Tranche 4 Letters of Credit, and so on in consecutive integral succession. The terms "Tranche X Bank", "Tranche X Letter of Credit Commitment", "Tranche X Letter of Credit Committed Amount" and "Tranche X Letter of Credit Commitment Percentage" shall have comparable meanings. The term "Tranche X Letter of Credit" shall have a comparable meaning, but such meaning shall be consistent with the following: (i) the term "TRANCHE 3 LETTER OF CREDIT" means each Participated Letter of Credit which is issued prior to the third Special Expiration Date, but shall not include any such Participated Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such third Special Expiration Date and shall not include any Tranche 1 Letter or Credit or any Tranche 2 Letter of Credit; (ii) the term "TRANCHE 4 LETTER OF CREDIT" means each Participated Letter of Credit which is issued prior to the fourth Special Expiration Date, but shall not include any such Participated Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such fourth Special Expiration Date and shall not include any Tranche 1 Letter of Credit, any Tranche 2 Letter of Credit or any Tranche 3 Letter of Credit; (iii) the terms "TRANCHE 5 LETTER OF CREDIT", "TRANCHE 6 LETTER OF CREDIT", and so on shall have comparable meanings (it being understood that a Participated Letter of Credit can change from one Tranche to another as a result of an extension of its L/C Termination Date). (b) CONVERSION TO TRANCHE SYSTEM. If XL Capital elects the Conversion to Tranche System with respect to an Extension Request, the following shall occur: (i) the Syndicated Letter of Credit Commitments of all of the Banks shall terminate as of the first Special Expiration Date and the Letter of Credit Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate as of the Special Expiration Date related to such Extension Request, but the Banks (other than Nonextending Banks which have been replaced as contemplated by Section 2.19 hereof) shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Tranche 1 Letters of Credit and shall retain their respective Letter of Credit Interests in and with respect to Tranche 1 Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Commitment of each Bank which has consented in writing to such Extension Request shall be a "TRANCHE 2 LETTER OF CREDIT COMMITMENT" and the Letter of Credit Participating Interested Committed Amount of such Bank shall be its "TRANCHE 2 LETTER OF CREDIT COMMITTED AMOUNT"; (iii) the "TRANCHE 2 LETTER OF CREDIT COMMITMENT PERCENTAGE" for each Tranche 2 Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche 2 Bank's Tranche 2 Letter of Credit Committed Amount and the denominator of which is the aggregate Tranche 2 Letter of Credit Committed Amounts of all of the Tranche 2 Banks. 32 (c) SUPPLEMENT TO TRANCHE SYSTEM. If XL Capital elects a Supplement to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate, but such Nonextending Banks shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Letters of Credit under existing Tranches and shall retain their respective Letter of Credit Interests in and with respect to existing Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Commitment of each Bank which has consented in writing to such Extension Request shall be a "TRANCHE X LETTER OF CREDIT COMMITMENT" and the Letter of Credit Committed Amount of such Bank shall be its "TRANCHE X LETTER OF CREDIT COMMITTED AMOUNT"; (iii) the "TRANCHE X LETTER OF CREDIT COMMITMENT PERCENTAGE" for each Tranche X Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche X Bank's Tranche X Letter of Credit Committed Amount and the denominator of which is the aggregate Tranche X Letter of Credit Committed Amounts of all of the Tranche X Banks, all as contemplated by the definition of the term "Tranche X" contained in paragraph (a) of this Section 2.20. 2.21. BENCHMARK CREDIT RATING. If the long-term deposit rating of any Bank shall decline below the Benchmark Credit Rating (as defined below), the Issuing Bank shall have the right, but not the obligation, to cause such Bank to be replaced as a party hereto by a Replacement Bank. In the event that any Bank is to be replaced by a Replacement Bank, such Bank shall, upon payment to it of all amounts owing to it on the date of its replacement, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. The "BENCHMARK CREDIT RATING" is both (i) a long-term deposit rating of at least A by Standard & Poor's and (ii) a long-term deposit rating of at least A2 by Moody's. Each Credit Party agrees that it shall cooperate with the Issuing Bank in connection with the identification of one or more Replacement Banks if the Issuing Bank exercises its right set forth in the first sentence of this Section 2.21. ARTICLE III REPRESENTATIONS AND WARRANTIES. Each Credit Party represents and warrants that: 3.01. ORGANIZATION; POWERS. Such Credit Party and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. 3.02. AUTHORIZATION; ENFORCEABILITY. The Transactions are within such Credit Party's and XL Investments' corporate powers and have been duly authorized by all necessary corporate and, if required, by all necessary shareholder action. This Agreement has been duly executed and delivered by such Credit Party and constitutes a legal, valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium, examination or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 33 3.03. GOVERNMENTAL APPROVALS; NO CONFLICTS. The Transactions (a) do not require any consent or approval of (including any exchange control approval), registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of such Credit Party or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any material indenture, agreement or other instrument binding upon such Credit Party or any of its Subsidiaries or assets, or give rise to a right thereunder to require any payment to be made by any such Person, and (d) will not result in the creation or imposition of any Lien on any asset of such Credit Party or any of its Subsidiaries. 3.04. FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE. (a) FINANCIAL CONDITION. Such Credit Party has heretofore furnished to the Banks the consolidated balance sheet and statements of income, stockholders' equity and cash flows of such Credit Party and its consolidated Subsidiaries (A) as of and for the fiscal years ended December 31, 1999 and December 31, 2000, reported on by PricewaterhouseCoopers LLP, independent public accountants (as provided in XL Capital's Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2000), and (B) as of and for the fiscal quarter ended September 30, 2001, as provided in XL Capital's Report on Form 10-Q filed with the SEC for the fiscal quarter ended September 30, 2001. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of such Credit Party and its respective consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP or (in the case of XL Europe, XL Insurance or XL Re) SAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (B) of the first sentence of this paragraph. (b) NO MATERIAL ADVERSE CHANGE. Since December 31, 2000, there has been no material adverse change in the assets, business, financial condition or operations of such Credit Party and its Subsidiaries, taken as a whole, except for losses caused by or relating to or arising out of the terrorist events of September 11, 2001; PROVIDED HOWEVER, that XL Capital remains in compliance with Section 6.06. 3.05. PROPERTIES. (a) PROPERTY GENERALLY. Such Credit Party and each of its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, subject only to Liens permitted by Section 6.03 and except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (b) INTELLECTUAL PROPERTY. Such Credit Party and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by such Credit Party and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 3.06. LITIGATION AND ENVIRONMENTAL MATTERS. (a) ACTIONS, SUITS AND PROCEEDINGS. Except as disclosed in Schedule 3.06 or as routinely encountered in claims activity, there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority now pending against or, to the knowledge of such Credit Party, threatened against or affecting such Credit Party or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that could reasonably be expected, 34 individually or in the aggregate, to result in a Material Adverse Effect or (ii) that involve this Agreement or the Transactions. (b) ENVIRONMENTAL MATTERS. Except as disclosed in Schedule 3.06 and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither such Credit Party nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required for its business under any Environmental Law, (ii) has incurred any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. 3.07. COMPLIANCE WITH LAWS AND AGREEMENTS. Such Credit Party and each of its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Event of Default has occurred and is continuing. 3.08. INVESTMENT AND HOLDING COMPANY STATUS. Neither such Credit Party nor XL Investments is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 3.09. TAXES. Such Credit Party and each of its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which such Person has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan by an amount that could reasonably be expected to result in a Material Adverse Effect. Except as could not reasonably be expected to result in a Material Adverse Effect, (i) all contributions required to be made by any Credit Party or any of their Subsidiaries with respect to a Non-U.S. Benefit Plan have been timely made, (ii) each Non-U.S. Benefit Plan has been maintained in compliance with its terms and with the requirements of any and all applicable laws and has been maintained, where required, in good standing with the applicable Governmental Authority and (iii) neither any Credit Party nor any of their Subsidiaries has incurred any obligation in connection with the termination or withdrawal from any Non-U.S. Benefit Plan. 3.11. DISCLOSURE. The reports, financial statements, certificates or other information furnished by such Credit Party or by XL Investments to the Bank Parties in connection with the negotiation of this Agreement or delivered hereunder (taken as a whole) do not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, such Credit Party represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. 35 3.12. USE OF CREDIT. Neither such Credit Party nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no Letter of Credit will be used in connection with buying or carrying any Margin Stock. 3.13. SUBSIDIARIES. Set forth in Schedule 3.13 is a complete and correct list of all of the Subsidiaries of XL Capital as of September 30, 2001, together with, for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and (iii) the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Schedule 3.13, (x) each of XL Capital and its Subsidiaries owns, free and clear of Liens, and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Schedule 3.13, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) except as disclosed in filings of XL Capital with the SEC prior to the date hereof, there are no outstanding Equity Rights with respect to any Credit Party. 3.14. WITHHOLDING TAXES. Based upon information with respect to each Bank provided by each Bank to the Agent, as of the date hereof, the payment of the LC Disbursements and interest thereon, the fees under Section 2.11 and all other amounts payable hereunder will not be subject, by withholding or deduction, to any Taxes imposed by any Credit Party Jurisdiction. 3.15. STAMP TAXES. To ensure the legality, validity, enforceability or admissibility in evidence of this Agreement, it is not necessary that this Agreement or any other document be filed or recorded with any Governmental Authority or that any stamp or similar tax be paid on or in respect of this Agreement, or any other document other than such filings and recordations that have already been made and such stamp or similar taxes that have already been paid. 3.16. LEGAL FORM. This Agreement is in proper legal form under the laws of any Credit Party Jurisdiction for the admissibility thereof in the courts of such Credit Party Jurisdiction. ARTICLE IV CONDITIONS 4.01. EFFECTIVENESS. The obligation of the Issuing Bank to issue Letters of Credit and to permit the commencement of the maintenance of Existing Letters of Credit as Letters of Credit hereunder shall be subject to the following conditions: (a) PROCEEDINGS AND INCUMBENCY. There shall have been delivered to the Agent with sufficient copies for each Bank a certificate with respect to each of the Credit Parties and XL Investments in form and substance satisfactory to the Agent dated the Closing Date or such other date as shall be satisfactory to the Agent and signed on behalf of such Credit Party or XL Investments, as the case may be, by the Secretary or an Assistant Secretary of such Credit Party or XL Investments, as the case may be, certifying as to: (a) with respect to a Credit Party, true copies of all corporate action taken by such Credit Party relative to this Agreement and the other Transaction Documents applicable to it, and with respect to XL Investments, true copies of all corporate action taken by it in connection with the Transaction Documents applicable to it, including but not limited to that described in Section 3.02 hereof and (b) with respect to a Credit Party, the names, true signatures and incumbency of the officer or officers of such Credit Party authorized to execute and deliver this Agreement and the other Transaction Documents applicable to it, and with respect to XL Investments, the names, true signatures and incumbency of the officer 36 or officers of XL Investments authorized to execute and deliver the Transaction Documents applicable to it. Each Bank may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Bank. (b) ORGANIZATIONAL DOCUMENTS. There shall have been delivered to the Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation or memorandum of association and by-laws or other equivalent organizational documents for each Credit Party and for XL Investments and (ii) a certificate of good standing for each Credit Party (other than XL Europe) and for XL Investments certified by the appropriate Governmental Authority of its place of organization. (c) OPINIONS OF COUNSEL. There shall have been delivered to the Agent with sufficient copies for each Bank written opinions addressed to the Banks, dated the Closing Date or such other date as shall be satisfactory to the Agent, of Messrs. Cahill Gordon & Reindel, Messrs. Conyers, Dill & Pearman, Hunter & Hunter, A&L Goodbody, Martha Bannerman, Esq., and Paul S. Giordano, Esq., respectively, the Account Parties', Guarantors' and Pledgors' counsel, which together are substantially to the effects set forth in EXHIBIT C, and opinions of counsel qualified to practice in each jurisdiction, other than Bermuda and the United States, under the laws of which an Account Party is organized substantially to such effects to the extent that the laws of such jurisdiction are relevant. (d) DETAILS, PROCEEDINGS AND DOCUMENTS. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory to each Bank, and each Bank shall have received all such counterpart originals or certified or other copies of this Agreement and the other the Transaction Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Bank have reasonably requested. (e) FEES AND EXPENSES. Each Account Party shall have paid all fees and other compensation to be paid by it hereunder on or prior to the Closing Date. (f) REPRESENTATION AND WARRANTIES. The representation and warranties contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (g) PLEDGE AGREEMENT. The Pledge Agreement shall have been delivered to the Agent, with sufficient copies for each Bank, duly executed by each Pledgor. The Custodian's Acknowledgment shall have been delivered to the Agent duly executed by the Custodian and by each of the Pledgors, respectively. (h) LETTER OF CREDIT AGREEMENT. Each Account Party shall have executed and delivered to the Agent, with sufficient copies for each Bank, a Continuing Letter of Credit Agreement. 4.02. ISSUANCE OF LETTERS OF CREDIT. The obligation of the Issuing Bank to issue any Letters of Credit hereunder is subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the performance by each Account Party of its obligations to be performed hereunder on or before the date of such Letters of Credit and to the satisfaction of the following further conditions: 37 (a) REPRESENTATIONS AND WARRANTIES; EVENTS OF DEFAULT AND POTENTIAL DEFAULTS. The representations and warranties contained in Article III hereof shall be true on and as of the date of each Letter of Credit issued hereunder with the same effect as though made on and as of each such date, and on the date of each Letter of Credit issued hereunder no Event of Default and no Potential Default shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Letter of Credit to be issued on such date. Failure of the Agent to receive notice from the applicable Account Party to the contrary before any Letter of Credit is issued hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the date of such Letter of Credit with the same effect as though made on and as of such date and (ii) on the date of such Letter of Credit no Event of Default or Potential Default has occurred and is continuing or exists or will occur or exist after giving effect to such Letter of Credit. (b) COMMITMENT. The fact that, immediately after the issuance of such Letter of Credit, the Letter of Credit Undrawn Availability (determined as Dollar Equivalents) and the aggregate of the Letter of Credit Unreimbursed Draws (determined as Dollar Equivalents) will not exceed the lesser of (x) the aggregate amount of the Letter of Credit Committed Amounts and (y) the Pledged Securities Available Amount. ARTICLE V AFFIRMATIVE COVENANTS Each Credit Party, as applicable, hereby covenants to the Agent, the Issuing Bank and each other Bank as follows: 5.01. FINANCIAL STATEMENTS AND OTHER INFORMATION. Each Credit Party will furnish to the Agent and each Bank: (a) within 135 days after the end of each fiscal year of each Credit Party except for XL America (but in the case of XL Capital, within 100 days after the end of each fiscal year of XL Capital), the audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Credit Party and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods) (it being understood that delivery to the Banks of XL Capital's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (a) to deliver the annual financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (a)), all reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such Credit Party and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied; (b) by June 15 of each year, (i) an unaudited consolidating balance sheet and related statements of operations, stockholders' equity and cash flows of XL America and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the 38 figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods), and (ii) audited statutory financial statements for each insurance subsidiary of XL America reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such audited consolidated financial statements present fairly in all material respects the financial condition and results of operations of such insurance subsidiaries in accordance with SAP, consistently applied; (c) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of such Credit Party, the consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Credit Party and its consolidated Subsidiaries as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of such Credit Party as presenting fairly in all material respects the financial condition and results of operations of such Credit Party and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that delivery to the Banks of XL Capital's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (c) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (c)); (d) concurrently with any delivery of financial statements under clause (a), (b) or (c) of this Section, a certificate signed on behalf of each Credit Party by a Financial Officer (i) certifying as to whether an Event of Default has occurred and, if an Event of Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.03, 6.05, 6.06 and 6.07 and (iii) stating whether any change in GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (e) concurrently with any delivery of financial statements under clause (a) of this Section, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Event of Default (which certificate may be limited to the extent required by accounting rules or guidelines); (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by such Credit Party or any of its respective Subsidiaries with the SEC, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any U.S. or other securities exchange, or distributed by such Credit Party to its shareholders generally, as the case may be; (g) concurrently with any delivery of financial statements under clause (a), (b) or (c) of this Section, a certificate of a Financial Officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (i) the aggregate book value of assets which are subject to Liens permitted under Section 6.03(g) and the aggregate book value of liabilities which are subject to Liens permitted under Section 6.03(g) (it being understood that the reports required by paragraphs (a), (b) 39 and (c) of this Section shall satisfy the requirement of this clause (i) of this paragraph (g) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (ii) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital; and (g) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of XL Capital or any of its Subsidiaries, or compliance with the terms of this Agreement, as the Agent or any Bank may reasonably request. 5.02. NOTICES OF MATERIAL EVENTS. Each Credit Party will furnish to the Agent and each Bank prompt written notice of the following: (a) the occurrence of any Event of Default; and (b) any event or condition constituting, or which could reasonably be expected to have a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the relevant Credit Party setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken by such Credit Party with respect thereto. 5.03. PRESERVATION OF EXISTENCE AND FRANCHISES. Each Credit Party will, and will cause each of its Subsidiaries to, maintain its corporate existence and its material rights and franchises in full force and effect in its jurisdiction of incorporation; provided that the foregoing shall not prohibit any merger or consolidation permitted under Section 6.01. Each Credit Party will, and will cause each of its Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. 5.04. INSURANCE. Each Credit Party will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurers, insurance with respect to its properties in such amounts as is customary in the case of corporations engaged in the same or similar businesses having similar properties similarly situated. 5.05. MAINTENANCE OF PROPERTIES. Each Credit Party will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition the properties now or hereafter owned, leased or otherwise possessed by and used or useful in its business and will make or cause to be made all needful and proper repairs, renewals, replacements and improvements thereto so that the business carried on in connection therewith may be properly conducted at all times except if the failure to do so would not have a Material Adverse Effect, provided, however, that the foregoing shall not impose on such Credit Party or any Subsidiary of such Credit Party any obligation in respect of any property leased by such Credit Party or such Subsidiary in addition to such Credit Party's obligations under the applicable document creating such Credit Party's or such Subsidiary's lease or tenancy. 5.06. PAYMENT OF TAXES AND OTHER POTENTIAL CHARGES AND PRIORITY CLAIMS; PAYMENT OF OTHER CURRENT LIABILITIES. Each Credit Party will, and will cause each of its Subsidiaries to, pay or discharge: (a) on or prior to the date on which penalties attach thereto, all taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income; 40 (b) on or prior to the date when due, all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon any such property; and (c) on or prior to the date when due, all other lawful claims which, if unpaid, might result in the creation of a Lien upon any such property (other than Liens not forbidden by Section 6.03) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Credit Party in any proceeding under the Bermuda Companies Law or Bermuda Insurance Law, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Credit Party or such Subsidiary; provided that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Credit Party need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP or SAP, as the case may be, shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. 5.07. FINANCIAL ACCOUNTING PRACTICES. Such Credit Party will, and will cause each of its consolidated Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Section 5.01 in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. 5.08. COMPLIANCE WITH APPLICABLE LAWS. Each Credit Party will, and will cause each of its Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; provided that such Credit Party or any Subsidiary of such Credit Party will not be deemed to be in violation of this Section as a result of any failure to comply with any such Law which would not (i) result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would have a Material Adverse Effect or (ii) otherwise impair the ability of such Credit Party to perform its obligations under this Agreement. 5.09. USE OF LETTERS OF CREDIT. No Letter of Credit will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X. 5.10. CONTINUATION OF AND CHANGE IN BUSINESSES. Each Credit Party and its Subsidiaries will continue to engage in substantially the same business or businesses it engaged in (or proposes to engage in) on the date of this Agreement and businesses related or incidental thereto. 5.11. VISITATION. Each Credit Party will permit such Persons as any Bank may reasonably designate to visit and inspect any of the properties of such Credit Party, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Credit Party at such times as such Bank may reasonably request. Each Credit Party hereby authorizes its financial management to discuss with any Bank the affairs of such Credit Party. 41 ARTICLE VI NEGATIVE COVENANTS Each Credit Party covenants to the Agent and to each Bank as follows: 6.01. MERGERS. No Credit Party will, and XL Capital will not permit XL Investments to, merge with or into or consolidate with any other Person, except that if no Event of Default shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto any Credit Party or XL Investments may merge or consolidate with any other corporation, including a Subsidiary, if such Credit Party or XL Investments, as the case may be, shall be the surviving corporation. 6.02. DISPOSITIONS. No Credit Party will, nor will it permit any of its Subsidiaries to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily (any of the foregoing being referred to in this Section as a "DISPOSITION" and any series of related Dispositions constituting but a single Disposition), any of its properties or assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper or general intangibles with or without recourse), except: (a) Dispositions in the ordinary course of business involving current assets or other assets classified on such Credit Party's balance sheet as available for sale; (b) sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, PROVIDED that any such sales, conveyances or transfers shall not individually, or in the aggregate for the Credit Parties and their respective Subsidiaries, exceed $500,000,000 in any calendar year; or (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Credit Party or its Subsidiaries. 6.03. LIENS. No Credit Party will, nor will it permit any of its Subsidiaries to, create, incur, assume or permit to exist ----- any Lien on any property or assets, tangible or intangible, now owned or hereafter acquired by it, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, PROVIDED that the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Schedule 6.03; PROVIDED, HOWEVER, that, except with respect to any Lien which arises by operation of law in favor of the Custodian or pursuant to the Custodian's right of set-off provided in Section 4 of the Custodian's Acknowledgement, no such Lien may at any time exist upon Qualifying Securities comprising Required Qualifying Securities or upon any Designated Account if such Lien upon such Designated Account would constitute a Lien upon Qualifying Securities comprising Required Qualifying Securities; (b) Liens arising from taxes, assessments, charges, levies or claims described in Section 6.06 that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of Section 6.06; 42 (c) Liens on property securing all or part of the purchase price thereof to such Credit Party and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Credit Party (and extension, renewal and replacement Liens upon the same property); PROVIDED (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Credit Party, as applicable, shall not exceed 100% of the lesser of the fair market value of such property at such time or the actual purchase price of such property; PROVIDED, HOWEVER, that, except with respect to any Lien which arises by operation of law in favor of the Custodian or pursuant to the Custodian's right of set-off provided in Section 4 of the Custodian's Acknowledgement, no such Lien may at any time exist upon Qualifying Securities comprising Required Qualifying Securities or upon any Designated Account if such Lien upon such Designated Account would constitute a Lien upon Qualifying Securities comprising Required Qualifying Securities; (d) zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other minor Liens that do not in the aggregate materially detract from the value of a property or asset to, or materially impair its use in the business of, such Credit Party or any such Subsidiary; (e) Liens securing Indebtedness permitted by Section 6.07(b) covering assets whose market value is not materially greater than the amount of the Indebtedness secured thereby plus a commercially reasonable margin; PROVIDED, HOWEVER, that, except with respect to any Lien which arises by operation of law in favor of the Custodian or pursuant to the Custodian's right of set-off provided in Section 4 of the Custodian's Acknowledgement, no such Lien may at any time exist upon Qualifying Securities comprising Required Qualifying Securities or upon any Designated Account if such Lien upon such Designated Account would constitute a Lien upon Qualifying Securities comprising Required Qualifying Securities; (f) Liens on cash and securities of a Credit Party or its Subsidiaries incurred as part of the management of its investment portfolio in accordance with XL Capital's Statement of Investment Policy Objectives and Guidelines as in effect on the date hereof or as it may be changed from time to time by a resolution duly adopted by the board of directors of XL Capital (or any committee thereof); PROVIDED, HOWEVER, that, except with respect to any Lien which arises by operation of law in favor of the Custodian or pursuant to the Custodian's right of set-off provided in Section 4 of the Custodian's Acknowledgement, no such Lien may at any time exist upon Qualifying Securities comprising Required Qualifying Securities or upon any Designated Account if such Lien upon such Designated Account would constitute a Lien upon Qualifying Securities comprising Required Qualifying Securities; (g) Liens on (i) assets received, and on actual or imputed investment income on such assets received, relating and identified to specific insurance payment liabilities or to liabilities arising in the ordinary course of any Credit Parties' or any of their Subsidiaries' business as an insurance or reinsurance company (including GICs) or corporate member of The Council of Lloyd's or as a provider of financial or investment services or contracts, or the proceeds thereof, in each case held in a segregated trust or other account and securing such liabilities or (ii) any other assets subject to any trust or other account arising out of or as a result of contractual, regulatory or any other requirements; PROVIDED that in no case shall any such Lien secure Indebtedness and any Lien which secures Indebtedness shall not be permitted under this clause (g); (h) statutory and common law Liens of materialmen, mechanics, carriers, warehousemen and landlords and other similar Liens arising in the ordinary course of business; (i) Liens existing on property of a Person immediately prior to its being consolidated with or merged into any Credit Party or any of their Subsidiaries or its becoming a Subsidiary, and Liens 43 existing on any property acquired by any Credit Party or any of their Subsidiaries at the time such property is so acquired (whether or not the Indebtedness secured thereby shall have been assumed) (and extension, renewal and replacement Liens upon the same property, PROVIDED that the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing), PROVIDED that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Subsidiary or such acquisition of property and (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such acquired property; and (j) Liens in favor of the Bank Parties created pursuant to the Pledge Agreement. 6.04. TRANSACTIONS WITH AFFILIATES. No Credit Party will, nor will it permit any of its Subsidiaries to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Credit Party, or directly or indirectly agree to do any of the foregoing, except (i) transactions involving guarantees or co-obligors with respect to any Indebtedness described in Schedule 6.07, (ii) transactions among the Credit Parties and their wholly-owned Subsidiaries and (iii) transactions with Affiliates of such Credit Party in good faith in the ordinary course of such Credit Party's business consistent with past practice and on terms no less favorable to such Credit Party or any Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 6.05. RATIO OF TOTAL FUNDED DEBT TO TOTAL CAPITALIZATION. XL Capital will not permit its ratio of (a) Total Funded Debt to (b) the sum of Total Funded Debt PLUS Consolidated Net Worth to be greater than 0.35:1.00 at any time. 6.06. CONSOLIDATED NET WORTH. XL Capital will not permit its Consolidated Net Worth to be less than $4,250,000,000 at any time. 6.07. INDEBTEDNESS. No Credit Party will, nor will it permit any of its Subsidiaries to, at any time create, incur, assume or permit to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness created hereunder; (b) other secured Indebtedness (including secured reimbursement obligations with respect to letters of credit) of any Credit Party or any Subsidiary in an aggregate principal amount (for all Credit Parties and their respective Subsidiaries) not exceeding $300,000,000 at any time outstanding; (c) other unsecured Indebtedness, so long as upon the incurrence thereof no Event of Default would occur or exist; (d) Indebtedness consisting of accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Credit Party or any Subsidiary; (e) Indebtedness incurred in transactions described in Section 6.03(f); and 44 (f) Indebtedness existing on the date hereof and described in Schedule 6.07 and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof. 6.08. CLAIMS PAYING RATINGS. XL Capital will maintain at all times a claims-paying rating of at least "A" from A.M. Best & Co. (or its successor) and XL Insurance and XL Re will maintain at all times a rating of at least "A" from Standard & Poor's. 6.09. PRIVATE ACT. No Credit Party or Pledgor will become subject to a Private Act other than the X.L. Insurance Company, Ltd. Act, 1989. ARTICLE VII EVENTS OF DEFAULT 7.01. EVENTS OF DEFAULT. An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) any Account Party shall fail to pay any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable; (b) any Account Party shall fail to pay any interest or any fee payable under this Agreement or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of 3 or more days; (c) any representation or warranty made or deemed made by any Account Party in or in connection with this Agreement or any amendment or modification hereof, or in any certificate or financial statement furnished pursuant to the provisions hereof, shall prove to have been false or misleading in any material respect as of the time made (or deemed made) or furnished; (d) any Account Party shall fail to observe or perform any covenant, condition or agreement contained in Article VI; (e) any Credit Party shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in Section 7.01(a), (b) or (d)) and such failure shall continue unremedied for a period of 20 or more days after notice thereof from the Agent (given at the request of any Bank) to such Credit Party; (f) any Account Party or any of its Subsidiaries shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $50,000,000 or more, or any payment of any principal amount of $50,000,000 or more under Hedging Agreements, in each case beyond any period of grace provided with respect thereto, or (ii) in the performance of any other agreement, term or condition contained in any such agreement (other than Hedging Agreements) under which any such obligation in principal amount of $50,000,000 or more is created, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement, PROVIDED that this clause (f) shall not apply to 45 secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (g) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Account Party a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Account Party under the Bermuda Companies Law or the Cayman Islands Companies Law (2000 Revision) or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of 60 days; or a decree or order of a court having jurisdiction in the premises for the appointment of an examiner, receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Account Party or a substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 60 days; (h) any Account Party shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bermuda Companies Law or the Cayman Islands Companies Law (2000 Revision) or any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of an examiner, receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate or other action shall be taken by such Account Party in furtherance of any of the aforesaid purposes; (i) one or more judgments for the payment of money in an aggregate amount in excess of $100,000,000 shall be rendered against any Account Party or any of its Subsidiaries or any combination thereof and the same shall not have been vacated, discharged, stayed (whether by appeal or otherwise) or bonded pending appeal within 45 days from the entry thereof; (j) an ERISA Event (or similar event with respect to any Non-U.S. Benefit Plan) shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events and such similar events that have occurred, could reasonably be expected to result in liability of the Account Parties and their Subsidiaries in an aggregate amount exceeding $100,000,000; (k) a Change in Control shall occur; (l) XL Capital shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of capital stock of XL Insurance, XL Re, XL America, XL Europe or XL Investments (except, in the case of any company organized under the laws of Bermuda, for a nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law); (m) the guarantee contained in Article X shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of each Guarantor or any Guarantor or any Person acting for or on behalf of any of such parties shall contest such validity or binding nature of such guarantee itself or the Transactions, or any other Person shall assert any of the foregoing; (n) the Pledge Agreement shall terminate or cease, in whole or in part, to be a legally valid and binding obligation of any Pledgor, or any Credit Party or any Person acting for or on behalf of any of such parties contests such validity or binding nature of the 46 Pledge Agreement itself or the transactions contemplated thereby (including the security interest thereunder); or (o) the Pledged Securities Available Amount shall at any time be less than the Letter of Credit Exposure, then, and in every such event (other than an event with respect to any Account Party described in Section 7.01(g) or (h)), and at any time thereafter during the continuance of such event, the Agent may, and at the request of the Required Banks shall, by notice to the Account Parties, take either or both of the following actions, at the same or different times: (i) terminate the Letter of Credit Commitments, and thereupon the Letter of Credit Commitments shall terminate immediately, and (ii) declare all fees and other obligations of the Account Parties accrued hereunder to be due and payable in whole (or in part, in which case any fees and other obligations not so declared to be due and payable may thereafter be declared to be due and payable) and thereupon such fees and other obligations, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Account Parties; and in case of any event with respect to any Account Party described in Section 7.01(g) or (h), the Letter of Credit Commitments shall automatically terminate and all fees and other obligations of the Account Parties accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Account Parties. ARTICLE VIII THE AGENT 8.01. APPOINTMENT. (a) Each Bank hereby appoints Mellon Bank, N.A. to act as Agent for such Bank under this Agreement and the other Transaction Documents. Subject to Section 8.09 hereof, each Bank hereby irrevocably authorizes the Agent to take such action on behalf of such Bank under the provisions of this Agreement and the other Transaction Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Agent on behalf of the Banks on the terms and conditions set forth in this Agreement and the other Transaction Documents, subject to its right to resign as provided in Section 8.10 hereof. Each Bank hereby irrevocably authorizes the Agent to execute and deliver each of the Transaction Documents and to accept delivery of such of the other Transaction Documents as may not require execution by the Agent. Each Bank agrees that the rights and remedies granted to the Agent under the Transaction Documents shall be exercised exclusively by the Agent, and that no Bank shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. (b) Each Bank agrees that Mellon Bank, N. A. may act as collateral agent in connection with a Future Collateral Allocation Transaction. As used herein, the term "Future Collateral Allocation Transaction" means a transaction which includes, among other things, the following elements: (i) a Credit Party shall have arranged one or more separate financing transactions with credit providers (which may, but need not, include any of the Banks) for which securities entitlements in the Designated Accounts serve as collateral at a time when securities entitlements in the Designated Accounts serve as collateral for the Obligations under this Agreement; (ii) Mellon Bank, N. A. shall have agreed to serve as collateral agent both for the Issuing Bank, the Agent and the Banks under this Agreement and the Pledge Agreement and for the parties providing the separate financing described in clause (i) of this paragraph; (iii) arrangements shall have been made pursuant to which specific securities entitlements within the Designated Accounts are allocated as collateral for the Obligations 47 under this Agreement and other specific securities entitlements within the Designated Accounts are allocated as collateral for such other financings; and (iv) the Required Banks and the Issuing Bank shall have approved all of such arrangements and the documents implementing the same, including amendments to this Agreement and the Pledge Agreement. The granting by a Credit Party to a person other than Mellon Bank, N. A. of a security interest in securities entitlements which are maintained in a Designated Account but which do not constitute Collateral (as defined in the Pledge Agreement) shall not be a "Future Collateral Allocation Transaction" and, accordingly, shall not require approval of the Required Banks but shall be subject to the applicable provisions of the Custodian's Acknowledgments, as defined in the Pledge Agreement. (c). The Arrangers shall have no duties or obligations in such capacity under this Agreement. 8.02. GENERAL NATURE OF AGENT'S DUTIES. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Transaction Document: (a) The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Agent shall be read into this Agreement or any Transaction Document or shall otherwise exist. (b) The duties and responsibilities of the Agent under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Agent shall not have a fiduciary relationship in respect of any Bank. (c) The Agent is and shall be solely the agent of the Banks. The Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Banks as provided in this Agreement and the other Transaction Documents). (d) The Agent shall be under no obligation to take any action hereunder or under any other Transaction Document if the Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Transaction Document, or may require the Agent to qualify to do business in any jurisdiction where it is not then so qualified. 8.03. EXERCISE OF POWERS. The Agent shall take any action of the type specified in this Agreement or any other Transaction Document as being within the Agent's rights, powers or discretion in accordance with directions from the Required Banks (or, to the extent this Agreement or such Transaction Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set of Persons). In the absence of such directions, the Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Transaction Document expressly requires the direction or consent of the Required Banks (or some other Person or set of Persons), in which case the Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Banks. The Agent shall not have any liability to any Person as a result of (x) the Agent acting or refraining from acting in accordance with the directions of the Required Banks (or other applicable Person or set of Persons), (y) the Agent refraining from acting in the absence of instructions to act from the Required Banks (or other applicable Person or set of Persons), whether or 48 not the Agent has discretionary power to take such action, or (z) the Agent taking discretionary action it is authorized to take under this Section (subject, in the case of this clause (z), to the provisions of Section 8.04(a) hereof). 8.04. GENERAL EXCULPATORY PROVISIONS. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Transaction Document: (a) The Agent shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. (b) The Agent shall not be responsible for (i) the execution (other than its own), delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Transaction Document which is made or issued by any Person other than the Agent, (iii) any failure of any Credit Party or Bank to perform any of their respective obligations under this Agreement or any other Transaction Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Transaction Documents or otherwise from time to time. (c) The Agent shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Credit Party, (ii) the business, operations, condition (financial or otherwise) or prospects of any Credit Party or any other Person, or (iii) except to the extent set forth in Section 8.05(f) hereof, the existence of any Event of Default or Potential Default. (d) The Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Transaction Document to be furnished by the Agent to such Bank. 8.05. ADMINISTRATION BY THE AGENT. (a) The Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) The Agent may consult with legal counsel (including, without limitation, in-house counsel for the Agent or in-house or other counsel for any Credit Party), independent public accountants and any other experts selected by it from time to time, and the Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Agent in accordance with the requirements of this Agreement or any other Transaction Document. Whenever the Agent shall deem 49 it necessary or desirable that a matter be proved or established with respect to any Credit Party or Bank, such matter may be established by a certificate of such Credit Party or Bank, as the case may be, and the Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Transaction Document). (d) The Agent may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Agent by reason of taking or continuing to take any such action. (e) The Agent may perform any of its duties under this Agreement or any other Transaction Document by or through agents or attorneys-in-fact. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care. (f) The Agent shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Agent has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Agent receives such a notice, the Agent shall give prompt notice thereof to each Bank. 8.06. BANK NOT RELYING ON AGENT OR OTHER BANKS. Each Bank acknowledges as follows: (a) neither the Agent nor any other Bank has made any representations or warranties to it, and no act taken hereafter by the Agent or any other Bank shall be deemed to constitute any representation or warranty by the Agent or such other Bank to it; (b) it has, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Transaction Documents; and (c) it will, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Transaction Documents. 8.07. INDEMNIFICATION. Each Bank agrees to reimburse and indemnify the Agent and its directors, officers, employees and agents (to the extent not reimbursed by a Credit Party and without limitation of the obligations of the Credit Parties to do so), ratably in accordance with their respective Letter of Credit Participating Interests, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel for the Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which a Letter of Credit directly or indirectly relates, PROVIDED that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of the Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section shall be due and payable on demand, and to the extent that any Bank fails to pay any such amount after a proper demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per 50 annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to 2% over the interest rate per annum announced by the Federal Reserve Bank of New York or otherwise determined by the Agent to be applicable for such day to overnight federal funds transactions arranged by federal funds brokers on the previous trading day. 8.08. AGENT IN ITS INDIVIDUAL CAPACITY. With respect to its commitments hereunder and the Obligations owing to it, the Agent shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Agent, and the terms "Banks" and like terms shall include the Agent in its individual capacity as such. The Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Agent were not the Agent hereunder. 8.09. SUCCESSOR AGENT. The Agent may resign at any time by giving 10 days' prior written notice thereof to the Banks and the Account Parties. The Agent may be removed by the Required Banks at any time by giving 10 days' prior written notice thereof to the Agent, the other Banks and the Account Parties. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Each successor Agent shall be a commercial bank or trust company organized under the laws of the United States of America or any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance by a successor Agent of its appointment as Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Agent, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Transaction Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If and so long as no successor Agent shall have been appointed, then any notice or other communication required or permitted to be given by the Agent shall be sufficiently given if given by the Required Banks, all notices or other communications required or permitted to be given to the Agent shall be given to each Bank, and all payments to be made to the Agent shall be made directly to the Account Parties or Bank for whose account such payment is made. 8.10. ADDITIONAL AGENTS. If the Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Banks, the Agent and the Account Parties shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Agent, to constitute another commercial bank or trust company, or one or more other Persons approved by the Agent, to act as co-Agent or agent with such powers of the Agent as may be provided in such supplemental agreement and to vest in such bank, trust company or Person as such co-Agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Agent under this Agreement or any other Transaction Document. 8.11. CALCULATIONS. The Agent shall not be liable for any calculation, apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Bank to whom payment was due but not made shall be to recover from the other Banks any payment in excess of the amount to 51 which they are determined to be entitled or, if the amount due was not paid by the appropriate Account Party, to recover such amount from the appropriate Account Party. 8.12. AGENT'S FEE. Each Account Party agrees to pay to the Agent, for its individual account, a nonrefundable Agent's fee in an amount and at such time or times as the Agent and XL Capital have heretofore agreed. ARTICLE IX MISCELLANEOUS 9.01. NO IMPLIED WAIVER ETC. No delay or failure of the Agent or any Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies hereunder of the Agent and the Banks are cumulative and not exclusive of any rights or remedies which, it or they would otherwise have. Any amendment, waiver, permit, consent or approval of any kind or character on the part of the Agent or a Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent in such writing specifically set forth. 9.02. SET-OFF. In case any one or more of the Events of Default described in Article VII hereof shall occur, each Bank shall have the right, in addition to all other rights and remedies available to it, to set-off against the unpaid balance of its interests in any Letter of Credit Reimbursement Obligations any debt owing by such Bank to the applicable Credit Party, including without limitation any funds in any deposit account maintained by such Credit Party with such Bank, and such Bank shall have and there is hereby created in favor of such Bank a security interest in all deposit accounts maintained by such Credit Party with such Bank, subject to Liens permitted under 6.03(f). Any sums obtained by any Bank by way of counterclaim, set-off, banker's lien or other lien for application upon any Letter of Credit Reimbursement Obligation shall be shared pro rata with the other Banks. Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.03. SURVIVAL OF PROVISIONS. Each of the representations, warranties, covenants and agreements of the Credit Parties contained herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, and the issuance of any Letter of Credit hereunder. 9.04. EXPENSES AND FEES; INDEMNITY. (a) Each Account Party agrees to pay or cause to be paid and to save the Agent and (in the case of clause (iii) below) each of the Banks harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs) incurred by the Agent or such Bank from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Transaction Documents, (ii) any requested amendments, 52 modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any Transaction Document, and (iii) the enforcement or preservation of rights under this Agreement or any Transaction Document (including but not limited to any such costs or expenses arising from or relating to (A) collection or enforcement of any other amount owing hereunder or thereunder by the Agent or any Bank and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Transaction Documents. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. Each Account Party hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by the Agent or any Bank to be payable in connection with this Agreement or any other Transaction Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and an Account Party agrees to save the Agent and each Bank harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees. (b) Each Account Party hereby agrees to reimburse and indemnify the Agent and each Bank (the "Indemnified Parties") from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which any Letter of Credit directly or indirectly relates (and without in any way limiting the generality of the foregoing, including any violation or breach of any Law by any Credit Party or any exercise by the Agent or any Bank of any of its rights or remedies under this Agreement or any other Transaction Document; any breach of any representation or warranty, covenant or agreement of any Credit Party); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Account Parties under this Section 9.04, or any other indemnification obligation of the Account Parties hereunder or under any other Transaction Document, are unenforceable for any reason, the Account Parties hereby agree to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. 9.05. SEVERABILITY. In the event any one or more of the provisions contained in this Agreement or in any other Transaction Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid 53 provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.06. HOLIDAYS. Unless otherwise specified herein, whenever any payment or action to be made or taken hereunder shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania or Bermuda, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. 9.07. NOTICES, ETC. Any notice or other communication in connection with this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to a Bank, at such Bank's address on the signature pages hereof, if to the Agent at One Mellon Center, Room 4401, Pittsburgh, Pennsylvania 15258, Attention: Karla Maloof, fax no. (412) 234-8087; if to the Issuing Bank at Mellon Client Service Center, 500 Ross St., Room 0860, Pittsburgh, Pennsylvania 15262-0001, Attention: Letter of Credit Administration, with a copy to Loan Products Department, Global Insurance Group, Room 4401, One Mellon Center, Pittsburgh, Pennsylvania 15258, Attention: Karla Maloof; and if to any Credit Party, to XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11 Bermuda, Attn: Roddy Gray, fax no. (441) 296-6399, with a copy to Paul Giordano, Esq., at the same address, fax no. (441) 295-4867, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. For the purposes of both receiving information from the Agent or any Bank or providing information to the Agent or any Bank, XL Capital shall act as the agent for each other Credit Party. 9.08. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR ANY OTHER MATTER RELATED THERETO MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OR IN THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA OR THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. EACH CREDIT PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION, SUBJECT TO ANY GENERAL RIGHT OF APPEAL. EACH CREDIT PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS PROVIDED IN THIS AGREEMENT. 9.09. WAIVER OF JURY TRIAL. TO THE EXTENT LITIGATION HEREUNDER IS BROUGHT BEFORE A COURT IN THE UNITED STATES, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISIONS OF EACH OTHER DOCUMENT RELATED HERETO TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT 54 FOR THE AGENT AND EACH BANK ENTERING INTO THIS AGREEMENT AND RELATED AGREEMENTS. 9.10. GOVERNING LAW. This Agreement and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the State of New York without giving effect to conflict of laws principles other than Section 5-1401 of its General Obligations Laws. 9.11 VALIDITY AND ENFORCEABILITY. If any stamp tax, levy, duty or fee is imposed or payable in respect to this Agreement or the transaction contemplated hereby or is necessary or advisable to ensure the legality, validity or enforceability of the documents in this transaction, the Account Parties shall promptly pay such stamp tax, levy, duty or fee. No government approval or consent is necessary for the execution, delivery and performance of the transactions contemplated under this Agreement. 9.12. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one (1) and the same instrument. 9.13. SUCCESSORS AND ASSIGNS; PARTICIPATIONS; ASSIGNMENTS. (a) SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the Account Parties, the Banks, the Agent, and their respective successors and assigns, except that no Credit Party may assign or otherwise transfer any of its rights or duties under this Agreement without the prior written consent of the Agent and all of the Banks, and any purported assignment without such consent shall be void. (b) PARTICIPATIONS. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or a portion of its Letter of Credit Commitment and Letter of Credit Interests); PROVIDED, that (i) any such participation sold to a Participant which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Capital and the Agent, unless an Event of Default has occurred and is continuing, in which case the consent of XL Capital shall not be required, (ii) any such Bank's obligations under this Agreement and the other Transaction Documents shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the parties hereto shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and each of the other Transaction Documents, 55 (v) such Participant shall be bound by the provisions of Section 9.18 hereof, and the Bank selling such participation shall obtain from such Participant a written confirmation of its agreement to be so bound, (vi) no Participant (unless such Participant is an affiliate of such Bank, or is itself a Bank) shall be entitled to require such Bank to take or refrain from taking action under this Agreement or under any other Transaction Document, except that such Bank may agree with such Participant that such Bank will not, without such Participant's consent, take action of the type described in subsections (a), (b), (c), (d) or (e) of Section 9.14 hereof, and (vii) a Participant shall have the right to vote regarding amendments to this Agreement only in connection with amendments which effect changes in the amount of Letter of Credit Commitments, Letter of Credit Interests, fees payable hereunder and the Expiration Date. Each Account Party agrees that any such Participant shall be entitled to the benefits of Sections 2.09 and 9.04 with respect to its participation in the Commitments and the Letters of Credit outstanding from time to time; PROVIDED, that no such Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) ASSIGNMENTS. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and under any Letter of Credit to which it is a party (if such Letter of Credit permits such assignment or the beneficiary consents thereto) and under the other Transaction Documents (including, without limitation, all or any portion of its Letter of Credit Commitments and Letter of Credit Interests) to any Bank, any affiliate of a Bank or to one or more additional commercial banks or other Persons (each a "Purchasing Bank"); provided, that (i) any such assignment to a Purchasing Bank which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of XL Capital and the Issuing Bank, unless an Event of Default has occurred and is continuing or exists, in which case the consent of XL Capital shall not be required, (ii) if a Bank makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Transaction Documents, such assignment shall be in a minimum aggregate principal amount of $10,000,000 of the Letter of Credit Commitments and Letter of Credit Interests then outstanding, (iii) each such assignment shall be of a constant, and not a varying, percentage of each Commitment of the transferor Bank and of all of the transferor Bank's rights and obligations under this Agreement and the other Transaction Documents, and (iv) each such assignment shall be made pursuant to a Transfer Supplement in substantially the form of EXHIBIT B to this Agreement, duly completed (a "Transfer Supplement"). 56 In order to effect any such assignment, the transferor Bank and the Purchasing Bank shall execute and deliver to the Agent a duly completed Transfer Supplement (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, and a processing and recording fee of $2,500; and, upon receipt thereof, the Agent shall accept such Transfer Supplement; PROVIDED, HOWEVER, that no such processing and recording fee shall be due if such assignment is to an affiliate of a Bank or a Federal Reserve Bank . Upon receipt of the Purchase Price Receipt Notice pursuant to such Transfer Supplement, the Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the close of business at the Agent's Office on the Transfer Effective Date specified in such Transfer Supplement. (x) the Purchasing Bank shall be a party hereto and, to the extent provided in such Transfer Supplement, shall have the rights and obligations of a Bank hereunder, and (y) the transferor Bank thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Transfer Supplement covering all or the remaining portion of a transferor Bank's rights and obligations under this Agreement, such transferor Bank shall cease to be a party to this Agreement) from and after the Transfer Effective Date. (d) REGISTER. The Agent shall maintain at its office a copy of each Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the Letter of Credit Commitment of, and the amount of the Letter of Credit Interests of, each Bank from time to time. The entries in the Register shall be conclusive absent manifest error and the Account Parties, the Agent and the Banks may treat each person whose name is recorded in the Register as a Bank hereunder for all purposes of the Agreement. The Register shall be available for inspection by any Account Party or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) FINANCIAL AND OTHER INFORMATION. Each Credit Party authorizes the Agent and each Bank to disclose to any Participant or Purchasing Bank (each, a "transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning the Credit Parties and their affiliates which has been or may be delivered to such Person by or on behalf of the Credit Parties in connection with this Agreement or any other Transaction Document or such Person's credit evaluation of the Credit Parties and their affiliates. At the request of any Bank, a Credit Party, at such Credit Party's expense, shall provide to each prospective transferee the conformed copies of documents referred to in Section 4 of the form of Transfer Supplement. 9.14. AMENDMENTS AND WAIVERS. Neither this Agreement nor any Transaction Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Agent and the Credit Parties may from time to time amend, modify or supplement the provisions of this Agreement or any other Transaction Document for the purpose of amending, adding to, or waiving any provisions or changing in any manner the rights and duties of any Credit Party, the Agent or any Bank. Any such amendment, modification or supplement made by the Credit Parties and the Agent in accordance with the provisions of this Section shall be binding upon the Credit Parties, each Bank and the Agent. The Agent shall enter into such amendments, modifications or supplements from time to time as directed by the Required Banks, and only as so directed, PROVIDED, that no such amendment, modification or supplement may be made which will: 57 (a) Increase the Letter of Credit Committed Amount of any Bank over the amount thereof then in effect, or extend the Expiration Date, without the written consent of each Commitment Bank affected thereby; (b) Reduce the amount of or postpone the date for payment of any Commitment Fee or Letter of Credit Fee or reduce or postpone the date for payment of any other fees, expenses, indemnities or amounts payable under any Transaction Document, without the written consent of each Bank affected thereby; (c) Change the definition of "Required Banks" or amend this Section 9.14, without the written consent of all the Banks; (d) Amend or waive any of the provisions of Article VII hereof, or impose additional duties upon the Agent or otherwise adversely affect the rights, interests or obligations of the Agent, without the written consent of the Agent; (e) Amend or waive any of the provisions of Article X or release any Guarantor from its obligations hereunder without the written consent of all the Banks; or (f) Amend the definition of Qualifying Securities or of Required Qualifying Securities (as each such term is defined herein and in the Pledge Agreement) or release all or (except in accordance with the terms of the Pledge Agreement) any material part of the Collateral under the Pledge Agreement or release XL Re, XL Europe and XL Investments from all of their respective obligations as the Grantors thereunder, without the written consent of all of the Banks; and PROVIDED FURTHER, that Transfer Supplements may be entered into in the manner provided in Section 9.13 hereof. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. Implementation of a Future Collateral Allocation Transaction (as defined in Section 8.01(b) hereof) shall require the consent of the Required Banks, the Issuing Bank and the Agent, but shall not require the consent of all of the Banks. Notwithstanding the foregoing, in connection with a Permitted Intercompany Transfer (as defined in the Pledge Agreement), (x) the Pledge Agreement may be amended to add an Additional Pledgor (as defined in the Pledge Agreement) as a party thereto as contemplated by the Pledge Agreement, (y) the Agent may sign on behalf of the Banks a new pledge agreement with an Additional Pledgor as contemplated by the Pledge Agreement and (z) the Agent may sign on behalf of the Banks a new custodian's acknowledgement with the Custodian and an Additional Pledgor as contemplated by the Pledge Agreement, in each case without the consent of the Required Banks. 9.15. JUDGMENT CURRENCY. In the event of a judgment or order being rendered by any court or tribunal for the payment of any amounts owing to the Banks, the Agent or any of them under this Agreement or any other Transaction Document or for the payment of damages in respect of any breach of this Agreement or any other Transaction Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Banks and the Agent harmless against any deficiency in terms of Dollars in the amounts received by the Banks or the Agent, as the case may be, 58 arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which each Bank or the Agent, as the case may be, is able to purchase Dollars with the amount of the Judgment Currency actually received by such Bank or the Agent, as the case may be, on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Account Parties hereunder and shall apply irrespective of any indulgence granted by the Banks. 9.16. RECORDS. The amount of outstanding Letters of Credit, each Bank's Letter of Credit Committed Amount and the accrued and unpaid Commitment Fees shall at all times be ascertained from the records of the Agent, which shall be conclusive absent manifest error. 9.17 CONFIDENTIALITY. Each of the Agent and the Banks agree to keep confidential any information relating to the Credit Parties received by it pursuant to or in connection with this Agreement which is (a) information which the Agent and the Banks reasonably expect that the applicable Credit Party would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.17 shall not be construed to prevent the Agent or any Bank from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Credit Parties to be bound by this obligation of confidentiality, (ii) upon the order of any court or administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over the Agent or such Bank which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by the Agent or any Bank, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that such Bank does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the applicable Credit Party (vi) in connection with the exercise of any right or remedy hereunder or under any other Transaction Document, (vii) as expressly contemplated by this Agreement or any other Transaction Document or (viii) to any prospective purchaser of all or any part of the interest of any Bank which shall agree in writing for the benefit of the Credit Parties to be bound by the obligation of confidentiality in this Agreement or the other Transaction Documents if such prospective purchaser is a financial institution or has been consented to by the Account Parties, which consent will not be withheld if such purchaser is not a competitor of any Account Party or an affiliate of a competitor of any Account Party. 9.18. SHARING OF COLLECTIONS. The Banks hereby agree among themselves that if any Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of any Obligation contemplated by this Agreement or the other Transaction Documents to be made by an Account Party pro rata to all Banks in greater proportion than any such amount received by any other Bank, then the Bank receiving such proportionately greater payment shall notify each other Bank and the Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Banks. The Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Banks a participation in the applicable Obligations owed to such other Banks in such amount as shall result in a ratable sharing by all Banks of such excess amount (and to such extent the receiving Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Bank making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Bank making such purchase. The Account Parties hereby 59 consent to and confirm the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were a Bank hereunder." ARTICLE X GUARANTEE 10.01. THE GUARANTEE. Each of the Guarantors hereby irrevocably, unconditionally and absolutely guarantees as of the Effective Date to the Agent and the Banks, and becomes surety for, the prompt payment of the Obligations of the Account Parties (the "Guaranteed Obligations") in full when due (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each Guarantor hereby further agrees, as a primary obligor, that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise and whether or not such payments would not be permitted under any applicable bankruptcy or similar law), the Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), 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. Notwithstanding any provision to the contrary contained herein or in any other of the Transaction Documents, to the extent the obligations of any Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 10.02. OBLIGATIONS UNCONDITIONAL. The obligations of each Guarantor under this Article are irrevocable, absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Transaction Documents, or any other agreement or instrument referred to therein, 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 which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against any Account Party, for amounts paid under this Article X until such time as the Banks have been paid in full, no Letter of Credit is outstanding, the Letter of Credit Commitments under this Agreement have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from any Bank in connection with monies received under the Transaction Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain irrevocable, absolute and unconditional as described above: 60 (i) at any time or from time to time, without notice to 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 of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be done or omitted; (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 of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be waived 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; (iv) any Lien granted to, or in favor of, the Agent or any Bank as security for any of the Guaranteed Obligations shall be void or voidable, or shall fail to attach or be perfected or the Agent or any Bank shall fail to realize on any collateral security; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and any requirement that the Agents, the Banks or any of them exhaust any right, power or remedy or proceed against any Person under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. This is a guarantee of payment and not merely of collection. 10.03. REINSTATEMENT. The obligations of the Guarantors under this Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agent and the Banks on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Agent or any Bank in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 10.04. REMEDIES. Each Guarantor agrees that, to the fullest extent permitted by applicable law, as between such Guarantor, on the one hand, and the Agent and the Banks, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 10.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed 61 Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 10.01. 10.05. CONTINUING GUARANTEE. The guarantee in this Article is a continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 10.06. NO RESTRICTIONS. Except for restrictions under the Transaction Documents, no Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to any Account Party, (y) make loans or advances to any Account Party, or (z) transfer any of its properties or assets to any Account Party. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] 62 IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. EXECUTED AS A DEED BY XL CAPITAL LTD, AS AN ACCOUNT PARTY AND A GUARANTOR By: /s/ BRIAN M. O'HARA ---------------------------------------------------------- (Signature) Name: BRIAN M. O'HARA ---------------------------------------------------------- Title: PRESIDENT & CEO ---------------------------------------------------------- By: /s/ JERRY M. DE ST. PAER ---------------------------------------------------------- (Signature) Name: JERRY M. DE ST. PAER ---------------------------------------------------------- Title: EVP & CEO ---------------------------------------------------------- X.L. AMERICA, INC., AS AN ACCOUNT PARTY AND A GUARANTOR By: /s/ MARTHA G. BANNERMAN ---------------------------------------------------------- (Signature) Name: MARTHA G. BANNERMAN ---------------------------------------------------------- Title: EVP & GENERAL COUNSEL ---------------------------------------------------------- GIVEN UNDER THE COMMON SEAL OF (Seal) XL EUROPE LTD, AS AN ACCOUNT PARTY AND A GUARANTOR /s/ DERMOT J. O'DONOHOE - ---------------------------------------------------------------- Director /s/ FIONA MULDOON - -------------------------------------------------------------- Director/secretary XL INSURANCE (BERMUDA) LTD, AS AN ACCOUNT PARTY AND A GUARANTOR By: /s/ CHRISTOPHER COELHO ---------------------------------------------------------- (Signature) Name: CHRISTOPHER COELHO ---------------------------------------------------------- Title: SVP, CFO ---------------------------------------------------------- Signature page to Letter of Credit Facility and Reimbursement Agreement XL RE LTD, AS AN ACCOUNT PARTY AND A GUARANTOR By: /s/ HENRY C.V. KEELING ---------------------------------------------------------- (Signature) Name: HENRY C.V. KEELING ---------------------------------------------------------- Title: PRESIDENT & CEO -------------------------------------------------------- Signature page to Letter of Credit Facility and Reimbursement Agreement MELLON BANK, N.A., AS A BANK, AS ISSUING BANK, AS ARRANGER AND AS AGENT By: /s/ CARRIE BURNHAM -------------------------------------------------------- (Signature) Name: CARRIE BURNHAM -------------------------------------------------------- Title: ASSISTANT VICE PRESIDENT -------------------------------------------------------- Notice Address: Loan Products Department Global Insurance Group One Mellon Center, Room 4401 Pittsburgh, PA 15258 Attn: Karla Maloof Telephone: (412) 234-7112 Facsimile: (412) 234-8087 with a copy to: Mellon Client Service Center 500 Ross St., Room 0860 Pittsburgh, PA 15262-0001 Attn: Letter of Credit Administration Telephone: (412) 234-6408 ------------------------ Facsimile: (412) 234-2733 ------------------------ Signature page to Letter of Credit Facility and Reimbursement Agreement BANCO SANTANDER CENTRAL HISPANO, S.A., NEW YORK BRANCH, AS A BANK By: /s/ SEN LOUIE ----------------------------------------------------------- Sen Louie Assistant Vice President By: /s/ THOMAS R. RIPPSTEIN ----------------------------------------------------------- Thomas Rippstein Assistant Vice President Notice Address: 45 EAST 53RD STREET - -------------------------------------------------------------- NEW YORK, NY 10022 - -------------------------------------------------------------- - -------------------------------------------------------------- Attn: JORGE SAAVEDRA / SEN LOUIE --------------------------------------------------------- Telephone: 212-350-3624 Facsimile: 212-350-3602 Initial Letter of Credit Committed Amount: $50,000,000 Signature page to Letter of Credit Facility and Reimbursement Agreement DEUTSCHE BANK AG, NEW YORK BRANCH, AS A BANK By: /s/ RUTH LEUNG -------------------------------------------------------- Name: RUTH LEUNG -------------------------------------------------------- Title: DIRECTOR -------------------------------------------------------- By: /s/ CLINTON M. JOHNSON -------------------------------------------------------- Name: CLINTON JOHNSON -------------------------------------------------------- Title: MANAGING DIRECTOR -------------------------------------------------------- Address for Notices: DEUTSCHE BANK SECURITIES INC. 31 W. 52ND STREET NEW YORK, NY 10019 Attn: RUTH LEUNG Telephone: (212) 469-8650 ------------------------ Facsimile: (212) 469-8366 ------------------------ Initial Letter of Credit Committed Amount: $50,000,000 Signature page to Letter of Credit Facility and Reimbursement Agreement EX-10.54 6 c23420_ex10-54.txt PLEDGE AGREEMENT EXECUTION COPY PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement"), dated as of December 18, 2001, made by XL Investments Ltd, a company organized under the laws of Bermuda ("XL Investments"), XL Re Ltd, a company organized under the laws of Bermuda ("XL Re"), XL Insurance (Bermuda) Ltd, a company organized under the laws of Bermuda ("XL Insurance") and XL Europe Ltd, a company organized under the laws of Ireland ("XL Europe", XL Investments, XL Re and XL Insurance and XL Europe being referred to collectively herein as the "Grantors" and individually as a "Grantor" and XL Europe, XL Investments and XL Insurance being collectively referred to herein as the "Guarantors") in favor of Citibank, N.A. (the "Bank"). RECITALS: A. XL Re has entered into (i) a Master Agreement--London Market Letter of Credit Scheme, dated as of October 21, 1996 and (ii) an Insurance Letters of Credit--Master Agreement, dated as of May 19, 1993 (each as amended from time to time, the "Reimbursement Agreements") in favor of the Bank pursuant to which XL Re has agreed to, among other things, reimburse the Bank in connection with the issuance by the Bank from time to time of letters of credit for its account (the "Letters of Credit"). Each of XL Investments, XL Europe and XL Insurance is an affiliate of XL Re. XL Re is the account party for the account of which Letters of Credit may be issued on behalf of any of the Grantors. Accordingly, each Grantor will derive substantial direct and indirect benefit from the issuance of Letters of Credit and the transactions contemplated by the Reimbursement Agreements. B. Each Guarantor shall execute, on even date herewith, a guarantee agreement (the "Guarantee Agreement"), pursuant to which the Guarantors guarantee, jointly and severally, the payment in full of the obligations of XL Re under the Reimbursement Agreements. C. In order to (i) provide collateral security for the Letters of Credit and the obligations under the Guarantee Agreement, and to induce the Bank to extend credit under the Reimbursement Agreements and (ii) replace and terminate the pledge of existing collateral by XL Re under the Security Agreement (Form 15) dated August 7, 1998 (the "Security Agreement"), the Grantors wish to execute and deliver this Agreement. D. Each Grantor acknowledges that the Bank will rely on this Agreement in issuing Letters of Credit. Each Grantor further acknowledges that it has, independently and without reliance upon the Bank or any representation by or other information from the Bank, made its own credit analysis and decision to enter into this Agreement. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the Grantors hereby agree as follows: ARTICLE I DEFINITIONS 1.1. DEFINITIONS. (a) CERTAIN DEFINITIONS. Capitalized terms not otherwise defined herein shall have the meanings given in the Reimbursement Agreements. In addition to the other terms defined elsewhere in this Agreement, as used herein the following terms shall have the following meanings: "Business Day" shall mean any day that is not a Saturday, Sunday or other day on which commercial banks in New York, New York, Bermuda or London, England are authorized or required by law to remain closed. 1 "Custodian" shall mean Mellon Bank, N.A., or any successor, or any successor custodian appointed in accordance with the terms of Section 6.11 hereof. "Custody Agreement" shall mean the Master Custody Agreement, dated June 30, 1998, among XL Capital Ltd (f/k/a/ EXEL Limited), the Principals named therein (of which each of the Grantors is one) and Mellon Bank, N.A., as custodian, as it may be amended, restated or otherwise modified from time to time with the consent of the Bank or as entered into between the Grantors and a successor custodian in connection with the appointment of a successor custodian in accordance with the terms of Section 6.11 hereof. "Designated Accounts" shall mean, collectively, (a) with respect to XL Investments the following custodial securities account maintained by XL Investments with the Custodian pursuant to terms of the Custody Agreement: XLIF0804002; (b) with respect to XL Re the following custodial securities accounts maintained by XL Re with the Custodian pursuant to terms of the Custody Agreement: XLRF0800452 and XLRF0803572; and (c) such custodial securities account(s) maintained by a Grantor with the Custodian as are designated on a Supplemental Document as "Designated Accounts" from time to time by such Grantor; PROVIDED, HOWEVER, that no custodial securities account may be a Designated Account if any party to the Custody Agreement other than the Grantor maintaining such account has any interest therein or in any securities entitlements or other financial assets credited thereto. "Distributions" shall mean all property, rights and interests of any kind or nature (whether cash, securities or other) from time to time received, receivable or otherwise distributed with respect to or in exchange for any Collateral, including all cash, securities or other property received or receivable as dividends, or as a result of any stock splits, reclassifications, mergers or consolidations, or as any other distributions (whether similar or dissimilar to the foregoing), or as a result of exercise of any options, warrants or rights included in or associated with any Collateral, or as principal, interest or premium. "Dollar Equivalent Amount" of any Qualifying Security shall mean (i) with respect to any Qualifying Security denominated in a currency other than U.S. Dollars, the amount of U.S. Dollars that would be required to purchase the amount of such currency, based upon the then prevailing spot selling rate at which the Bank offers to sell such currency for U.S. Dollars in the relevant foreign exchange market and (ii) with respect to a Qualifying Security denominated in U.S. Dollars, the market value of such Qualifying Security as most recently determined at the time in question in accordance with Section 2.2(b). "Event of Default" shall mean (a) a Grantor's failure to pay when due any obligation owing by it to the Bank under either Reimbursement Agreement or this Agreement, (b) a Grantor's failure to perform or observe any other term or covenant of either Reimbursement Agreement or this Agreement or deliver any document required to be delivered by it under either Reimbursement Agreement or this Agreement, if such failure (other than a failure to comply with the requirements of Section 2.2 hereof) shall not be remedied for a period of twenty (20) days after written notice thereof to such Grantor from the Bank, (c) any representation or warranty made by any Grantor in or in connection with either Reimbursement Agreement or this Agreement or any amendment or modification of either Reimbursement Agreement or this Agreement, or in any certificate or financial statement furnished pursuant to the provisions of either Reimbursement Agreement or this Agreement, shall prove to have been false or misleading in any material respects as of the time made or furnished, (d) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Grantor a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Grantor under the Bermuda Companies Law or the Irish Bankruptcy Act 1988 or any other similar applicable law, and such decree or order shall have continued undischarged or unstayed for a period of 60 days; or a decree or order of a court having jurisdiction in the premises for the appointment of an examiner, receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Grantor or a substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 60 days, (e) any Grantor shall institute proceedings to be adjudicated a 2 voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bermuda Companies Law or the Irish Bankruptcy Act 1988 or any other similar applicable law, or shall consent to the filing of any such petition, or shall consent to the appointment of an examiner, receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or a substantial part or its property, or shall make an assignment for the benefit of the creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate or other action shall be taken by such Grantor in furtherance of any of the aforesaid purposes, or (f) any Grantor or any of its Subsidiaries shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $50,000,000 or more, or any payment of any principal amount of $50,000,000 or more under Hedging Agreements, in each case beyond any period of grace provided with respect thereto, or (ii) in the performance of any other agreement term condition contained in any such agreement (other than Hedging Agreements), under which any such obligation in principal amount of $50,000,000 or more is created, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity or to terminate its commitment under such agreement; PROVIDED that this clause (f) shall not apply to secured indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such indebtedness. "Hedging Agreement" shall mean any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Investment Manager" shall mean, with respect to each Designated Account, any investment manager appointed by the applicable Grantor to manage investment decisions with respect to such Designated Account. "Lien of this Agreement" shall mean the security interest granted by this Agreement. "Pledge Supplement" shall mean a supplement to this Agreement setting forth such additional Designated Account(s) constituting Collateral. "Qualifying Securities" shall have the meaning set forth in Section 2.2(a) hereof. "Required Qualifying Securities" shall mean, at any time, Qualifying Securities 90% of the market value of which (expressed as a Dollar Equivalent Amount) is equal to, but not greater than, the sum of the aggregate unreimbursed drawings under all Letters of Credit (determined as a Dollar Equivalent Amount) at such time and the aggregate undrawn availability under all Letters of Credit at such time. "Secured Obligations" shall mean, collectively, (i) all obligations (whether or not constituting future advances) from time to time of XL Re to the Bank under or in connection with either Reimbursement Agreement, (ii) all obligations from time to time of any Grantor to the Bank under or in connection with this Agreement, in each case including all obligations to pay reimbursement obligations, principal, interest, fees, indemnities or other amounts, and in each case whether such obligations are direct or indirect, secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (including interest and other obligations arising or accruing after the commencement of any bankruptcy, insolvency, reorganization or similar proceeding with respect to any Grantor or any other Person, or which would have arisen or accrued but for the commencement of such proceeding, even if such obligation or the claim therefor is not enforceable or allowable in such proceeding) and (iii) all obligations from time to time of any Guarantor in respect of the Guarantee Agreement. "Supplemental Document" shall mean a supplement to this Agreement in the form of Exhibit B hereto, executed by a Grantor for the purpose of designating one or more securities accounts maintained by such Grantor with the Custodian as Designated Accounts hereunder. 3 Any Supplemental Document delivered under this Agreement may be delivered by telecopier, with an original copy sent by regular mail. "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York on the date hereof. (b) CERTAIN CROSS-REFERENCES. The following terms are defined in this Agreement in the Section or other place indicated: "Collateral" in Section 2.1; "Grantor", "Grantors" and "Guarantors" in the Preamble; "notices" in Section 6.3; and "Reimbursement Agreements" in the Recitals. 1.2. UCC DEFINITIONS. Unless otherwise defined herein, terms defined in Articles 8 or 9 of the UCC shall have the same meanings in this Agreement. ARTICLE II THE SECURITY 2.1. GRANT OF SECURITY. (a) As security for the full and timely payment and performance of the Secured Obligations, each Grantor hereby assigns and pledges to the Bank, and grants to the Bank, a security interest in, all right, title and interest of such Grantor in, to and under the following, whether now or hereafter existing or acquired (the "Collateral"): (i) the Designated Account with respect to such Grantor and each security entitlement (as such term is defined in Section 8-102(a)(17) of the UCC) from time to time credited to such Designated Account and all financial assets (as such term is defined in Section 8-102(a)(9) of the UCC) from time to time deposited therein; (ii) all claims and rights of whatever nature which such Grantor may now have or hereafter acquire against any third party(ies) in respect of any of the Collateral described in this Section 2.1(a) (including any claims or rights in respect of any security entitlements credited to an account of the Custodian maintained at The Depository Trust Company or any other clearing corporation) or any other securities intermediary (as such terms are defined in Section 8-102(a) of the UCC); (iii) all rights which such Grantor may now have or hereafter acquire against the Custodian in respect of its holding and managing all or any part of the Collateral; and (iv) all proceeds (as such term is defined in Section 9-102(a) of the UCC) of any of the foregoing. (b) Concurrently with the execution of this Agreement, (i) each of the Grantors will execute and deliver or cause to be delivered to the Bank a Control and Consent Acknowledgment and Agreement Concerning Designated Accounts for each Designated Account (collectively referred to herein as the "Custodian's Acknowledgment") in the form attached as Exhibit A hereto and (ii) the Bank hereby notifies XL Re that, simultaneously with the execution and delivery of the Custodian's Acknowledgment and this Agreement and the grant of the security interest hereunder, the security interest granted to the Bank pursuant to the Security Agreement is terminated. The Custodian's Acknowledgment shall not be amended, modified, revoked or withdrawn without the prior written consent of the Bank. (c) Each Grantor acknowledges that the Custodian is a securities intermediary (as such term is defined in Section 8-102(a) of the UCC) for such Grantor; each Grantor agrees with the Bank that notwithstanding any provision of this Agreement or any other circumstance, the Bank shall have at all times control (as defined in Section 8-106 of the UCC) of each Designated Account and the Collateral, as confirmed in the Custodian's Acknowledgment, and shall be authorized to direct the Custodian to comply with, and the Custodian shall comply with, entitlement orders (as such term is defined in Section 8-102(a) of the UCC) originated by the Bank with respect to the Collateral without further consent of any Grantor or any Investment Manager or any other person acting or purporting to act for such Grantor. The 4 Bank agrees that such entitlement orders referred to in the first sentence of this Section 2.1(c) will be issued by the Bank to the Custodian in respect of the Collateral only (i) in connection with the Bank's exercise of remedies upon the occurrence and continuation of an Event of Default or (ii) to the extent necessary to prevent the withdrawal of Collateral from a Designated Account or release of Collateral from the Lien of this Agreement if such withdrawal or release would cause noncompliance with, or result in noncompliance with, the Collateral Value Requirement. (d) Each Grantor shall deliver, from time to time, to the Bank (with a copy to the Custodian) a Pledge Supplement setting forth each additional Designated Account, if any. Each Pledge Supplement, upon its delivery to the Bank, shall be deemed to be incorporated in this Pledge Agreement. Any Pledge Supplement delivered under this Agreement may be delivered by telecopier and will be effective when so delivered, it being the intention of the parties that an "ink" copy thereof will be sent (and the Grantors agree that they will send such "ink" copy) promptly thereafter by regular mail or overnight courier. 2.2. COLLATERAL VALUE, ETC. (a) The Grantors shall maintain Required Qualifying Securities at all times as security entitlements in the Designated Accounts (the "Collateral Value Requirement"). The preceding sentence shall not preclude any Grantor from maintaining in the Designated Accounts Qualifying Securities or other securities or assets in excess of the Required Qualifying Securities. Each Grantor agrees that only Qualifying Securities may be counted towards the Collateral Value Requirement. "Qualifying Securities" means securities in a Designated Account which are not subject to any security interest or lien in favor of any person other than the security interest of the Bank under this Agreement and the Custodian's Acknowledgment and which consist of: (i) direct claims (including securities, loans and leases) on, and the portions of claims that are directly and unconditionally guaranteed by, the central government of any OECD country or any U.S. Government Agency, as such terms are used in Appendix A, Section III(C), Category I to Regulation H, as promulgated by the Board of Governors of the Federal Reserve System; and (ii) claims on, and the portions of claims that are guaranteed by, U. S. Government-sponsored agencies and claims on, and the portions of claims guaranteed by, certain multilateral lending institutions in which the U. S. government is a shareholder or contributing member or shares of money market mutual funds investing solely in U.S. Government Securities, as such terms are used in Appendix A, Section III(C), Category II to such Regulation H; provided, however, that those securities or obligations referred to in clauses (i) and (ii) above shall not be counted towards the Collateral Value Requirement unless such securities or obligations have a zero percent risk capital weighting under such Regulation H, as amended from time to time. If at any time the market value of the Qualifying Securities is less than the Collateral Value Requirement, the Grantors shall, within two Business Days of such occurrence, deliver to one or more Designated Accounts Qualifying Securities sufficient to satisfy the Collateral Value Requirement. (b) In determining compliance by the Grantors with the Collateral Value Requirement, the Bank may use any commercially reasonable valuation or classification method determined by the Bank to be appropriate. 2.3. SUBSTITUTION AND WITHDRAWAL, ETC. (a) So long as no Event of Default has occurred and is continuing, and the market value of the Qualifying Securities satisfies the Collateral Value Requirement, any Grantor (other than XL Re in the case of clause (v) below) may: (i) substitute new Collateral for any existing Collateral, PROVIDED that, after giving effect to any such substitution, any substituted Collateral (together with other Collateral), satisfies the Collateral Value Requirement and the substituted Collateral is transferred to, or already maintained in, Designated Accounts; (ii) to the extent not inconsistent with the other provisions of this Agreement, trade, sell, exchange, lend or transfer from a Designated Account any Collateral so long as the Grantors contemporaneously and continually provide the Bank with such new or replacement Collateral as may be necessary to satisfy the Collateral Value Requirement; (iii) require the Bank to cause partial termination of the pledge of Collateral to the extent that sufficient Collateral remains after effecting such termination to satisfy the Collateral 5 Value Requirement (such termination to be accomplished by execution and delivery of a termination agreement signed on behalf of the applicable Grantor and the Bank); (iv) subject at all times to compliance with the Collateral Value Requirement, receive and retain, free of all right, title and interest of the Bank, all interest and dividend payments made in respect of the Collateral and exercise any voting rights with respect thereto; and (v) subject at all times to compliance with the Collateral Value Requirement, by not less than three days' written notice to the Bank, remove a securities account from the category of Designated Accounts, whereupon any financial assets in such securities account shall no longer be subject to the Lien of this Agreement. (b) Whenever a Grantor substitutes new Collateral for existing Collateral (such existing Collateral hereinafter referred to as "Replaced Collateral") or causes the sale, exchange or transfer of, or causes the termination of the pledge of, Collateral, in each case pursuant to and in compliance with the foregoing provisions of Section 2.3(a) hereof, the Bank shall be deemed to have released all right, title or interest in or to such Replaced Collateral and such sold, exchanged, transferred or terminated Collateral (and the proceeds thereof) arising hereunder. The sale, exchange or transfer of Collateral in accordance with this Section 2.3(b) shall occur upon the consummation of the sale or other transfer of ownership of such Collateral by a Grantor to any third party or the consummation of a transfer of Collateral from a Designated Account to another securities account maintained for such Grantor. (c) Upon payment and satisfaction in full of the Secured Obligations and termination of the Reimbursement Agreements, the Bank shall promptly release to the Grantors all of the Bank's right, title and interest in or to the Collateral to the extent arising under or pursuant to this Agreement. 2.4. DELIVERY OF PROPERTY. In the event that a Grantor receives any new securities, instruments, documents or other property by reason of ownership of the Collateral (other than payments of a kind described in Section 2.3(a)(iv)), such Grantor shall promptly deliver all such property to the Custodian, to be held by the Custodian in the Designated Accounts of such Grantor as part of the Collateral. Promptly upon receipt thereof, each Grantor agrees to deliver to the Bank all documents evidencing such property, together with appropriate bond, stock or other powers duly executed by such Grantor. 2.5. INVESTMENT RISK AND TAXES. As between the Bank and the Grantors, the Grantors shall bear the investment risk with respect to the Collateral, and the risk of loss of, damage to, or the destruction of the Collateral, whether in possession of, or maintained as a security entitlement by, or subject to the control of, the Bank, the Custodian, a Grantor or another party, PROVIDED, HOWEVER, that nothing contained in this Section 2.5 shall release or relieve the Custodian of its duties and obligations to Grantors or any other party under the Custody Agreement or applicable law. Further, the Grantors shall promptly pay all taxes, fees and charges of whatever kind or nature with respect to the Collateral, all other taxes payable by any Grantor which, if unpaid, could become a charge against the Collateral, and any stamp duty or tax payable with respect to this Agreement. If the Grantors do not make such payments, then the Bank may (but is in no way obligated to) pay such amounts for the account of the applicable Grantor and any such amounts paid will be added to the amount of the Secured Obligations. 2.6. CONTINUING AGREEMENT. This Agreement creates a continuing security interest in the Collateral and shall continue in full force and effect until all Secured Obligations have been paid in cash and performed in full and all Letters of Credit have terminated, subject in any event to reinstatement in accordance with Section 2.9. Without limiting the generality of the foregoing, each Grantor hereby irrevocably waives any right to terminate or revoke this Agreement. Upon the payment in cash and performance in full of all Secured Obligations and termination of all Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantor. Upon any such termination, the Bank will, at the Grantors' request and expense, return to the applicable Grantor, without any representations, warranties or recourse of any kind whatsoever, such of the Collateral as then may be held by the Bank hereunder, and execute and deliver to the applicable Grantor such documents as the such Grantor may reasonably request to evidence such termination. 6 2.7. RIGHTS AND INTERESTS OF BANK ABSOLUTE. The obligations of each Grantor under this Agreement are independent of the Secured Obligations, and a separate action or actions may be brought and prosecuted against any Grantor regardless of whether action is brought against any other Grantor or any other Person or whether any other Grantor or any other Person is joined in any such action or actions. The security interest granted hereby shall secure payment and performance of the Secured Obligations strictly in accordance with the terms of hereof, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting the Secured Obligations (or the rights of the Bank or any other Person with respect thereto). The security interest of the Bank hereunder shall be absolute, unconditional and irrevocable and all other rights and interests of the Bank hereunder, and all obligations of each Grantor hereunder, shall be absolute and irrevocable, irrespective of any of the following: (a) any lack of legality, validity, enforceability, allowability (in a bankruptcy, insolvency, reorganization, dissolution or similar proceeding, or otherwise), or any avoidance or subordination, in whole or in part, of any of the Secured Obligations; (b) any change in the amount, nature, time, place or manner of payment or performance of, or in any other term of, any of the Secured Obligations (specifically including any increase in the Secured Obligations, whether resulting from the extension of additional credit or otherwise); (c) any taking, exchange, release, impairment or nonperfection of any Collateral, or any taking, release, impairment or amendment or waiver of or consent to departure from any guaranty or other direct or indirect security for any of the Secured Obligations (it being understood that a release of Collateral in accordance with the terms of this Agreement is not rendered ineffective by reason of this Section 2.7(c)); (d) any manner of application of Collateral or other direct or indirect security for any of the Secured Obligations, or proceeds thereof, to any of the Secured Obligations, or any manner of sale or other disposition of any Collateral for any of the Secured Obligations or any other assets of any Grantor; (e) any impairment by the Bank or any other Person of any recourse of any Grantor against the Bank or any other Person, or any other impairment by the Bank or any other Person of the suretyship status of either Grantor; (f) any bankruptcy, insolvency, reorganization, dissolution or similar proceeding with respect to, or any change, restructuring or termination of the corporate structure or existence of, any Grantor or any other Person; (g) any failure of the Bank or any other Person to disclose to any Grantor any information pertaining to the business, operations, condition (financial or otherwise) or prospects of the other Grantors or any other Person, or to give any other notice, disclosure or demand; or (h) any other event or circumstance (including any right of set off, defense of failure of consideration, breach of representation or warranty, statute of frauds, bankruptcy, lack of capacity, statute of limitations, release, accord and satisfaction or usury, and excluding only the defense of full, strict and indefeasible payment and performance) that might otherwise constitute a defense available to, a discharge of, or a limitation on the obligations of, any Grantor or a guarantor or surety. 2.8. WAIVERS, ETC. Each Grantor hereby irrevocably waives any defense to or limitation on its obligations under this Agreement arising out of or based upon any matter referred to in Section 2.7 and, without limiting the generality of the foregoing, any requirement of promptness, diligence or notice of acceptance, any other notice, disclosure or demand with respect to any of the Secured Obligations and this Agreement, any requirement of acceptance hereof, reliance hereon or knowledge hereof by the Bank, and any requirement that the Bank protect, secure, perfect or insure any lien or any property subject thereto or exhaust any right or take any action against any other Grantor or any other Person or any direct or indirect security for any of the Secured Obligations. 7 2.9. REINSTATEMENT. This Agreement shall continue to be effective, or be automatically reinstated, as the case may be, if at any time payment of any of the Secured Obligations is avoided, rescinded or must otherwise be returned by the Bank for any reason, all as though such payment had not been made. 2.10. NO STAY. Without limiting the generality of any other provision of this Agreement, if any acceleration of the time for payment or performance of any Secured Obligation, or any condition to any such acceleration, shall at any time be stayed, enjoined or prevented for any reason (including stay or injunction resulting from the pendency against any Grantor or any other Person of a bankruptcy, insolvency, reorganization, dissolution or similar proceeding), each Grantor agrees that, for purposes of this Agreement and its obligations hereunder, at the option of the Bank such Secured Obligation shall be deemed to have been accelerated and such condition to acceleration shall be deemed to have been met. 2.11. SUBROGATION, ETC. Any rights which any Grantor may have or acquire by way of subrogation, reimbursement, restitution, exoneration, contribution or indemnity, and any similar rights (whether arising by operation of law, by agreement or otherwise), against any other Grantor or any other Person, arising from the existence, payment, performance or enforcement of any of the obligations of any Grantor under or in connection with this Agreement, shall be subordinate in right of payment to the Secured Obligations, and such Grantor shall not exercise any such rights until all Secured Obligations have been paid in cash in full and all Letters of Credit shall have terminated. If, notwithstanding the foregoing, any amount shall be received by any Grantor on account of any such rights at any time prior to the time at which all Secured Obligations shall have been paid in cash and performed in full and all Letters of Credit shall have terminated, such amount shall be held by such Grantor in trust for the benefit of the Bank, segregated from other funds held by such Grantor, and shall be forthwith delivered to the Bank in the exact form received by such Grantor (with any necessary endorsement), to be held as additional Collateral. The forgoing will not, so long as no Event of Default has occurred and is continuing, preclude any Grantor from receiving and retaining amounts paid to it by a Person pursuant to a separate agreement between such Grantor and such Person, which separate agreement provides to such Grantor no subrogation rights under any document referred to herein. ARTICLE III REPRESENTATIONS AND WARRANTIES Each Grantor hereby represents and warrants to the Bank as follows: 3.1. TITLE. Such Grantor is the legal and beneficial owner of the Collateral (other than the Collateral of which any other Grantor is the legal and beneficial owner), free and clear of any lien, security interest, option or other charge or encumbrance, except for the security interest under this Agreement in favor of the Bank securing the Secured Obligations and the Custodian's right of set-off described in Section 4 of the Custodian's Acknowledgment. No effective financing statement or other item similar in effect, and no control agreement, in each case covering any Collateral is or will be on file in any recording office or otherwise in effect, except such as may be filed or made in favor of the Bank relating to this Agreement. 3.2. VALIDITY, PERFECTION AND PRIORITY. This Agreement creates a valid security interest in the Collateral in favor of the Bank securing the Secured Obligations, which security interest has been duly perfected and is, and will be, prior to all other liens, security interests, options or other charges or encumbrances subject, however, to the Custodian's right of set-off described in Section 4 of the Custodian's Acknowledgment. Except for the filing of this Agreement with the Registrar of Companies in Bermuda and with the Irish Registrar of Companies, no filing or other action is or will be necessary or desirable to perfect or protect such security interest in favor of the Bank. 3.3. GOVERNMENTAL APPROVALS AND FILINGS. Other than the filing of this Agreement with the Registrar of Companies in Bermuda and with the Irish Registrar of Companies, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is or will be necessary (a) for the grant by such Grantor of the security interest in the Collateral 8 hereunder or for the execution, delivery or performance of this Agreement by such Grantor, (b) to ensure the validity, perfection or priority of the security interest in the Collateral granted hereunder, or (c) for the exercise by the Bank of any of its rights or remedies hereunder, except as may be required in connection with a disposition of Collateral constituting securities by laws affecting the offering and sale of securities generally. 3.4. POWERS; ENFORCEABILITY; ETC. Such Grantor has, and will at all times have, the necessary power to enable it to execute and deliver this Agreement and perform the obligations expressed to be assumed by it under this Agreement and its execution, delivery and performance of this Agreement do not violate its charter or by-laws or any applicable law or regulation or any contract or agreement to which it is a party. This Agreement constitutes the legal, valid and binding obligation of such Grantor, enforceable in accordance with its terms, except that (A) the enforceability thereof may be subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to or affecting creditors' rights or remedies generally and (B) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and the discretion of the court before which any proceeding therefor may be brought. 3.5. NAMES, ETC. During the one year period ending on the date hereof, no Grantor nor any of its direct or indirect predecessors by merger, consolidation or other corporate reorganization is or has been known by or used any corporate or fictitious name or trade name (other than the corporate name of such Grantor as of the date hereof and other than, in the case of XL Investments, the name "X.L. Investments Ltd.", other than, in the case of XL Europe the name "XL Europe" and "X.L. Europe Insurance", other than, in the case of XL Insurance, the name "XL Insurance Ltd" and other than, in the case of XL Re, the names "X.L. Mid Ocean Reinsurance Company Ltd" and the name "X.L. Global Reinsurance Company, Ltd."), nor has such Grantor or any such predecessor been the subject of any merger, consolidation or other corporate reorganization, nor has such Grantor or any such predecessor otherwise changed its name (except as aforesaid), identity or corporate structure. 3.6. MARGIN STOCK. None of the Collateral constitutes "margin stock," as that term is used in Regulations T, U or X of the Board of Governors of the Federal Reserve System, as amended from time to time. ARTICLE IV COVENANTS 4.1. BOOKS AND RECORDS. Each Grantor shall, and shall cause the Custodian to (a) keep complete and accurate books and records concerning the Collateral and, at the request of the Bank from time to time, permit the Bank or its representatives to inspect and copy such books and records, (b) at the request of the Bank from time to time, permit the Bank or its representatives to inspect any Collateral not in the possession of the Bank, and (c) furnish to the Bank such information and reports in connection with the Collateral at such times and in such form as the Bank may reasonably request. The Bank shall have the right to examine and verify the Collateral from time to time, and such Grantor shall, and shall cause the Custodian to, cooperate with the Bank in such examination. 4.2. TRANSFERS AND OTHER LIENS. (a) TRANSFERS. No Grantor shall sell, assign, transfer or otherwise dispose of any Collateral (voluntarily or involuntarily, by operation of law or otherwise), except as permitted by Section 2.3 hereof. (b) OTHER LIENS. No Grantor shall create or permit to exist any lien, security interest, option or other charge or encumbrance on any Collateral (voluntarily or involuntarily, by operation of law or otherwise), except for the security interest under this Agreement in favor of the Bank securing the Secured Obligations and the Custodian's right of set-off described in Section 4 of the Custodian's Acknowledgment. 9 4.3. CHANGE IN NAME, OFFICE, ETC. Each Grantor shall (a) not, without at least 30 days prior written notice to the Bank, have, use or be known by any corporate or fictitious name or trade name (other than its corporate name as of the date hereof), nor be the subject of any merger, consolidation or other corporate reorganization, nor otherwise change its name, identity or corporate structure, (b) give 30 days notice to the Bank of any change in its chief executive office (which on the date hereof is with respect to XL Europe, La Touche House, International Financial Services Centre, Dublin 1, Republic of Ireland, and, with respect to XL Re, XL Insurance and XL Investments, XL House, One Bermudiana Road, Hamilton HM11 Bermuda) and the offices (whether maintained by such Grantor or otherwise) where books and records relating to the Collateral are kept (which on the date hereof are such Grantor's office at the aforesaid address and the office of the Custodian at One Mellon Bank Center, Pittsburgh, PA 15258) and (c) with respect to XL Investments, XL Insurance and XL Re, maintain its jurisdiction of incorporation and its chief executive office in Bermuda and with respect to XL Europe, maintain its jurisdiction of incorporation and its chief executive office in Ireland. 4.4. CERTAIN COVENANTS. (a) VOTING RIGHTS. (i) GENERAL. Subject to Section 4.4(a)(ii), each Grantor shall be entitled to exercise all voting and other consensual rights pertaining to the Collateral; provided, that no Grantor shall exercise or refrain from exercising any such right if such action would (A) conflict with any provision of this Agreement, or (B) impair the value of any Collateral or impair the interest or rights of any Grantor or the Bank. (ii) CERTAIN RIGHTS OF BANK. If an Event of Default has occurred and is continuing, the Bank may from time to time give notice to the Grantors revoking in whole or in part the rights of the Grantors under Section 4.4(a)(i). If and to the extent such notice has been given, all voting and other consensual rights pertaining to the Collateral shall thereupon be vested in the Bank, who shall thereafter have the sole right to exercise or refrain from exercising such rights. (iii) PROXIES, ETC. The Bank shall, if necessary, execute and deliver to the Grantors such proxies and other instruments as the Grantors may reasonably request for the purpose of enabling each Grantor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to Section 4.4(a)(i). Each Grantor hereby grants the Bank an irrevocable proxy, with full power of substitution, coupled with an interest, to exercise all voting and other consensual rights pertaining to the Collateral, exercisable if and to the extent that the Bank is entitled to exercise such rights pursuant to Section 4.4(a)(ii). All third parties are entitled to rely conclusively on a representation by the Bank that it is entitled to exercise such power of attorney. (b) DISTRIBUTIONS. (i) GENERAL. Subject to Section 4.4(b)(ii), the Grantors shall be entitled to receive and retain all Distributions. (ii) CERTAIN RIGHTS OF BANK. If an Event of Default has occurred and is continuing, all rights of any Grantor to receive and retain the Distributions that it would otherwise be authorized to receive and retain pursuant to Section 4.4(b)(i) shall automatically cease, and all such rights shall thereupon vest in the Bank. Such Distributions shall be Collateral, and shall be forthwith delivered to the Custodian to hold as such. (iii) PAYMENT OVER. If any Grantor receives any payment or property which, pursuant to Section 4.4(b)(ii), it is not entitled to retain, such payment or property shall be received in trust for the benefit of the Bank, shall be segregated from other funds and property of such Grantor, and shall be forthwith delivered to the Custodian as Collateral in the same form as so received (with any necessary endorsement). 10 4.5. FURTHER ASSURANCES. (a) GENERAL. Each Grantor shall from time to time, at its expense, promptly execute and deliver all further instruments and agreements, and take all further actions, that may be necessary or appropriate, or that the Bank may reasonably request, in order to perfect or protect any assignment, pledge or security interest granted or purported to be granted hereby or to enable the Bank to exercise or enforce its rights and remedies hereunder. Without limiting the generality of the foregoing, each Grantor will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Bank may request, in order to perfect and preserve any assignment, pledge or security interest granted or purported to be granted hereby. (b) FILINGS, ETC. Each Grantor hereby authorizes the Bank to file this Agreement with the Registrar of Companies in Bermuda and the Irish Registrar of Companies and to file one or more financing or continuation statements, and amendments thereto, relating to any Collateral without the signature of such Grantor where permitted by law. A photocopy or other reproduction of this Agreement or any financing statement covering any Collateral shall be sufficient as a financing statement or other filing required to perfect a security interest in the Collateral where permitted by law, it being understood that the filing of an original of this Agreement or a certified copy thereof with the Registrar of Companies in Bermuda and the Irish Registrar of Companies is required to perfect the security interest granted hereunder. ARTICLE V CERTAIN RIGHTS AND REMEDIES OF THE BANK 5.1. BANK MAY PERFORM. If any Grantor fails to perform any obligation under or in connection with this Agreement, the Bank may itself perform or cause performance of such obligation, and the expenses of the Bank incurred in connection therewith shall be payable by the Grantors pursuant to Section 6.4. The Bank may from time to time take any other action which the Bank deems necessary or appropriate for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. 5.2. NO DUTY TO EXERCISE POWERS. The powers of the Bank under and in connection with this Agreement are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. 5.3. DUTIES OF BANK. Except for exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys received by it pursuant to this Agreement, the Bank (in its capacity as such) shall have no duty as to any Collateral. In any event the Bank (a) shall have no duty to take any steps to preserve rights against prior parties or any other rights pertaining to any Collateral, (b) shall have no duty as to ascertaining or taking action with respect to calls, conversions, exchanges, tenders, maturities or other matters pertaining to any Collateral, whether or not the Bank has any knowledge of such matters, and (c) shall not be liable for any action, omission, insolvency or default on the part of any agent or custodian (other than the Bank) appointed by the Bank in good faith. The Bank shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if it takes such action for such purpose as the Grantors request in writing from time to time (but failure to take any such action shall not in itself be deemed a failure to exercise reasonable care or evidence of such failure). Subject only to the performance by the Bank of its duties set forth in this Section 5.3, risk of loss, damage and diminution in value of the Collateral, of whatever nature and however caused, shall be on the Grantors. 5.4. REMEDIES. Upon the occurrence of an Event of Default, the Bank shall have all the rights and remedies available to it under law or at equity, including those of a secured party under the UCC (whether or not, to the extent permitted by applicable law, the UCC is in effect in the jurisdiction where the rights and remedies are asserted) or applicable commercial or other law, and may immediately exercise any and all such rights and remedies whether or not the Bank has made any demand of the Grantors, taken any action of any nature against the Grantors or resorted to any other collateral which the Bank may have with respect to the Secured Obligations, all as the Bank shall, in its sole discretion, 11 determine. Upon the occurrence of an Event of Default, the Bank shall have the right to cause the Collateral to be reregistered in the Bank's sole name or the name of it's nominee and shall have the right, to the fullest extent permitted by applicable law, to direct the Custodian to sell all or any part of the Collateral in a commercially reasonable manner upon any exchange or at any public or private sale at the option of the Bank at any time or times without advertisement or demand or notice to the Grantors (all of which are hereby waived), except such notice as is required by applicable statute and cannot be waived; with the right on the part of the Bank or its nominee to become the purchaser thereof at any such sale (unless prohibited by statute). Without limiting the generality of the foregoing, it is contemplated that the Bank will use good faith efforts to refrain from causing the Custodian to liquidate substantially more securities constituting Collateral than the Bank determines or estimates are necessary to generate the cash amounts referred to in the second sentence of Section 5.6 hereof, it being understood that, without limiting the generality of Section 5.3 or the preceding sentence, the Bank shall have no obligation or liability to any Grantor on account of liquidations of such securities yielding proceeds in excess of such cash amounts and the Bank shall not have responsibility to marshal assets or otherwise refrain from exercising its sole and absolute discretion in determining when to sell Collateral and which Collateral to sell. If any notification of intended sale of any of the Collateral is required by law, such notification shall be deemed reasonable if made in accordance with Section 6.3 hereof at least five days before such sale. It is understood that the Bank may cause the Custodian to dispose of the Collateral or any of it through any of the Bank's securities brokerage affiliates. The Bank shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Collateral is accorded treatment substantially equal to that which the Bank accords its own property, it being understood that the Bank shall not have any responsibility for taking any necessary steps to preserve rights against parties with respect to the Collateral. In no event shall the Bank be deemed a trustee of or fiduciary in respect of the Collateral. The proceeds of each collection, sale or other disposition under this Section 5.4 shall be promptly applied in accordance with Section 5.6 hereof. Each of the Grantors recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Bank may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. 5.5. APPOINTMENT OF BANK AS ATTORNEY-IN-FACT. Each Grantor hereby appoints and constitutes the Bank, its successors and assigns, as such Grantor's agent and attorney-in-fact for the purpose of effecting, perfecting, and continuing the grant of security interest in the Collateral to the Bank under this Agreement and the exercise of the Bank's rights and remedies upon the occurrence of an Event of Default hereunder and taking any action or executing any document or instrument that the Bank deems necessary or convenient for such purpose, including the power to endorse and deliver checks, notes and other instruments for the payment of money in the name of and on behalf of such Grantor, to endorse and deliver in the name of and on behalf of such Grantor securities or other certificates and execute and deliver in the name of or on behalf of such Grantor instruments to the issuers of uncertificated securities and to execute and file in the name of and on behalf of such Grantor financing statements, mortgages, charges or similar documents and continuations and amendments thereto. This appointment is coupled with an interest and is irrevocable and will not be affected by the bankruptcy or insolvency of such Grantor or any circumstances whatsoever. Each Grantor agrees that the Custodian, each Investment Manager, the issuers of any Collateral or any registrar or transfer agent shall be entitled to accept the provisions hereof as conclusive evidence of the Bank's rights to effect any transfer pursuant to this Agreement and the authority granted to the Bank hereunder, notwithstanding any other notice as direction to the contrary heretofore or hereinafter given by such Grantor or any other party. 5.6. APPLICATION OF PAYMENTS. All cash held by the Bank as Collateral and all cash proceeds received by the Bank in respect of any sale of, collection from, or other realization upon any of the Collateral, may in the discretion of the Bank be held by the Bank as collateral for the Secured Obligations, or then or at any time thereafter applied (after payment of any amounts payable to the Bank pursuant to Section 6.4) in whole or part by the Bank to the Secured Obligations (whether or not then due) in such order as the Bank may elect, but not in contravention of the express terms hereof. If and when all Secured Obligations shall have been paid in cash in full and all Letters of Credit shall have terminated, any surplus of such cash or cash proceeds held by the Bank shall be paid over to the Grantors or as otherwise required by law. If the proceeds of sale, collection or other realization of or upon the Collateral pursuant to this Section 5.6 hereof are insufficient to cover the costs and expenses of such 12 realization and the payment in full of the Secured Obligations, the Grantors shall remain liable for any deficiency. ARTICLE VI MISCELLANEOUS 6.1. AMENDMENTS, ETC. No amendment to or waiver of any provision of this Agreement, and no consent to any departure by any Grantor herefrom, shall in any event be effective unless in a writing manually signed by the Bank. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 6.2. NO IMPLIED WAIVER; REMEDIES CUMULATIVE. No delay or failure of the Bank in exercising any right or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of the Bank under this Agreement are cumulative and not exclusive of any other rights or remedies available hereunder, under any other agreement, at law, or otherwise. 6.3. NOTICES. Unless otherwise specified in this Agreement, notices shall be in writing and shall be effective, if to a Grantor, when received by such Grantor c/o XL Capital Ltd. at XL House, One Bermudiana Road, Hamilton HM11, Bermuda Attn: General Counsel and, if to the Bank, when received at 388 Greenwich Street, 22nd Floor, New York, NY 10013 Attn: Mike Taylor, or, in any case, such other address as the Bank, on the one hand, or any of the Grantors, on the other hand, may notify the other in writing. The Grantors and the Bank further agree that, if any notice given by a party triggers an obligation on the part of the party receiving the notice which requires an affirmative action to be taken by such receiving party within five Business Days of the receipt of such notice, then such notice shall be given by telecopier. 6.4. INDEMNITY AND EXPENSES. (a) INDEMNITY. Each Grantor agrees, jointly and severally, to indemnify the Bank from and against any and all claims, losses, liabilities and expenses (including reasonable attorney's fees and expenses) arising out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses, liabilities and expenses resulting solely from the gross negligence or willful misconduct of the Bank. (b) EXPENSES. Each Grantor agrees, jointly and severally, to pay upon demand to the Bank the amount of all reasonable fees and expenses, including the reasonable fees and expenses of its counsel (which, in any event, shall be limited to one counsel in any one jurisdiction) and of any experts and agents, which the Bank may incur in connection with (i) the administration of this Agreement, (ii) any Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Bank in respect thereof, by litigation or otherwise, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated), (iii) the enforcement of this Section 6.4 or (iv) the failure by any Grantor to perform or observe any of the provisions hereof; PROVIDED that the Grantors shall not be liable for any fees and expenses resulting solely from the gross negligence or willful misconduct of the Bank. All such fees and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 2.1 hereof. Without limiting the foregoing, the Grantors shall pay and reimburse the Bank on demand for all reasonable fees and expenses incurred by them in liquidating the Collateral pursuant hereto. 13 6.5. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements. 6.6. SURVIVAL. The obligations of each Grantor under Sections 2.5, 2.9 and 6.4 shall survive termination of this Agreement and all other events and conditions whatever. All representations and warranties of the Grantors contained in or made in connection with this Agreement shall survive, and shall not be waived by, the execution and delivery of this Agreement, any investigation by or knowledge of the Bank, any extension of credit, termination of this Agreement, or any other event or circumstance whatever. 6.7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all such counterparts shall constitute but one and the same agreement. 6.8. SEVERABILITY. If any one or more of the provisions hereof or in any other related document should for any reason be invalid, illegal, or unenforceable in any respect, the validity, legality, or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, and such invalid, illegal, or unenforceable provision shall be deemed modified to the extent necessary to render it valid while most nearly preserving its original intent. 6.9. CONSTRUCTION. In this Agreement, unless the context otherwise clearly requires, references to the plural include the singular, the singular the plural, and the part the whole; the neuter case includes the masculine and feminine cases; and "or" is not exclusive. In this Agreement, any references to property (and similar terms) include an interest in such property (or other item referred to); "include," "includes," "including" and similar terms are not limiting; and "hereof," "herein," "hereunder" and similar terms refer to this Agreement as a whole and not to any particular provision. Section and other headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement in any respect. Section and other references in this Agreement are to this Agreement unless otherwise specified. 6.10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon each Grantor and its successors and assigns, and shall inure to the benefit of and be enforceable by the Bank and its successors and assigns. 6.11. SUCCESSOR CUSTODIAN. The Grantors may appoint a successor Custodian upon no less than 60 days prior written notice to the Bank, which successor Custodian shall become the Custodian for all purposes of this Agreement upon establishing securities accounts which will become Designated Accounts, receiving all Collateral required to be deposited to such securities accounts and crediting such Collateral to such securities accounts; PROVIDED that (i) such successor Custodian shall be an institution qualified to maintain securities accounts for customers or depositors and to perform the functions of a securities intermediary with respect to the Collateral, of recognized national standing as a securities intermediary and custodian, and have a capitalization of not less than $500,000,000, (ii) such successor Custodian shall have its principal place of business in the United States, which principal place of business shall be located in, and the securities accounts shall be maintained in, a jurisdiction which has enacted the 1994 revisions to Article 8 and the 2000 revisions to Article 9 of the Uniform Commercial Code, (iii) such successor Custodian shall have the ability to, and shall have agreed to, provide electronic access to the Designated Accounts and/or valuation reports to the Bank and the Grantors when requested to do so, which may be as frequently as daily and (iv) such successor Custodian shall have entered into and provided a custodian acknowledgment in favor of the Bank and such other agreements and documentation which are reasonably required by the Bank, all in form and substance reasonably satisfactory to the Bank; PROVIDED FURTHER that upon the occurrence and during the continuance of an Event of Default, the Bank shall have the absolute right at any time to appoint itself as successor Custodian. In the event the Bank appoints itself as successor Custodian as set forth above, (i) the Grantors shall cause the then current Custodian to transfer all Collateral in the Designated Accounts at such time to such account(s) as the Bank shall direct and (ii) the Grantors hereby acknowledge that the Collateral shall continue to be subject to the security interest created hereby. 14 6.12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCLUSIVE OF CHOICE OF LAW PRINCIPLES. 6.13. CONSENT TO JURISDICTION; SERVICE OF PROCESS. Each Grantor irrevocably submits to the non-exclusive jurisdiction of any state or federal court sitting in New York, New York, for itself and in respect of any of its property and, if a law other than the law of the State of New York, has been chosen to govern a Letter of Credit, each Grantor also irrevocably submits to the non-exclusive jurisdiction of any state or federal court sitting in such jurisdiction, in each case in connection with any suit, action or proceeding relating to this Agreement or such Letter of Credit. Each Grantor agrees not to bring any action or proceeding against the Bank in any jurisdiction not described in the immediately preceding sentence. Each Grantor irrevocably waives any objection to venue or any claim of inconvenient forum in connection with any such action, suit or proceeding. Each Grantor agrees that any service of process or other notice of legal process may be served upon it by mail or hand delivery if sent to CT Corporation System at 111 Eighth Avenue, New York, NY 10016 which the Grantors now designate as their authorized agent for the service of process in the courts in the State of New York. (If no authorized agent is designated in the space provided above, each Grantor agrees that process shall be deemed served if sent to its address given for notices under this Agreement.) Each Grantor agrees that nothing in this Agreement shall affect the Bank's right to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Grantor in any other jurisdiction. Each Grantor agrees that final judgment against it in any action or proceeding shall be enforceable in any other jurisdiction within or outside the United States of America by suit on the judgment, a certified copy of which shall be conclusive evidence of the judgment. 6.14. WAIVER OF IMMUNITY. To the extent any Grantor now has or hereafter acquires any immunity from jurisdiction of any court or from suit, jurisdiction, attachment before or after judgment or execution or from any other legal process with respect to itself or its property, such Grantor irrevocably waives such immunity with respect to its obligations under this Agreement. 6.15. SET-OFF. If any Event of Default shall occur and be continuing, the Bank may set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of any of the Grantors ("Deposits") against any and all of the Grantors' obligations under this Agreement, irrespective of whether or not the Bank shall have made any demand under this Agreement and although such Deposits or obligations may be unmatured or contingent. The Bank's rights under this section are in addition to other rights and remedies (including other rights of set-off) which the Bank may have under this Agreement or applicable law. 15 IN WITNESS WHEREOF, each of the parties hereto has executed and delivered this Agreement as of the date first above written. XL INSURANCE (BERMUDA) LTD By /s/ Christopher Coelho ------------------------------------------------ Name: Christopher Coelho --------------------------------------------- Title: Senior Vice President & Chief Financial -------------------------------------------- Officer -------------- XL RE LTD By /s/ John Hume ------------------------------------------------ Name: John Hume --------------------------------------------- Title: Executive Vice President & Chief Financial -------------------------------------------- Officer -------------- XL INVESTMENTS LTD By /s/ Jerry de St. Paer ------------------------------------------------ Name: Jerry de St. Paer --------------------------------------------- Title: Executive Vice President -------------------------------------------- XL EUROPE LTD By /s/ Fiona Muldoon ------------------------------------------------ Name: Fiona Muldoon --------------------------------------------- Title: Chief Financial Officer -------------------------------------------- CITIBANK, N.A. By /s/ Michael A.L. Taylor ------------------------------------------------ Name: Michael A.L. Taylor --------------------------------------------- Title: Director -------------------------------------------- 16 EX-10.55 7 c23420_ex10-55.txt LIMITED LIABILITY COMPANY AGREEMENT LIMITED LIABILITY COMPANY AGREEMENT OF XL CAPITAL PRINCIPAL PARTNERS I, L.L.C. THE UNDERSIGNED are executing this Limited Liability Company Agreement ("Agreement") for the purpose of forming, and do hereby form, a limited liability company (the "Company") pursuant to the provisions of the Delaware Limited Liability Company Act, 6 DEL. C. ss.ss. 18-101 ET SEQ. (the "Act"), and do hereby agree as follows: 1. NAME. The name of the Company shall be XL Capital Principal Partners I, L.L.C., or such other name as the Managing Members may from time to time hereafter designate. 2. DEFINITIONS. Capitalized terms not otherwise defined herein shall have the meanings set forth therefor in Section 18-101 of the Act. 3. PURPOSE. The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, engaging in any lawful act or activity for which a limited liability company may be formed under the Act and engaging in all activities and transactions which the Managing Members deems necessary or advisable in connection with the foregoing. 4. OFFICES. (a) The principal place of business and office of the Company shall be located at, and the Company's business shall be conducted from, c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda or at any other place that the Managing Members may select, provided that notice of that selection is given to the Members. 2 (b) The registered office of the Company in the State of Delaware shall be located at c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801 or at such other office as may from time to time be determined by the Managing Members. The name and address of the registered agent of the Company for service of process on the Company in the State of Delaware shall be The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 5. MEMBERS. The name and business or residence address of each Member of the Company are kept in the books and records of the Company. The Members, as such, have no responsibility for the management of the Company and have no authority or right to act on behalf of the Company or to bind the Company in connection with any matter. 6. TERM. The term of the Company shall commence on the date of filing of the certificate of formation of the Company in accordance with the Act and shall continue until dissolved and its affairs are wound up in accordance with Section 13 of this Agreement. 7. MANAGEMENT OF THE COMPANY. The names and addresses of the Managing Members are XL Capital Partners I, L.P., located at c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda and XL Principal Partners I, L.P., located at c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda. The business and affairs of the Company shall be managed by the Managing Members. Each Managing Member, acting individually, shall have the power to do any and all acts necessary or convenient to or for the furtherance of the purposes described herein, including all powers, statutory or otherwise, possessed by members under the laws of the State of Delaware. XL Capital Partners I, L.P. is hereby designated as an authorized person, within the meaning of 3 the Act, to execute, deliver and file the certificate of formation of the Company (and any amendments and/or restatements thereof) and any other certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business. The execution by XL Capital Partners I, L.P. of any of the foregoing certificates (and any amendments and/or restatements thereof) shall be sufficient. Any action to be taken by the Company shall be by the sole discretion of the Managing Members (except as otherwise expressly provided herein) and the discretion of the Managing Members shall, for all purposes hereunder, be exercised by XL Capital Partners Corporation (as general partner of each Managing Member). Conyers Dill & Pearman is authorized to execute documents on behalf of XL Capital Partners Corporation in Bermuda. 8. CAPITAL CONTRIBUTIONS. The Members will make capital contributions to the Company in such amounts and at such times as the Managing Members shall determine. 9. ASSIGNMENTS OF MEMBER INTEREST. A Member may not sell, assign, pledge or otherwise transfer or encumber any of its interest or interests in the Company to any person without the written consent of the Managing Members, which consent may be granted or withheld in their sole and absolute discretion, and subject to the satisfaction of certain conditions as the Managing Members may require, such as the execution and delivery of a subscription agreement or transfer agreement or the making of certain representations. 10. ADDITIONAL MEMBERS. Additional Members may be admitted at any time at the sole discretion of the Managing Members on such terms and conditions as the Managing Members shall determine. 11. RESIGNATION. A Member may not resign without the consent of the Managing Members. 4 12. ALLOCATIONS AND DISTRIBUTIONS. (a) Allocations and distributions shall be made to the Member at the times and in such amounts as determined by the Managing Members. Such distributions shall be allocated among the Members according to their then capital account balances or as otherwise determined by the Managing Members. (b) To the extent the Managing Members reasonably determine that the Company is required by law to withhold or to make tax payments on behalf of or with respect to any Member ("Tax Advances"), the Managing Members may withhold such amounts and make such tax payments as so required. All Tax Advances (together with interest thereon as reasonably determined by the Managing Members if such Tax Advance took the form of a tax payment rather than withholding) made on behalf of a Member shall, at the option of the Managing Members, (i) be paid promptly to the Company by the Member on whose behalf such Tax Advances were made or (ii) be repaid by reducing the amount of the current or next succeeding distribution or distributions which would otherwise have been made to such Member or, if such distributions are not sufficient for that purpose, by so reducing the proceeds of liquidation otherwise payable to such Member. Whenever the Managing Members select option (ii) pursuant to the preceding sentence for repayment of a Tax Advance by a Member, for all other purposes of this Agreement such Member shall be treated as having received all distributions (whether before or upon liquidation) unreduced by the amount of such Tax Advances. Each Member hereby agrees to indemnify and hold harmless the Company and the other Members from and against any liability (including, without limitation, any liability for taxes, penalties, additions to tax, interest or failure to withhold taxes) with respect to income attributable to or distributions or other payments to such Member. 5 13. DISSOLUTION. The Company shall be dissolved and its affairs wound up upon the first to occur of the following: (a) a determination made by the Managing Members at any time to liquidate and dissolve the Company for any reason; (b) the bankruptcy, insolvency, termination or dissolution of each Managing Member; (c) the withdrawal of each Managing Member without a corresponding permitted substitution; or (d) the entry of a decree of judicial dissolution. However, the Company shall not be dissolved upon the occurrence of (b) or (c) if within 90 days after the occurrence of such event, all remaining Members agree in writing to continue the business of the Company and to the appointment, effective as of the date of such event, of one or more additional managing members of the Company. 14. AMENDMENTS. This Agreement may be amended upon the written consent of the Managing Members. 15. MISCELLANEOUS. The Members shall not have any liability for the debts, obligations or liabilities of the Company except to the extent provided by the Act. This Agreement shall be governed by, and construed under, the laws of the State of Delaware, without regard to conflict of law rules. 16. OFFICERS. (a) The Company, and the Managing Members on behalf of the Company, may employ and retain persons as may be necessary or appropriate for the conduct of the Company's business, including employees and agents who may be designated as officers with titles, including, but not limited to, "chairman," "chief executive officer," "president," "vice 6 president," "treasurer," "secretary," "managing director", "chief financial officer," "assistant treasurer" and "assistant secretary," as authorized by the Managing Members. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of June 26, 2001. XL CAPITAL PARTNERS I, L.P. and XL PRINCIPAL PARTNERS I, L.P. By: XL Capital Partners Corporation, THEIR RESPECTIVE GENERAL PARTNERS By: _____________________________ Name: Title: EX-10.56 8 c23420_ex10-56.txt AGREEMENT OF LIMITED PARTNERSHIP ================================================================================ XL CAPITAL PARTNERS I, L.P. AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ----------------------------------- DATED AS OF MAY 31, 2001 ----------------------------------- ================================================================================ TABLE OF CONTENTS PAGE ARTICLE 1 Certain Defined Terms...............................................1 1.1. DEFINED TERMS...................................................1 ARTICLE 2 Formation, Name and Place of Business; Purpose and Limitation on Operations; Term; Conversion to Corporate Form......................8 2.1. FORMATION.......................................................8 2.2. NAME............................................................8 2.3. PRINCIPAL OFFICE................................................8 2.4. PURPOSE.........................................................8 2.5. ORGANIZATIONAL CERTIFICATES AND OTHER FILINGS; LIMITATIONS ON CONDUCT OF BUSINESS..............................8 2.6. TERM............................................................9 2.7. REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS...............9 2.8. FISCAL YEAR.....................................................10 2.9. ALTERNATIVE INVESTMENT STRUCTURE................................10 ARTICLE 3 General Partner; Relationship with XL Capital.......................10 3.1. GENERAL PARTNER; MANAGEMENT OF GENERAL PARTNER..................10 3.2. NO COMPENSATION OF GENERAL PARTNER; EXPENSES....................11 3.3. ADMINISTRATIVE SERVICES.........................................11 3.4. SERVICES BY XL CAPITAL; CHARGES AND EXPENSES....................11 3.5. RELATED PARTNERSHIPS............................................11 ARTICLE 4 Limited Partners....................................................11 4.1. INITIAL LIMITED PARTNER.........................................11 4.2. ADDITIONAL LIMITED PARTNERS.....................................12 4.3. LIST OF LIMITED PARTNERS........................................12 i PAGE 4.4. NO MANAGEMENT BY LIMITED PARTNERS...............................12 4.5. LIMITATION ON TRANSFER OF LIMITED PARTNERS' UNITS...............12 4.6. LIABILITIES OF THE LIMITED PARTNERS;............................13 ARTICLE 5 Powers of General Partner; Prohibited Transactions and Restrictions; Duties of General Partner; Liabilities; Indemnification and Contribution....................................13 5.1. POWERS..........................................................13 5.2. RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER............14 5.3. DUTIES..........................................................14 5.4. LIABILITY OF THE GENERAL PARTNER................................15 5.5. EXCULPATION, INDEMNIFICATION AND CONTRIBUTION...................15 5.6. GENERAL PARTNER LOANS...........................................15 ARTICLE 6 Capital Contributions and Accounts; No Further Contributions Required; Interest; Accounting and Valuation........................16 6.1. CAPITAL CONTRIBUTIONS AND ACCOUNTS..............................16 6.2. SUBSEQUENT CLOSINGS.............................................17 6.3. FURTHER CAPITAL CONTRIBUTIONS...................................18 6.4. DEFAULTING LIMITED PARTNER......................................18 6.5. INTEREST........................................................19 6.6. ACCOUNTING PERIODS AND TAXABLE YEARS............................19 ARTICLE 7 Allocations.........................................................19 7.1. ALLOCATION OF PROFITS AND LOSSES; OTHER ALLOCATIONS.............19 7.2. SPECIAL ALLOCATION PROVISIONS...................................20 7.3. TAX ALLOCATIONS.................................................21 7.4. ALLOCATION AMONG LIMITED PARTNERS; TRANSFERS....................21 7.5. TAX ELECTIONS...................................................21 7.6. OTHER ALLOCATION PROVISIONS.....................................21 ii PAGE 7.7. TAX ADVANCES....................................................21 ARTICLE 8 Distributions; Withdrawal...........................................22 8.1. GENERAL PARTNER DISCRETION......................................22 8.2. DISTRIBUTIONS...................................................22 8.3. NON-CASH DISTRIBUTIONS..........................................23 8.4. WITHHOLDING.....................................................23 8.5. WITHDRAWAL......................................................23 8.6. REQUIRED WITHDRAWAL.............................................23 ARTICLE 9 Transferability of Interests; Vesting; Termination of Employment...24 9.1. RESTRICTIONS AND CONDITIONS ON TRANSFERS OF UNITS...............24 9.2. ASSIGNEES.......................................................25 9.3. SUBSTITUTED LIMITED PARTNERS....................................25 9.4. TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF LIMITED PARTNER.................................................26 9.5. DISPOSITION OF GENERAL PARTNER'S INTEREST.......................28 ARTICLE 10 Term and Dissolution of the Partnership............................28 10.1. EVENTS CAUSING DISSOLUTION.....................................28 10.2. WINDING UP.....................................................28 10.3. FINAL DISTRIBUTION.............................................29 ARTICLE 11 Books and Records; Accounting; Appraisal; Tax Matters and Elections......................................................30 11.1. BOOKS AND RECORDS..............................................30 11.2. ACCOUNTING BASIS; FISCAL YEAR..................................30 11.3. BANK ACCOUNTS..................................................30 11.4. APPRAISAL......................................................30 11.5. REPORTS........................................................31 11.6. TAX MATTERS AND ELECTIONS......................................31 iii PAGE ARTICLE 12 Miscellaneous Provisions...........................................31 12.1. POWER OF ATTORNEY..............................................31 12.2. AMENDMENTS OF THIS AGREEMENT...................................32 12.3. ARBITRATION....................................................34 12.4. NOTICES........................................................34 12.5. BINDING PROVISIONS.............................................34 12.6. GOVERNING LAW..................................................34 12.7. JURISDICTION; VENUE............................................34 12.8. COUNTERPARTS...................................................35 12.9. SEPARABILITY OF PROVISIONS.....................................35 12.10. ENTIRE AGREEMENT..............................................35 12.11. PARAGRAPH TITLES..............................................35 12.12. WAIVER OF RIGHT OF PARTITION AND ACCOUNTING...................35 12.13. EFFECTIVENESS.................................................35 iv AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP XL CAPITAL PARTNERS I, L.P. This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, (this "Agreement") of XL CAPITAL PARTNERS I, L.P., an exempted limited partnership registered under the laws of the Cayman Islands (the "Partnership") is made this 31st day of May 2001, by and among XL Capital Partners Corporation, a Cayman Islands company, as general partner hereunder (the "General Partner"), the Initial Limited Partner (as described in Section 4.1 hereof) and the persons who have signed this Agreement and have been admitted as additional limited partners hereunder (the "Limited Partners") (the General Partner and the Limited Partners are collectively referred to as the "Partners"). W I T N E S S E T H : ------------------- WHEREAS, the General Partner and the Initial Limited Partner have entered into an agreement of limited partnership dated March 15, 2001 and formed an exempted limited partnership under the laws of the Cayman Islands under the name of XL Capital Partners I, L.P.; WHEREAS, the parties hereto desire to enter into this Amended and Restated Limited Partnership Agreement of the Partnership to permit the withdrawal of the Initial Limited Partner and the admission of the additional Limited Partners who have signed this Agreement and have been admitted as additional Limited Partners hereunder and further to make the modifications hereinafter set forth; and NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties hereto agree to amend and restate the Limited Partnership Agreement of the Partnership in its entirety to read as follows: ARTICLE 1 CERTAIN DEFINED TERMS 1.1. DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: Act The Exempted Limited Partnership Law (2001 Revision) of the Cayman Islands, as revised or amended from time to time Additional Share As defined in Section 9.4(e) Affiliate Any person or entity that controls, is controlled by, or is under common control with, any other person or entity 2 Agreement This Amended and Restated Agreement of Limited Partnership, as it may be amended, modified or supplemented from time to time Alternative Investment Vehicle As defined in Section 2.9 Board Board of Directors of the General Partner appointed from time to time by XL Capital as the sole shareholder of the General Partner Capital Account As defined in Section 6.1(d) Capital Contributions Amounts contributed to the Partnership or any Alternative Investment Vehicle by the Partners Carried Interest As defined in 7.1(a)(i) Carrying Value With respect to any Partnership asset, the asset's adjusted basis for United States federal income tax purposes, except that the Carrying Values of all Partnership assets shall be adjusted to equal their respective fair market values (as determined by the General Partner), in accordance with the rules set forth in Treasury Regulations Section 1.704-1(b)(2)(iv)(f), except as otherwise provided herein, immediately prior to: (a) the date of the distribution of more than a DE MINIMIS amount of Partnership property (other than a PRO RATA distribution) to a Partner; or (b) the date of the acquisition of any additional interests in the Partnership by any new or existing Partner in exchange for more than a DE MINIMUS capital contribution; PROVIDED that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner determines in its sole discretion that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners. The Carrying Value of any Partnership asset distributed to any Partner shall be adjusted immediately prior to such distribution to equal its Fair Market Value. The Carrying Value of Partnership assets shall be adjusted by depreciation and amortization as computed for book purposes as provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(g). Cause (i) The conviction of the Limited Partner of a felony involving moral turpitude or dishonesty, or (ii) The Limited Partner, in carrying out his or her duties for the XL Group has been guilty of (a) gross negligence or (b) willful misconduct; provided, however, that any act or failure to act by the Limited Partner shall not constitute Cause if such act or failure to act was committed, or omitted, by the Limited Partner in good faith and in a manner he or she reasonably believed to be in the overall best interests of the XL Group. The determination of whether the Limited Partner acted in good faith and that 3 he or she reasonably believed such action to be in the XL Group's overall best interest will be made in the reasonable judgment of the General Counsel of XL Capital or, if the General Counsel shall have an actual or potential conflict of interest, the Compensation Committee, or the Board of Directors of XL Capital, or (iii) The Limited Partner's continued willful refusal to obey any appropriate policy or requirement duly adopted by the Chief Executive Officer or board of directors of any member of the XL Group and the continuance of such refusal after the receipt of notice Closing The date of the initial closing of the Partnership Code United States Internal Revenue Code of 1986, as amended Commitment Period The period from the Closing to the earlier of (i) the date of full investment in Investments and the fifth anniversary of the Closing; PROVIDED, that the General Partner may extend this period for up to one year in respect of transactions that have been identified by the General Partner prior to such date, PROVIDED, FURTHER that the General Partner may terminate the Commitment Period at any time in its sole discretion. Defaulting Limited Partner As defined in Section 6.4 Disability A disability which meets the criteria under the XL Group Long Term Disability Plan Disabling Event The transfer or assignment of the General Partner's interest in the Partnership, or the withdrawal, death, insanity, retirement, bankruptcy, commencement of liquidation proceedings, resignation, insolvency, dissolution or winding up of the General Partner. For purposes of this definition, the term "bankruptcy" shall be deemed to include the following: (i) the General Partner (A) making an assignment for the benefit of creditors, (B) filing a voluntary petition in bankruptcy, (C) being adjudged as bankrupt or insolvent or having entered against it an order for relief in any bankruptcy or insolvency proceeding, (D) filing a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, (E) filing an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of this nature or (F) seeking, consenting or acquiescing in the appointment of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties or (ii) if, 120 days after the commencement of any proceeding against the General Partner seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar 4 relief under any statute, law or regulation, the proceeding has not been dismissed, or if within 90 days after the appointment without its consent or acquiescence of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties, the appointment is not vacated or stayed, or if within 90 days after the expiration of any such stay, the appointment is not vacated Dissolution Sale All sales and liquidations by or on behalf of the Partnership of its assets in connection with or in contemplation of the winding-up of the Partnership Event of Dissolution As defined in Section 10.1 Final Distribution The distribution described in Section 10.3 Fiscal Year As defined in Section 2.8 Fixed Return Cumulative (but not compound) preferred annual return on the General Partner's aggregate Capital Contribution equal to 10% General Partner XL Capital Partners Corporation, a Cayman Islands company, as general partner of the Partnership General Partner's Capital As defined in Section 5.5 Contribution Immediate Family Member With respect to any natural person, such person's spouse, children, grandchildren, parents and siblings Initial Limited Partner Huntlaw Nominees Ltd, as the Initial Limited Partner of the Partnership Initial Payment 50% of the amount subscribed for Investment Committee As defined in Section 5.4. Investment Company Act The Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder Investment As defined in Section 2.4 Limited Partner Payment The aggregate amount of the Capital Contribution of each Limited Partner which is to be paid upon execution and delivery of the Subscription Agreement Limited Partners Persons who have been admitted as limited partners to the Partnership pursuant to their purchase of Units as set forth in the Register of the Partnership 5 Memorandum The Confidential Private Placement Memorandum dated March 2001, relating to the Partnership, as amended or supplemented from time to time Nonrecourse Deductions As defined in U.S. Treasury Regulations Section 1.704-2(b). The amount of Partnership Nonrecourse Deductions for a fiscal year equals the net increase, if any, in the amount of Partnership minimum gain during that fiscal year, determined according to the provisions of Treasury Regulations Section 1.704-2(c) Partner Nonrecourse Debt An amount with respect to each partner Minimum Gain nonrecourse debt (as defined in Treasury Regulations Section 1.704-2(b)(4)) equal to the Partnership Minimum Gain that would result if such partner nonrecourse debt were treated as a nonrecourse liability (as defined in Treasury Regulations Section 1.752-1(a)(2)) determined in accordance with Treasury Regulations Section 1.704-2(i)(3) Partner Nonrecourse Deductions As defined in Treasury Regulations Section 1.704-2(i)(2) Partners The General Partner and the Limited Partners, collectively Partnership XL Capital Partners I, L.P., the exempted limited partnership formed in accordance with this Agreement and under the laws of the Cayman Islands Partnership Minimum Gain As defined in Treasury Regulations Section 1.704-2(b)(2) and 1.704-2(d) Person Any individual, partnership, corporation, limited liability company, unincorporated organization or association, trust (including the trustees thereof, in their capacity as such), government (or agency or political subdivision thereof) or other entity Pro Rata Share As defined in Section 9.4(e) Profits and Losses For each fiscal year or other period, the taxable income or loss of the Partnership, or particular items thereof, determined in accordance with the accounting method used by the Partnership for United States federal income tax purposes with the following adjustments: (a) all items hereof of income, gain, loss or deduction allocated pursuant to Section 7.2 shall not be taken into account in computing such taxable income or loss; (b) any income of the Partnership that is exempt from federal income taxation and not otherwise taken into account in computing Profits and Losses shall be added to such taxable income or loss; (c) if the Carrying 6 Value of any asset differs from its adjusted tax basis for federal income tax purposes, any gain or loss resulting from a disposition of such asset shall be determined with reference to such Carrying Value; (d) upon an adjustment to the Carrying Value of any asset pursuant to the definition of Carrying Value (other than an adjustment with respect to depreciation or amortization), the amount of the adjustment shall be included as gain or loss in computing such taxable income or loss; (e) except for items in (a) above, any expenditures of the Partnership not deductible in computing taxable income or loss, not properly capitalizable and not otherwise taken into account in computing Profits and Losses pursuant to this definition shall be treated as deductible items Reference Rate The rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank (or its successor) as its prime rate in effect at its principal office in New York City or, if no such rate is announced, the rate quoted from time to time by a New York money center bank selected by the General Partner. Register The register of the contributions of the Partners maintained at the registered office of the Partnership in accordance with the Act. Representative Any executor, administrator, trustee, committee, guardian, conservator or representative appointed by a court of competent jurisdiction to act on behalf of a Limited Partner or the estate of a Limited Partner Tax Advances As defined in Section 7.7 Transfer As defined in Section 9.1(a) Transfer Application Written and dated notification of a Transfer of all or any portion of the Units of a Limited Partner referred to in Section 9.2 Transferring Limited Partner As defined in Section 9.1(c) Treasury Regulations United States treasury regulations promulgated under the Code Units Units of limited partnership interests in the Partnership representing the entire rights owned by a Limited Partner, including the right to a share of the Profits and Losses of the Partnership, as offered pursuant to the Memorandum Unpaid Capital Commitment As to any Partner as of any time, an amount equal to: (i) such Partner's capital commitment, minus (ii) the aggregate amount of such Partner's Capital Contributions (and capital contributions to any Alternative Investment Vehicle) (but not additional amounts thereon pursuant to Section 6.2) made at or prior to such time. Unvested Interest The unvested portion of each Limited Partner's interest in the Partnership, determined in accordance with Section 9.4(a) 7 Vesting Schedule The schedule according to which a Limited Partner's interest in the Partnership generally will vest, as set forth in Section 9.4(a) XL Capital XL Capital Ltd, a Cayman Islands company XL Group XL Capital and its subsidiaries and Affiliates 8 ARTICLE 2 FORMATION, NAME AND PLACE OF BUSINESS; PURPOSE AND LIMITATION ON OPERATIONS; TERM; CONVERSION TO CORPORATE FORM 2.1. FORMATION. The parties hereto continue a limited partnership formed on March 15, 2001 pursuant to the Act. 2.2. NAME. The name of the Partnership shall be "XL Capital Partners I, L.P." The General Partner is authorized to make any variations in the Partnership's name which the General Partner may deem necessary or advisable, PROVIDED (a) that such name shall contain the words "Limited Partnership" or the letters "L.P." or the equivalent translation thereof and any other designation required by applicable law and (b) that the General Partner shall notify the Registrar of Limited Partnerships in the Cayman Islands of any such change of name in accordance with the Act. All Partnership business shall be conducted in such name of the Partnership. 2.3. PRINCIPAL OFFICE. The Partnership shall maintain its principal office at, and its affairs shall be conducted from, Bermuda or such place or places as the General Partner may, with notice to the Limited Partners, decide. 2.4. PURPOSE. The purpose of the Partnership is to (a) achieve long-term capital appreciation for its investors through a portfolio of investments, including without limitation, private equity, venture capital and hedge funds; equity and equity-related securities of all types; investments in debt securities, preferred shares and other financial instruments; and securities issued by companies providing financial guarantee, insurance and reinsurance contracts. These investments are referred to collectively as the "Investments;" and (b) to engage in any other business activities that may be lawful in or from within the Cayman Islands and to engage in any other business or activity that now or hereafter may be necessary, incidental, proper, advisable or convenient to accomplish the foregoing purposes (including, without limitation, obtaining financing) and that is not forbidden by the law of the jurisdiction in which the Partnership engages in that business. 2.5. ORGANIZATIONAL CERTIFICATES AND OTHER FILINGS; LIMITATIONS ON CONDUCT OF BUSINESS. (a) The General Partner has executed and caused to be filed with the Registrar of Exempted Limited Partnerships in the Cayman Islands a registration statement pursuant to Section 9 of the Act containing information required by the Act. The General Partner may cause the Partnership to qualify as a foreign limited partnership (or a partnership in which the Limited Partner has limited liability) in any other jurisdiction. (b) If requested by the General Partner, the Limited Partners shall promptly execute all certificates and other documents consistent with the terms of this Agreement necessary for the General Partner to accomplish all filing, recording, publishing and other acts as may be appropriate to comply with all requirements for (i) the formation and operation of a limited partnership under the laws of the Cayman Islands, (ii) the operation of the Partnership as an 9 entity or partnership in which the Limited Partners have limited liability, in all jurisdictions where the Partnership proposes to operate and (iii) all other filings required to be made by the Partnership. (c) The General Partner shall use its best efforts to cause the Partnership to maintain the limited liability of the Limited Partners. The General Partner shall cause the Partnership to be qualified or registered under assumed or fictitious names or foreign limited partnership statutes or similar laws in any jurisdiction in which the Partnership owns property or transacts business to the extent such qualification or registration is necessary or, in the judgment of the General Partner, advisable in order to protect the limited liability of the Limited Partners or to permit the Partnership to lawfully own property or transact business, and shall cause the Partnership not to own property or transact business in any such jurisdiction until it is so qualified or registered. The General Partner shall execute, file and publish all such certificates, notices, statements or other instruments necessary to permit the Partnership lawfully to own property and conduct business as a limited partnership in all jurisdictions where the Partnership elects to own property or transact business and to maintain the limited liability of the Limited Partners. 2.6. TERM. The Partnership shall continue until the close of business on December 31, 2027, or upon earlier termination by the General Partner. The Partnership is also subject to termination upon the occurrence of certain specific events as set forth in Section 10.1 hereof. Upon the dissolution of the Partnership, its liabilities are to be paid in the order provided herein. The General Partner shall cause Partnership assets to be sold in such manner as the General Partner, in its sole discretion, may determine. The General Partner may, to the extent permitted by applicable law, purchase from the Partnership any Partnership investments upon which there are significant restrictions or for which another purchaser willing to pay fair market value is not readily obtainable. The fair market value of any such investment shall be determined in good faith by the General Partner at the time of the transfer and shall be deemed fair and reasonable and not a violation of the General Partner's fiduciary duty to the Partnership, absent manifest error. Pending sale of Partnership assets, the General Partner shall have the right to continue to operate and otherwise to deal with Partnership assets. After the payment of the debts and liabilities of the Partnership and the setting up of reasonable reserves, the remaining proceeds of the liquidation shall be distributed to the Partners in proportion to their capital accounts in the Partnership. 2.7. REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS. The address of the Partnership's registered office in the Cayman Islands shall be at the offices of Huntlaw Corporate Services Ltd., Huntlaw Building, P.O. Box 1350GT, 75 Fort Street, Grand Cayman, Cayman Islands, and the address of its principal place of business shall be c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda. Such registered office and principal place of business may be changed by the General Partner; PROVIDED that the General Partner and its Affiliates shall notify the Limited Partners of such change within a reasonable period of time thereafter; and PROVIDED FURTHER that the registered office shall always be in the Cayman Islands. The Partnership may from time to time have such other place or places of business within or outside the Cayman Islands as may be determined by the General Partner. 10 2.8. FISCAL YEAR. The fiscal year ("Fiscal Year") of the Partnership shall be the calendar year or, in the case of the first and last fiscal years of the Partnership, the fraction thereof commencing on the Closing or ending on the date on which the winding-up of the Partnership is completed, as the case may be. The taxable year of the Partnership shall be determined under Section 706 of the Code. The General Partner shall have the authority to change the ending date of the Fiscal Year if the General Partner shall determine that such change is necessary or appropriate; PROVIDED that the General Partner shall promptly give notice of any such change to the Limited Partners. 2.9. ALTERNATIVE INVESTMENT STRUCTURE. (a) If the General Partner determines in good faith that for legal, tax, regulatory or other reasons it is in the best interests of some or all of the Partners that an Investment be made through an alternative investment structure, the General Partner shall be permitted to structure the making of all or any portion of such Investment outside of the Partnership, by requiring any Partner or Partners to make such Investment either directly (which shall not include a general partner interest or other similar interest) or indirectly through a partnership or other vehicle (other than the Partnership) that will invest on a parallel basis (and on effectively the same economic terms) with or in lieu of the Partnership, as the case may be (any such structure or vehicle, an "Alternative Investment Vehicle"). The Partners investing through such Alternative Investment Vehicle shall be required to make capital contributions to such Alternative Investment Vehicle to the same extent, for the same purposes and on the same terms and conditions as Partners are required to make Capital Contributions to the Partnership, and such capital contributions shall reduce the Unpaid Capital Commitments of the Limited Partners to the same extent as if Capital Contributions were made to the Partnership with respect thereto. Each Partner shall have the same economic interest in all material respects in Investments made pursuant to this Section 2.9 as such Partner would have if such Investment had been made solely by the Partnership, and the other terms of such Alternative Investment Vehicle shall be substantially identical in all material respects to those of the Partnership, to the maximum extent applicable; PROVIDED that such Alternative Investment Vehicle (or the entity in which such Alternative Investment Vehicle invests) shall provide for the limited liability of the Limited Partners as a matter of the organizational documents of such Alternative Investment Vehicle (or the entity in which such Alternative Investment Vehicle invests) and as a matter of local law; PROVIDED, FURTHER, that the General Partner or an Affiliate thereof will serve as the general partner or in some other similar fiduciary capacity with respect to such Alternative Investment Vehicle. (b) If the Partnership makes an Investment through an Alternative Investment Vehicle the General Partner may make a distribution to Limited Partners in order to permit them to fund the Alternative Investment Vehicle. ARTICLE 3 GENERAL PARTNER; RELATIONSHIP WITH XL CAPITAL 3.1. GENERAL PARTNER; MANAGEMENT OF GENERAL PARTNER. XL Capital Partners Corporation shall be the sole general partner of the Partnership. The General Partner shall have complete control of the Partnership's business. Such control shall be exercised by XL Capital 11 Partners Corporation, in its capacity as general partner of the Partnership, by the appropriate officers of the General Partner or their designees or agents. 3.2. NO COMPENSATION OF GENERAL PARTNER; EXPENSES. (a) No compensation shall be paid by the Partnership to the General Partner for its services as General Partner thereof, other than reimbursement for out-of-pocket expenses incurred in the course of conducting the business of the Partnership. The General Partner shall be reimbursed for (i) fees paid to others for Partnership accounting and communication services and (ii) certain other fees and expenses (including those paid to consultants, attorneys, accountants or other professionals) incurred by it on behalf of the Partnership, including, but not limited to, all fees and expenses of litigation and tax audits of the Partnership and for the outside valuation of securities or property obtained by the Partnership. (b) The costs and expenses incurred on behalf of the Partnership with respect to the organization of the Partnership, pre-offering activities and offering activities and the selling of Units including, but not limited to, travel, telephone, postage, legal and accounting expenses, shall be paid by the General Partner. Except as otherwise provided herein to the contrary, the Partnership shall bear all other expenses of its operations including fees and expenses of attorneys, accountants and experts, commitment and investment banking fees, and interest and all expenses related to investments or potential investments and to the acquisition, holding and sale or other disposition of investments. 3.3. ADMINISTRATIVE SERVICES. The day-to-day operations of the Partnership may be managed by XL Capital pursuant to such administrative services arrangements as the General Partner may enter into. 3.4. SERVICES BY XL CAPITAL; CHARGES AND EXPENSES. In connection with the investment activities of the Partnership, the XL Group may co-invest or have business relationships with, and may be entitled to receive certain fees, commissions or other benefits from, purchasers, sellers and portfolio companies (including other investment partnerships, funds or pooled investment vehicles) in connection with services rendered to these companies, including insurance and re-insurance services, strategic and financial services, and other lending, which fees may be higher or lower than competitive market rates. 3.5. RELATED PARTNERSHIPS. The General Partner and any of its Affiliates in the future may serve as the general partner of other partnerships formed for the benefit of officers, employees, partners and directors of the XL Group, which partnerships may have the same or a similar purpose and may invest or propose to invest in the same types of investments as the Partnership. ARTICLE 4 LIMITED PARTNERS 4.1. INITIAL LIMITED PARTNER. (a) The Initial Limited Partner has become such only for the purpose of organizing the Partnership and has contributed $10.00 to the Partnership as a 12 Capital Contribution. Upon the admission of one or more Limited Partners to the Partnership at the Closing, the Initial Limited Partner shall (i) receive a return of any capital contribution made by it in such capacity to the Partnership, (ii) withdraw as the Initial Limited Partner of the Partnership and (iii) have no further right, interest or obligation of any kind whatsoever as a Partner in the Partnership. (b) Unless the context otherwise specifically requires, references in this Agreement to the Limited Partners, their capital and their rights and obligations shall not be references to the Initial Limited Partner. 4.2. ADDITIONAL LIMITED PARTNERS. (a) The General Partner is authorized to admit Limited Partners to the Partnership pursuant to the terms of this Agreement and upon execution and delivery by each Limited Partner of a subscription agreement and such other documents as the General Partner deems necessary or advisable, each in form satisfactory to the General Partner, relating to the Units or any other limited partnership interests in the Partnership. The manner of the offering of the Units or such other limited partnership interests, the terms and conditions under which subscriptions for such Units or other limited partnership interests shall be accepted, and the manner of and conditions to the sale of Units or other limited partnership interests to subscribers therefor shall be as provided in this Agreement and the various subscription agreements between the Partnership and each Limited Partner, and subject to any provisions of any of them. A person shall be admitted as a Limited Partner upon acceptance of the subscription agreement by or on behalf of the Partnership and on the day his or her admission is reflected on the Register of the Partnership. Upon such admission the Limited Partner shall become a party to and be bound by the terms and conditions of this Agreement. The admission of additional Limited Partners hereunder shall not cause the dissolution of the Partnership. (b) The General Partner shall make such other adjustment to the interests of such new Limited Partners as are appropriate and required to properly reflect the interest of such new Limited Partner and interests of the Partners existing prior to the admission of such new Limited Partner including such amendments as are necessary to reflect the economic arrangements of the Partners including allocations of Profits and Losses and the manner in which distributions are shared among the Partners. 4.3. LIST OF LIMITED PARTNERS. The name, residence and business address of each Limited Partner and the amount of such Limited Partner's Capital Contribution shall be set forth in the Register of the Partnership. 4.4. NO MANAGEMENT BY LIMITED PARTNERS. No Limited Partner as such shall take part in the management of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. Limited Partners shall not participate in any investment decisions made on behalf of the Partnership. 4.5. LIMITATION ON TRANSFER OF LIMITED PARTNERS' UNITS. Except as set forth in Article 9 herein, no Limited Partner shall, directly or indirectly, Transfer any Units. 13 4.6. LIABILITIES OF THE LIMITED PARTNERS; LIMITED LIABILITY. Except as provided by the Act or other applicable law and subject to any obligations expressly set forth herein, including, without limitation, the obligations to make Capital Contributions pursuant to Article 6 and to indemnify the Partnership and the General Partner as provided in Section 7.7, no Limited Partner shall have any personal liability whatsoever in its capacity as a Limited Partner to the Partnership, to any of the Partners, or to the creditors of the Partnership, for the debts, liabilities, contracts, or other obligations of the Partnership or for any losses of the Partnership. No Limited Partner, as such, shall have any fiduciary duty to any other Partner, the Partnership or any other party. ARTICLE 5 POWERS OF GENERAL PARTNER; PROHIBITED TRANSACTIONS AND RESTRICTIONS; DUTIES OF GENERAL PARTNER; LIABILITIES; THE INVESTMENT COMMITTEE; INDEMNIFICATION AND CONTRIBUTION 5.1. POWERS. (a) In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, and except as limited, restricted or prohibited by the express provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purpose and business of the Partnership. These powers shall include, without limitation, the following powers: (i) to borrow money in the name of the Partnership for use in the Partnership business, and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device; (ii) to enter into transactions and make investments with or through Affiliates of the General Partner and to participate in transactions sponsored or managed by Affiliates of the General Partner or in customers of such Affiliates; (iii) to purchase interests in customers of Affiliates of the General Partner, or in which Affiliates of the General Partner have an interest, including, but not limited to, limited partnership interests in limited partnerships in which such Affiliates serve as general partner; (iv) to make temporary investments of Partnership capital in all types of securities, including, without limitation, deposits with members of the XL Group, short-term government and agency securities, certificates of deposit, interest-bearing deposits in banks, securities issued by or on behalf of countries, states, municipalities and their instrumentalities, prime-grade commercial paper, repurchase agreements 14 with respect to any of the foregoing, and prime-grade commercial paper issued by other investment companies; (v) to buy and sell securities and open brokerage and other accounts with entities including with Affiliates of the General Partner; (vi) to enter into contracts (including, without limitation, insurance policies and contracts, of any type and coverage) and make commitments on behalf of the Partnership and, in general, to do and perform everything which may be necessary, advisable, suitable or proper for the conduct of the Partnership's business and for the carrying out of the purposes and objects herein before enumerated, including the delegation to any person or persons of such functions and authority as the General Partner may determine; and (vii) to employ attorneys and accountants to represent and audit the books of the Partnership, which attorneys and accountants may also serve as counsel and auditors to the General Partner and any of its Affiliates. (b) Any person not a party to this Agreement dealing with the Partnership shall be entitled to rely conclusively upon the power and authority of any officer or director of the General Partner to bind the Partnership in all respects, and to execute agreements, instruments and other writings on behalf of and in the name of the Partnership. 5.2. RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER. Without the approval of a majority in interest of the Limited Partners, the General Partner shall not have the authority to alter the purpose of the Partnership. 5.3. DUTIES. (a) Other than with respect to temporary investments, and after setting aside suitable reserves, the General Partner shall use its reasonable efforts to invest the Capital Contributions of the Partners and reinvest the revenues of the Partnership in accordance with the purposes of the Partnership, monitor the investments of the Partnership and manage the related affairs of the Partnership. (b) Except as otherwise expressly provided herein, the General Partner shall take all action that may be necessary or appropriate for the continuation of the Partnership's valid existence as a limited partnership under the laws of the Cayman Islands, and for the acquisition, holding and disposition, in accordance with the provisions of this Agreement and applicable laws and regulations, of the investments of the Partnership. (c) The General Partner shall prepare or cause to be prepared and shall file on or before the due date (or any extension thereof) any United States federal, state or local tax returns required to be filed by the Partnership. The General Partner shall cause the Partnership to pay, from Partnership funds, any taxes payable by the Partnership. (d) The General Partner shall be under a fiduciary duty and obligation to conduct the affairs of the Partnership in the best interests of the Partnership, including the safekeeping and use of all Partnership funds and assets (whether or not in the immediate possession or control of 15 the General Partner) for the benefit of the Partnership. The General Partner shall at all times act with integrity and good faith and exercise due diligence in all activities relating to the conduct of the business of the Partnership and in resolving conflicts of interest. (e) The General Partner may delegate or assign any action that may be or is required to be taken by the General Partner to any third party, including without limitation, an Affiliate of the General Partner. 5.4. INVESTMENT COMMITTEE. All investment decisions by the General Partner shall be subject to the approval of a committee consisting of three to four members (the "Investment Committee"), two of whom will be outside directors of an Affiliate of the XL Group. 5.5. LIABILITY OF THE GENERAL PARTNER. Except as may be required by the Act, the General Partner shall not be required to contribute to the capital of the Partnership any funds in excess of 4.0 times the Limited Partners' aggregate Capital Contributions (the "General Partner's Capital Contribution"). Neither the General Partner nor any of its Affiliates shall have any personal liability for the return or repayment of the Capital Contributions of any Limited Partner. 5.6. EXCULPATION, INDEMNIFICATION AND CONTRIBUTION. Neither the General Partner, any of its officers, directors, representatives or agents, nor any member of the Investment Committee, nor any partners or principals of the XL Group (including any directors, officers, employees, agents or Affiliates thereof) nor any person who controls the General Partner or the XL Group (a "control person") within the meaning of Section 15 of the Securities Act of 1933, as amended, shall be liable to the Partnership or the Limited Partners for any act or failure to act relating in any way to the Partnership, its assets, business or affairs so long as such act or failure to act does not (i) have a material adverse effect on the Partnership and (ii) constitute such person's willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Partnership or such person's office. The General Partner and its officers, directors, agents, representatives, and members of the Investment Committee, and any partners or principals of the XL Group (including any directors, officers, employees, agents and Affiliates thereof) and control persons shall be indemnified by the Partnership to the fullest extent permitted by law for any and all losses, claims, damages and expenses arising out of or incurred in connection with any claim, action or demand against the General Partner, the Partnership or any such indemnified person relating to the Partnership, its assets, business or affairs (including, without limitation, attorneys' fees and expenses and any amounts paid in settlement or compromise of any such claim, action or demand); PROVIDED, HOWEVER, that the foregoing indemnification shall not apply if a court of competent jurisdiction makes a final decision that such claim, action or demand resulted directly from such indemnified person's willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Partnership or such person's office. 5.7. GENERAL PARTNER LOANS. Notwithstanding the provisions of Section 3.4, in the event that the Partnership at any time lacks sufficient funds to meet its financial obligations, the General Partner shall have the right to, but shall not be required to, lend money to the Partnership on terms, including interest rates, that are fair and reasonable to the Partnership (but in no event less than the rate required under United States tax law to avoid compensation income to the 16 Limited Partners) without any approval of the Limited Partners. The General Partner may execute written agreements governing any such loans on behalf of the Partnership. ARTICLE 6 CAPITAL CONTRIBUTIONS AND ACCOUNTS; NO FURTHER CONTRIBUTIONS REQUIRED; INTEREST; ACCOUNTING AND VALUATION 6.1. CAPITAL CONTRIBUTIONS AND ACCOUNTS. (a) Subscriptions for Units shall be accepted or rejected by the General Partner as it determines in its sole discretion. Each Unit represents a capital commitment of $25,000. The minimum Capital Contribution of each Limited Partner is one Unit ($25,000), or such fractional Unit as permitted in the General Partner's sole discretion. Additional whole Units may be purchased up to a maximum Capital Contribution as determined on a case-by-case basis by the General Partner in its sole discretion. The Initial Payment is due and payable upon execution and delivery of the related subscription agreement unless the General Partner shall specify one or more other dates on which the Initial Payment shall be due. The General Partner may invest such Capital Contributions in temporary investments until needed to fund one or more Partnership investments. Any Capital Contributions made to the Partnership by a Limited Partner must be paid in cash. The obligation of a Limited Partner to pay its Initial Payment Amount in full shall be limited by the provisions of this Section 6.1 and Section 9.4. The General Partner may decide not to make or participate in any further investments at any time in its sole discretion. (b) The remaining portion of each Limited Partner's Commitment shall be due upon a call date to be determined in the sole discretion of the General Partner. The Fund shall provide each Limited Partner with a written notice at least 20 days prior to the date of draw down (each, a "Capital Draw"); provided that the General Partner may not call more than 25% of a Limited Partner's Commitment (in addition to the Initial Payment) prior to the date designated by XL Capital for the payment of annual bonuses in 2002. Any Capital Contributions made to the Fund by a Limited Partner must be paid in cash. (c) Pending the making of investments for which the Partnership requires capital, payments for the purchase price of each Limited Partner's Units may be invested in temporary investments as the General Partner determines. Amounts invested in temporary investments may not be subject to redemption by Limited Partners, although income earned from temporary investments may be distributed to the Limited Partners in the General Partner's sole discretion. The General Partner shall dispose of temporary investments from time to time as needed to fund specific Partnership investments or otherwise fund Partnership expenses. Amounts held at the end of the Investment Period that have not been used for Partnership purposes and which the Partnership has not allocated for future use shall be distributed to the Limited Partners in proportion to their allocable share of amounts originally contributed to the Partnership. (d) The General Partner shall contribute to the capital of the Partnership an amount equal to 4.0 the aggregate amount contributed by the Limited Partners. The General Partner shall make its Capital Contributions at the time the Partnership funds its investments or otherwise to fund 17 Partnership expenses. The General Partner's Capital Contribution shall receive the benefit of a preferred return (the "Fixed Return"), at the rate of 10% per annum. (e) A separate capital account (the "Capital Account") shall be established and maintained for each Partner. The Capital Account of each Partner shall be credited with such Partner's Capital Contributions, all Profits allocated to such Partner pursuant to Section 7.1 and any items of income or gain which are specially allocated pursuant to Section 7.2; and shall be debited with all Losses allocated to such Partner pursuant to Section 7.1, any items of loss or deduction of the Partnership specially allocated to such Partner pursuant to Section 7.2, and all cash and the Carrying Value of any property (net of liabilities assumed by such Partner and the liabilities to which such property is subject) distributed by the Partnership to such Partner. To the extent not provided for in the preceding sentence, the Capital Accounts of the Partners shall be adjusted and maintained in accordance with the rules of Treasury Regulations Section 1.704-1(b)(2)(iv), as the same may be amended or revised; PROVIDED that such adjustment and maintenance does not have a material adverse effect on the economic interests of the Partners. Any references in any section of this Agreement to the Capital Account of a Partner shall be deemed to refer to such Capital Account as the same may be credited or debited from time to time as set forth above. In the event of any Transfer of any interest in the Partnership in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (f) METHOD OF FUNDING; NO COMPENSATION OR LOANS. Capital Contributions shall be made by check or wire transfer of immediately available funds or such other method as may be acceptable to the General Partner, to the account specified in the related Payment Notice. Other than as set forth in this Section 6.4, no Partner shall be entitled to any interest or compensation by reason of its Capital Contributions or by reason of serving as a Partner. No Partner shall be required to lend any funds to the Partnership; PROVIDED that the General Partner may in its sole discretion make loans to the Partnership on arms'-length terms based on the Reference Rate or the cost of borrowing such funds by XL Capital. (g) Upon the termination of the Commitment Period, a Limited Partner will not be required to make any further Capital Contributions to the Partnership, except to the extent necessary to (i) cover certain expenses borne by the Partnership and (ii) make follow-on Investments in existing Investments of the Partnership in an aggregate amount of up to 25% of the Partnership's aggregate capital commitments from the Partners. In no event will a Limited Partner be required to fund at any time an amount in excess of his or her undrawn capital commitment at such time. 6.2. SUBSEQUENT CLOSINGS. The General Partner may, in its sole discretion, admit additional Limited Partners or permit any existing Limited Partner to increase its Capital Contribution at one or more subsequent closings ("Subsequent Closings"), provided that no Subsequent Closing shall occur after the six-month anniversary of the Closing. No additional Limited Partner shall be admitted to the Partnership unless such Limited Partner has executed a subscription agreement in the form provided to it by the General Partner (and which subscription agreement has been accepted by the General Partner) and the conditions set forth in Sections 9.1, 9.2 and 9.3 are satisfied (with such conditions being interpreted as applying to the admission of 18 an additional Limited Partner rather than an assignment or transfer of an interest in the Partnership). Each Limited Partner that is admitted or increases its Capital Contribution at a Subsequent Closing shall also make an additional contribution and/or payment, if any, determined by the General Partner in its sole discretion that represents the increase in the value of investments held by the Partnership, if any, plus an additional amount thereon at the rate calculated by the General Partner from the date of the initial closing. Limited Partners who are admitted to the Partnership after the Closing or who increase their commitments will be treated generally as if such subscriptions had been accepted at the date of the first closing. 6.3. FURTHER CAPITAL CONTRIBUTIONS. No Limited Partner shall be required to purchase additional Units or make any Capital Contribution to the Partnership in excess of such Limited Partner's Unpaid Capital Commitment. After all Capital Contributions have been made and all contributions, including required General Partner contributions, have been invested by the Partnership, if the General Partner determines it to be in the best interests of the Partnership, the Partnership may, subject to subsection 4.2(b), offer existing or new Limited Partners the opportunity to make additional contributions to the Partnership's capital on a PRO RATA basis, as determined by the General Partner. 6.4. DEFAULTING LIMITED PARTNER. (a) If any Limited Partner fails to make, when due, any portion of the Capital Contribution required to be contributed by such Limited Partner pursuant to this Agreement or such Limited Partner's Subscription Agreement or to make any other payment required to be made by such Limited Partner hereunder or thereunder when required to be made, then the General Partner may provide written notice of such failure to such Limited Partner. If such Limited Partner fails to make such Capital Contribution or other payment within ten (10) Business Days after receipt of such notice, then, (i) such Limited Partner shall be deemed a "Defaulting Limited Partner" and (ii) the following Sections 6.4(b) through (e) shall apply; PROVIDED that the General Partner in its sole discretion may choose not to designate a Limited Partner as a Defaulting Limited Partner and may agree to waive or permit the cure of any default by a Defaulting Limited Partner, subject to such conditions as the General Partner and the Defaulting Limited Partner may agree on. (b) A Defaulting Limited Partner shall forfeit to the General Partner, as recompense for damages suffered, as follows: (i) with respect to such Limited Partner's Pro Rata Share and related distributions, the General Partner shall assess a 25% reduction, (ii) with respect to such Limited Partner's interest in the vested portion of the Additional Share, the General Partner shall assess a 25% reduction and (iii) the General Partner shall cause such Defaulting Limited Partner to be excluded from any vote of the Limited Partners. Any proceeds forfeited by the Defaulting Limited Partner pursuant to the preceding sentence shall be distributed to the General Partner. (c) The General Partner may, in its sole discretion cancel such Defaulting Limited Partner's right to make further Capital Contributions and allocate such right to the General Partner or one of its Affiliates, and the Defaulting Limited Partner shall not be permitted to make any further Capital Contributions to the Partnership in the event of such cancellation. 19 (d) No right, power or remedy conferred upon the General Partner in this Section 6.4 shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy whether conferred in this Section 6.4 or now or hereafter available at law or in equity or by statute or otherwise. No course of dealing between the General Partner and any Defaulting Limited Partner and no delay in exercising any right, power or remedy conferred in this Section 6.4 or now or hereafter existing at law or in equity or by statute or otherwise shall operate as a waiver or otherwise prejudice any such right, power or remedy. (e) The powers conferred upon the General Partner in this Article VI shall not limit any actions available at law or in equity or by statute that the General Partner may undertake against a Defaulting Limited Partner. Each Limited Partner acknowledges by its execution of a Subscription Agreement that it has been admitted to the Partnership in reliance upon the terms of this Agreement, that the General Partner may have no adequate remedy at law for a breach hereof and that damages resulting from a breach hereof may be impossible to ascertain at the time hereof or of such breach. 6.5. INTEREST. No Limited Partner shall receive interest on amounts credited to such Limited Partner's Capital Account. 6.6. ACCOUNTING PERIODS AND TAXABLE YEARS. An accounting period and taxable year shall mean the calendar year, or, in the case of the first and last accounting period and taxable year of the Partnership, the fraction thereof commencing on the Closing or ending on the date on which the winding-up of the Partnership is completed, as the case may be. The taxable year of the Partnership shall be determined under Section 706 of the Code. The General Partner shall have the authority to change the ending date of the fiscal Year if the General Partner shall determine that such change is necessary or appropriate; PROVIDED that the General Partner shall promptly give notice of any such change to the Limited Partners. ARTICLE 7 ALLOCATIONS 7.1. ALLOCATION OF PROFITS AND LOSSES; OTHER ALLOCATIONS. (a) Except as otherwise provided in this Agreement, Profits, Losses and, to the extent necessary, individual items of income, gain, loss or deduction, of the Partnership shall be allocated among the Partners in a manner such that the Capital Account of each Partner, immediately after making such allocation, is, as nearly as possible, equal (proportionately) to (i) the distributions that would be made to such Partner pursuant to Section 8.2(a) if the Partnership were dissolved, its affairs wound up and its assets sold for cash equal to their Carrying Value, all Partnership liabilities were satisfied (limited with respect to each nonrecourse liability to the Carrying Value of the assets securing such liability), and the net assets of the Partnership were distributed in accordance with Sections 8.2(a) to the Partners immediately after making such allocation, MINUS (ii) such Partner's share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain, computed immediately prior to the hypothetical sale of assets. 20 (b) As provided further in Section 9.4(a), allocations of Profits and Losses which would otherwise be made to a Limited Partner pursuant to the foregoing may instead be made to the General Partner with respect to the Unvested Interest of such Limited Partner whose employment with a member of the XL Group has terminated other than due to such Limited Partner's death or Disability. 7.2. SPECIAL ALLOCATION PROVISIONS. Notwithstanding anything to the contrary in this Agreement, the following special allocations shall be made: (a) MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision in this Article 7, if there is a net decrease in Partnership Minimum Gain or Partner Nonrecourse Debt Minimum Gain (determined in accordance with the principles of Treasury Regulations Sections 1.704-2(d) and 1.704-2(i)) during any Partnership taxable year, the Partners shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to their respective shares of such net decrease during such year, determined pursuant to Treasury Regulations Sections 1.704-2(g) and 1.704-2(i)(5). The items to be so allocated shall be determined in accordance with Treasury Regulations Section 1.704-2(f). This Section 7.2(a) is intended to comply with the minimum gain chargeback requirements in such Treasury Regulations Sections and shall be interpreted consistently therewith; including that no chargeback shall be required to the extent of the exceptions provided in Treasury Regulations Sections 1.704-2(f) and 1.704-2(i)(4). (b) QUALIFIED INCOME OFFSET. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the deficit balance in his or her Capital Account created by such adjustments, allocations or distributions as promptly as possible. (c) GROSS INCOME ALLOCATION. In the event any Limited Partner has a deficit Capital Account at the end of any Fiscal Year which is in excess of the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Limited Partner shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, PROVIDED that an allocation pursuant to this Section 7.2(c) shall be made only if and to the extent that a Limited Partner would have a deficit Capital Account in excess of such amount after all other allocations provided for in this Article 7 have been tentatively made as if Section 7.2(a) and this Section 7.2(c) were not in this Agreement. (d) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions shall be allocated 10% to the General Partner and 90% among the Limited Partners in accordance with their respective Capital Account balances. (e) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for any taxable period shall be allocated to the Partner who bears the economic risk of loss with respect to the 21 liability to which such Partner Nonrecourse Deductions are attributable in accordance with U.S. Treasury Regulations Section 1.704-2(j). 7.3. TAX ALLOCATIONS. For applicable income tax purposes only, each item of income, gain, loss and deduction of the Partnership shall be allocated among the Partners in the same manner as the corresponding items of Profits and Losses and specially allocated items are allocated for Capital Account purposes; provided that in the case of any Partnership asset, the Carrying Value of which differs from its adjusted tax basis for United States federal income tax purposes, income, gain, loss and deduction with respect to such asset shall be allocated solely for income tax purposes in accordance with the principles of Sections 704(b) and (c) of the Code (in any manner determined by the General Partner) so as to take account of the difference between Carrying Value and adjusted basis of such asset. 7.4. ALLOCATION AMONG LIMITED PARTNERS; TRANSFERS. (a) Profits and Losses allocated to Limited Partners shall be apportioned among each Limited Partner based upon a fraction, the numerator of which is the Capital Contributions by such Limited Partner (or his or her predecessor in interest) and the denominator of which is the aggregate Capital Contributions of all Limited Partners, taking into account any change in such ratio during the period. (b) In the event of a permitted Transfer of a Unit or the termination or reduction of a Partner's interest in the Partnership during a taxable year of the Partnership, allocations of income, gain, loss, deductions and credits of the Partnership shall be based on an interim closing of the Partnership's books. 7.5. TAX ELECTIONS. The General Partner is hereby authorized and empowered to make on behalf and in the name of the Partnership any election, and to prepare or have prepared, to execute or have executed and to file, on behalf and in the name of the Partnership, any returns, applications and other instruments and documents, under the Code and the Treasury Regulations thereunder, as in effect from time to time, which the General Partner determines in its sole discretion are desirable or advisable in connection with determining such allocations. 7.6. OTHER ALLOCATION PROVISIONS. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such regulations. Sections 7.1 to 7.6 may be amended at any time by the General Partner if necessary, in the opinion of the General Partner, to comply with such regulations. 7.7. TAX ADVANCES. To the extent the General Partner reasonably determines that the Partnership is required by law to withhold or to make tax payments on behalf of or with respect to any Partner ("Tax Advances"), the General Partner may withhold such amounts and make such tax payments as so required. All Tax Advances (together with interest thereon at the Reference Rate if such Tax Advance took the form of a tax payment rather than withholding) made on behalf of a Partner shall, at the option of the General Partner, (i) be paid promptly to the Partnership by the Partner on whose behalf such Tax Advances were made or (ii) be repaid by reducing the amount of the current or next succeeding distribution or distributions which would 22 otherwise have been made to such Partner or, if such distributions are not sufficient for that purpose, by so reducing the proceeds of liquidation otherwise payable to such Partner. Whenever the General Partner selects option (ii) pursuant to the preceding sentence for repayment of a Tax Advance by a Partner, for all other purposes of this Agreement such Partner shall be treated as having received all distributions (whether before or upon liquidation) unreduced by the amount of such Tax Advance. Each Partner hereby agrees to indemnify and hold harmless the Partnership and the other Partners from and against any liability (including, without limitation, any liability for taxes, penalties, additions to tax, interest or failure to withhold taxes) with respect to income attributable to or distributions or other payments to such Partner. ARTICLE 8 DISTRIBUTIONS; WITHDRAWAL 8.1. GENERAL PARTNER DISCRETION. Distributions may be made in cash or in kind in the General Partner's sole discretion. The General Partner may in its sole discretion offer Limited Partners the right to elect whether to receive cash or in kind distributions in connection with any distribution and, following any such election, may (but shall not be required to) make a distribution to some Limited Partners in cash and to others in kind. The General Partner shall have no obligation to make cash or non-cash distributions to the Limited Partners prior to termination of the Partnership, and may invest the earnings on and proceeds of any of the Partnership's investments in temporary investments in its sole discretion. The General Partner in its sole discretion shall determine the aggregate amount of and payment dates for any cash and non-cash distributions to Partners after establishing such reasonable reserves as the General Partner deems appropriate in its sole discretion for working capital, contingencies or other items and for the satisfaction of liabilities (including, without limitation, contingent liabilities and the Fixed Return) as they come due or may come due. 8.2. DISTRIBUTIONS. (a) Distributions from the Partnership generally shall be made in the following order and priority: (i) first, 100% to the General Partner until the amount received by the General Partner is equal to the General Partner's Fixed Return; (ii) second, 100% to the General Partner until the General Partner has received an amount from that distribution (not including the amount received in (i) above) equal to the Capital Contributions made by the General Partner; (iii) third, 100% to the Limited Partners until the Limited Partners have received an amount equal to the Limited Partners' Capital Contributions; and (iv) thereafter, 90% to the Limited Partners and 10% to the General Partner. 23 Provided that for the avoidance of doubt nothing in this Agreement shall be construed as giving a Limited Partner a direct interest in the assets of the Partnership or any particular asset of the Partnership. (b) Distributions to Limited Partners shall be apportioned among each Limited Partner based upon a fraction, the numerator of which is the Capital Contributions by such Limited Partner (or his or her predecessor in interest) and the denominator of which is the aggregate Capital Contributions of all Limited Partners. (c) Notwithstanding Section 8.2(a), amounts otherwise distributable to the Partners shall be paid instead to the Partners (other than any Defaulting Limited Partners, regardless of their tax status) such that in a fiscal year each Partner has received an amount equal to 40% of the allocations of taxable income made (or to be made) to such Partner pursuant to Section 7.3; PROVIDED that the General Partner may, at its sole discretion, vary the amounts distributed pursuant to this Section 8.2(c); PROVIDED, FURTHER, that the timing of any distribution, pursuant to this Section 8.2(c) shall be determined by the General Partner in its sole discretion. The amount distributable to any Partner pursuant to any clause of Section 8.2 shall be reduced by the amount distributed to such Partner pursuant to this Section 8.2(c) and the amount so distributed under this Section 8.2(c) shall be deemed to have been distributed to the extent of such reduction pursuant to such clause of Section 8.2 for purposes of making the calculations required by Sections 8.2. (d) As provided further in Section 9.4(a), distributions which would otherwise be made to a Limited Partner pursuant to the foregoing may instead be made to the General Partner with respect to the Unvested Interest of such Limited Partner whose employment with a member of the XL Group has terminated other than due to such Limited Partner's death or Disability. 8.3. NON-CASH DISTRIBUTIONS. Whenever possible non-cash distributions, including distributions under Sections 10.3(a) and (b), shall be made PRO RATA among the Partners in accordance with the terms of Section 8.2. The value of any non-cash assets that are distributed shall be determined by the General Partner in accordance with Section 11.4 hereof. 8.4. WITHHOLDING. The Partnership shall withhold from any amounts otherwise distributable to any Partner the amounts required by law to be withheld for income tax or other purposes; any amounts so withheld shall be treated as having been distributed to such Partner for all purposes of this Agreement. 8.5. WITHDRAWAL. No Partner shall have the right to withdraw such Partner's Capital Contribution or any part thereof from the Partnership or to receive a return of such Partner's Capital Contribution or any part thereof except upon termination and dissolution of the Partnership, except as may be permitted by the General Partner in its sole discretion. 8.6. REQUIRED WITHDRAWAL. (a) A Limited Partner may be required to withdraw from the Partnership if the General Partner determines, in its sole discretion, that such withdrawal is necessary or advisable because (i) by virtue of that Limited Partner's interest in the Partnership, the Partnership is reasonably likely to be subject to any reporting requirement under the 24 Securities Exchange Act of 1934, as amended, (ii) the Limited Partner is no longer employed by a member of the XL Group or, in the case of Immediate Family Members, is no longer an Immediate Family Member of an employee of the XL Group or (iii) by virtue of that Limited Partner's interest in the Partnership, the Partnership is likely to experience a significant delay, extraordinary expense or other material adverse effect on the Partnership or any of its Affiliates or any of its investments or prospective investments. (b) Withdrawals pursuant to this Section 8.6 shall be effected by the Partnership's purchase of the Limited Partner's interest in the Partnership at a price equal to the fair market value of such interests as determined from time to time by the General Partner in its sole discretion. ARTICLE 9 TRANSFERABILITY OF INTERESTS; VESTING; TERMINATION OF EMPLOYMENT 9.1. RESTRICTIONS AND CONDITIONS ON TRANSFERS OF UNITS. (a) No direct or indirect sale, exchange, transfer, assignment, pledge, creation of a security interest in, or encumbrance on, or other disposition by a Limited Partner of all or any portion of such Limited Partner's Units or any economic interest therein (including without limitation by means of any participation or swap transaction (each, a "Transfer")) shall be made except, with the prior written consent of the General Partner (which consent may be withheld in the sole discretion of the General Partner), and then only to Immediate Family Members of the transferor Limited Partner, trusts or to other investment vehicles established for the benefit of the Limited Partner or his or her Immediately Family Members or to the General Partner. The General Partner may not transfer any of its interest in the Partnership. (b) Any Transfer otherwise permitted under this Article 9 may only be made if: (i) such transfer would not violate the Securities Act or any state securities or "Blue Sky" or other securities laws applicable to the Partnership or the interest to be transferred; (ii) such transfer, when added to the total of all other transfers of interests within the preceding twelve months, would not result in the Partnership being considered to have terminated within the meaning of Section 708 of the Code; (iii) such transfer would not cause the Partnership to become subject to the Investment Company Act; and (iv) such transfer would not cause the Partnership to be treated as a "publicly traded partnership" within the meaning of Section 7704 of the Code and the Treasury Regulations promulgated thereunder. 25 (c) The General Partner, each Limited Partner, the Partnership and their respective officers, directors, agents and control persons shall be indemnified by a Limited Partner (the "Transferring Limited Partner") to the fullest extent permitted by law for any and all losses, claims, damages and expenses arising out of or reasonably incurred in connection with any claim, action or demand against the General Partner, the Partnership or any such indemnified person relating to the Partnership, its properties, business or affairs (including, without limitation, attorneys' fees and expenses and any amounts paid in settlement or compromise of any such claim, action or demand) against expenses for which the Partnership, the General Partner or such other person has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by them in connection with such action, suit or proceeding and arising out of, relating to, or in connection with, any Transfer of all or any portion of such Transferring Limited Partner's Units, or in connection with the admission of a substituted Limited Partner to the Partnership; PROVIDED, HOWEVER, that the foregoing indemnification shall not apply if a court of competent jurisdiction makes a final decision that such claim, action or demand resulted primarily from such indemnified person's willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Partnership or such person's office. (d) Subject to Section 6.1 and Section 9.4, no Unit may be subdivided into fractional Units. 9.2. ASSIGNEES. (a) The Partnership shall not recognize for any purpose any purported Transfer of all or any portion of the Units of a Limited Partner unless the provisions of Section 9.1 shall have been complied with and there shall have been filed with the Partnership a Transfer Application, in form satisfactory to the General Partner, executed and acknowledged by both the seller, transferor or assignor and the purchaser, transferee or assignee and such Transfer Application contains the acceptance by the purchaser, transferee or assignee of all of the terms and provisions of this Agreement, represents that such Transfer was made in accordance with all applicable laws and regulations and contains the purchaser's, transferee's or assignee's power of attorney identical to that provided in Section 12.1 and, in addition, appoints the General Partner his or her attorney-in-fact to execute this Agreement on behalf of such purchaser, transferee or assignee. Any Transfer shall be recognized by the Partnership as effective as of the date on which such Transfer Application is filed with the Partnership. (b) Any Limited Partner who shall assign all of his or her Units shall not cease to be a Limited Partner unless and until a substituted Limited Partner is admitted in his or her stead. (c) A person who is the assignee of all or any portion of the Units of a Limited Partner, but does not become a substituted Limited Partner and desires to make a further assignment of such Units, shall be subject to all the provisions of this Article 9 to the same extent and in the same manner as any Limited Partner desiring to effect a Transfer of his or her Units. 9.3. SUBSTITUTED LIMITED PARTNERS. (a) No Limited Partner shall have the right to substitute a purchaser, assignee, transferee, donee, heir, legatee, distributee or other recipient of all or any portion of such Limited Partner's Units as a Limited Partner in his or her place. Any such purchaser, assignee, transferee, donee, heir, legatee, distributee or other recipient of Units 26 shall be admitted to the Partnership as a substituted Limited Partner only with the consent of the General Partner, which consent shall be granted or withheld in the sole and absolute discretion of the General Partner and may be arbitrarily withheld, and executed by all necessary parties and recorded, as and to the extent required by law, in the proper records of each jurisdiction in which such recordation is necessary to qualify the Partnership to conduct business or to preserve the limited liability of the Limited Partners. The Limited Partners hereby consent to the admission of a substituted Limited Partner whose admission has been consented to by the General Partner. Any such consent by the General Partner and the Limited Partners may be evidenced by the execution by the General Partner of an amendment to this Agreement on its behalf and on behalf of all Limited Partners evidencing the admission of such person as a Limited Partner and the making of any filing required by law. (b) To the extent required by law, the General Partner shall file an amended certificate of limited partnership with the appropriate authorities of each jurisdiction in which the Partnership transacts business for the purpose of adding as substituted Limited Partners all assignees of Units previously approved by the General Partner for admission as substituted Limited Partners and deleting any person who is no longer a Limited Partner or reflecting accurately Capital Contributions of the Limited Partners or to receive any interest thereon. (c) No person shall become a substituted Limited Partner until such person shall have delivered a Transfer Application as provided in Section 9.2(a) and become a party to this Agreement. For the purpose of allocating profits, losses and distributable cash, a person shall be treated as having become, and as appearing in the records of the Partnership as, a Limited Partner on such date as the Transfer to such person was recognized by the Partnership pursuant to Section 9.2(a). 9.4. TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF LIMITED PARTNER. (a) GENERALLY. If a Limited Partner's employment with a member of the XL Group is terminated for any reason (other than termination of employment for Cause or due to such Limited Partner's death or Disability), then the General Partner shall have the right, exercisable in its sole discretion by written notice sent by certified mail (or its equivalent) or via overnight courier to such Limited Partner (or his or her Representative) within 30 days following such termination of employment, to allocate and distribute Profits and Losses that are realized after the date of termination in respect of the unvested portion of such Limited Partner's interest in the Partnership (the "Unvested Interest"), including allocations pursuant to Article 8 and distributions pursuant to Article 9, to the General Partner. Vested Interest shall be determined according to the schedule set forth below (the "Vesting Schedule"). The General Partner shall conclusively determine in its sole and absolute discretion the closing date for purposes of the Vesting Schedule. 27
PERCENTAGE OF VESTED ON OR AFTER BUT PRIOR TO INTEREST IN ADDITIONAL SHARE - -------------------------------------------------------------------------------------------------------------------- Immediately First Anniversary of Closing 0.00% First Anniversary of Closing Second Anniversary of Closing 25.00% Second Anniversary of Closing Third Anniversary of Closing 50.00% Third Anniversary of Closing Fourth Anniversary of Closing 75.00% Fourth Anniversary of Closing N/A 100.00%
The Limited Partner whose employment has been terminated shall continue to receive an allocation and distribution of profits and losses on his or her Units equal to the aggregate of (i) such Limited Partner's Pro Rata Share and (ii) the vested portion of such Limited Partner's Additional Share of such profits and losses as of the termination date. In such event of termination, the Limited Partner shall not be required to return to the Partnership any cash or assets that were distributed prior to the date of termination. (b) TERMINATION FOR CAUSE. Upon a Limited Partner's termination of employment by the XL Group for Cause, the General Partner shall have the right, exercisable in its sole discretion, to purchase such Limited Partner's Units including (i) such Limited Partner's Pro Rata Share and (ii) the vested portion of such Limited Partner's Additional Share of Units at the lower of their cost price or fair market value as determined by the General Partner in its sole discretion. (c) TERMINATION DUE TO DEATH OR DISABILITY. Upon a Termination due to death or Disability, a Limited Partner's interest in the Additional Share shall immediately vest in full. Such departed Limited Partner shall therefore be entitled to share fully in distributions and allocations of Partnership profits and losses equal to the aggregate of (i) such Limited Partner's Pro Rata Share and (ii) the full amount of such Limited Partner's Additional Share. (d) If a Limited Partner's employment with any member of the XL Group is terminated for any reason (including death), the Partnership shall have the right to require that Limited Partner to withdraw from the Partnership in accordance with Section 8.6(a). Upon such withdrawal, the Partnership shall purchase the Limited Partner's Units in accordance with Section 8.6(b). (e) RELATED DEFINITIONS (i) A Limited Partner's "Pro Rata Share" of profits is such Limited Partners share of profits based upon the percentage that his or her capital commitments represent of the total capital commitments to the Partnership; (ii) A Limited Partner's "Additional Share" of profits is such Limited Partner's share in excess of the Pro Rata Share and includes such Limited Partner's pro rata share of the profits on the General Partner's Commitment. 28 (iii) A "Limited Partner" for purposes of reference to employment shall be the individual employee of the XL Group to whom a Limited Partner Interest was originally offered, notwithstanding any subscription by, or transfer to, a Immediate Family Member or other Person in accordance with this Agreement at the request of such individual employee of the XL Group. 9.5. DISPOSITION OF GENERAL PARTNER'S INTEREST. The General Partner shall not dispose of its interest in the Partnership as a general partner. No disposition of the General Partner's interest shall be effective, and the General Partner shall not cease to be a general partner of the Partnership. ARTICLE 10 TERM AND DISSOLUTION OF THE PARTNERSHIP 10.1. EVENTS CAUSING DISSOLUTION. The Partnership shall be dissolved upon the expiration of its term as set forth in Section 2.6 hereof, or sooner upon the happening of any of the following events (each an "Event of Dissolution"): (a) the resignation, withdrawal, dissolution, bankruptcy commencement of liquidation proceedings or insolvency of the General Partner or the occurrence of any other event that causes the General Partner to cease to be a general partner of the Partnership under the Act; PROVIDED that the Partnership shall not be dissolved or required to be wound up upon the happening of such event if at the time of such event there is at least one remaining general partner of the Partnership and such remaining general partner carries on the business of the Partnership or within 90 days after such event, all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional general partners; or (b) the conversion of the Partnership to corporate form pursuant to Section 2.6 hereof. Upon dissolution, the General Partner shall file a notice of dissolution with the Registrar of Exempted Limited Partnership in accordance with the Act. The Partnership shall not be dissolved until the assets of the Partnership have been distributed as provided in Section 11.2, and the notice of dissolution has been filed by the General Partner as aforesaid. 10.2. WINDING UP. Upon the occurrence of an Event of Dissolution, the Partnership shall be wound up and liquidated The General Partner or, if there is no general partner or following an Event of Dissolution, a liquidator appointed by XL Capital, shall proceed with the Dissolution Sale and the Final Distribution. In the Dissolution Sale, the General Partner or such liquidator shall use its best efforts to reduce to cash and cash equivalent items such assets of the Partnership as the General Partner or such liquidator shall deem it advisable to sell, subject to obtaining fair value for such assets and any tax or other legal considerations (including legal restrictions on the ability of a Limited Partner to hold any assets to be distributed in kind). 29 10.3. FINAL DISTRIBUTION. After the Dissolution Sale, the proceeds thereof and the other assets of the Partnership shall be distributed in one or more installments in the following order of priority: (a) to satisfy all creditors of the Partnership, including the payment of the expenses of the winding-up, liquidation and dissolution of the Partnership and in accordance with the terms agreed among them and otherwise on a pro rata basis, Partners who are creditors (other than with respect to distributions owing to them or to former Partners hereunder) either by the payment thereof or the making of reasonable provision therefor, which shall include establishing reserves, in amounts determined by the General Partner or such liquidator, which the General Partner or such liquidator may deem necessary to meet any other obligations or liabilities (whether contingent, unforeseen or otherwise) of the Partnership other than to the Partners or former partners in respect of distributions owing to them hereunder, which reserves may be paid over by the General Partner or such liquidator to any attorney at law or other acceptable party, as escrow agent, to be held for disbursement in payment of any such liabilities or obligations. At the expiration of such period as shall be deemed advisable by the General Partner or such liquidator, any balance shall be distributed in accordance with this Section 10.3; and (b) The remaining proceeds, if any, plus any remaining assets of the Partnership, shall be applied and distributed to the Partners as soon as practicable, in accordance with the positive balances of the Partners' Capital Accounts, as determined after taking into account all adjustments to Capital Accounts for the Partnership taxable year during which the liquidation occurs; PROVIDED that liquidating distributions shall be made in the same manner as distributions under Section 8.2 (other than Section 8.2(c)) if such distributions would result in the Partners receiving a different amount than would have been received pursuant to a liquidating distribution based on Capital Account balances. The General Partner or such liquidator shall use its reasonable best efforts to sell the assets of the Partnership and distribute the proceeds therefrom in cash to the Partners. Notwithstanding the foregoing, if assets other than cash are to be distributed, such distribution shall be subject to the provisions of Section 8.2. To the extent deemed desirable by the General Partner or such liquidator, distributions may be made into a liquidating trust or other appropriate entity, and reserves may be established for contingencies; PROVIDED, HOWEVER that the time during which distributions may be withheld by such trust or other entity may not extend beyond the term of the Partnership pursuant to Section 2.6 without the consent of a majority in interest of the Limited Partners, unless such distribution would be illegal. For purposes of the application of this Section 10.3 and determining Capital Accounts on liquidation, all unrealized gains, losses and accrued income and deductions of the Partnership shall be treated as realized and recognized immediately before the date of distribution. If a Limited Partner shall, upon the advice of counsel, determine that there is a reasonable likelihood that any distribution in kind of an asset would cause such Limited Partner to be in violation of any law, regulation or order, such Limited Partner and the General Partner or the liquidator shall each use its best efforts to make alternative arrangements for the sale or transfer into an escrow account of any such distribution on mutually agreeable terms. 30 ARTICLE 11 BOOKS AND RECORDS; ACCOUNTING; APPRAISAL; TAX MATTERS AND ELECTIONS 11.1. BOOKS AND RECORDS. The General Partner shall keep or cause to be kept complete and appropriate records and books of account of the Partnership and the Register. The books and records of the Partnership, including information relating to the sale by the General Partner or any of its Affiliates of securities, property, goods or services to the Partnership, shall be maintained by the General Partner at the office of the Partnership or of the General Partner and shall be available for examination there by any Limited Partner or his or her duly authorized Representatives at any and all reasonable times for any purpose reasonably related to the Limited Partner's interest as a limited partner of the Partnership, subject to certain reasonable limitations, to address concerns with respect to, among other things, the confidentiality of certain information. Such information shall be used only for a purpose reasonably related to the Limited Partner's interest as a limited partner of the Partnership. The Register shall reflect the name and address of each of the Partners, the amount and date of the Capital Contribution or Contributions of each Partner and the amount and date of any payment to any of the Limited Partners representing a return of any part of their Capital Contributions in the event of any such distribution. The Register shall be open to inspection by the public during normal business hours in the Cayman Islands. The Partnership may maintain such other books and records and may provide such financial or other statements as the General Partner in its sole discretion deems advisable. 11.2. ACCOUNTING BASIS; FISCAL YEAR. The books and records and the financial statements and reports of the Partnership shall be kept on such basis as the General Partner shall determine. The fiscal year of the Partnership shall be the calendar year. 11.3. BANK ACCOUNTS. The General Partner shall maintain the Partnership bank accounts and brokerage accounts, and withdrawals shall be made only in the regular course of the Partnership business on such signature or signatures as the General Partner may determine. Temporary investments are deemed activities in the ordinary course of Partnership business. 11.4. APPRAISAL. If at any time the value of one or more non-cash assets of the Partnership is required to be determined under this Agreement, the General Partner shall value such assets, taking into account all relevant factors, including without limitation restrictions on transfer, other legal or contractual restrictions and the costs and expenses of disposition of such assets. In the sole discretion of the General Partner, the valuation of any non-cash assets may be made by independent third parties appointed by the General Partner and deemed qualified by the General Partner to render an opinion as to the value of Partnership assets, using such methods and considering such information relating to such assets as such persons may deem appropriate. The valuation of Partnership assets reflected in an appraisal made in good faith by the General Partner or any adviser or consultant retained for such purpose shall be conclusive and binding on the Limited Partners. 31 11.5. REPORTS. Within 180 days after the end of each fiscal year, or as soon as practicable thereafter, the General Partner shall send to each person who was a Limited Partner at any time during the fiscal year then ended (i) such tax information as shall be necessary for the preparation by such Limited Partner of his or her United States federal and state income tax returns; (ii) a report of the investment activities of the Partnership during such year; and (iii) financial statements of the Partnership audited by its accountants. 11.6. TAX MATTERS AND ELECTIONS. (a) Each Limited Partner hereby appoints and designates the General Partner as tax matters partner of the Partnership, as such term is defined under the Code, and hereby agrees that any action taken by the General Partner in connection with audits of the Partnership under the Code shall be binding upon the Limited Partners. Each Limited Partner further agrees that he or she shall not treat any Partnership item on his or her individual income tax return in a manner inconsistent with the treatment of the item on the Partnership's tax return and that he or she shall not act independently with respect to tax audits or tax litigation affecting the Partnership, unless, in either case, previously authorized to do so in writing by the General Partner, which authorization may be withheld in the sole discretion of the General Partner. (b) As such tax matters partner, the General Partner may cause the Partnership to make all elections required or permitted to be made by the Partnership under the Code (including an election under Section 754 thereof permitting the adjustment in basis of Partnership assets upon the occurrence of certain events, such as a sale of Units or the death of a Limited Partner) and not otherwise expressly provided for in this Agreement. Notwithstanding the foregoing, the Partnership will elect to be treated as a partnership for United States federal income tax purposes, and no election to the contrary shall be made. ARTICLE 12 MISCELLANEOUS PROVISIONS 12.1. POWER OF ATTORNEY. Each Limited Partner hereby irrevocably constitutes and appoints the General Partner, with full power of substitution to its Affiliates or successors permitted hereunder, the true and lawful attorney-in-fact and agent of such Limited Partner, to execute, acknowledge, verify, swear to, deliver, record and file, in its or its assignee's name, place and stead, all in accordance with the terms of this Agreement, all instruments, documents and certificates which may from time to time be required by the laws of the Cayman Islands, any other jurisdiction in which the Partnership conducts or plans to conduct its affairs in the future, or any political subdivision or agency thereof to effectuate, implement and continue the valid existence and affairs of the Partnership, including, without limitation, the power and authority to verify, swear to, acknowledge, deliver, record and file: (i) all certificates and other instruments, including any amendments to this Agreement, which the General Partner deems appropriate to form, qualify or continue the Partnership as a limited partnership (or a partnership in which the 32 limited partners have limited liability) in the Cayman Islands and all other jurisdictions in which the Partnership conducts or plans to conduct its affairs, (ii) any amendments to this Agreement or any other agreement or instrument which the General Partner deems appropriate to (A) effect the addition, substitution or removal of any Limited Partner or General Partner pursuant to this Agreement or (B) effect any other amendment or modification to this Agreement, but only if such amendment or modification is duly adopted in accordance with the terms hereof, (iii) all conveyances and other instruments which the General Partner deems appropriate to reflect the dissolution and termination of the Partnership pursuant to the terms hereof, (iv) all instruments relating to transfers of interests of Limited Partners or to the admission of any substitute Limited Partner undertaken as permitted hereunder, (v) all certificates of assumed name and such other certificates and instruments as may be necessary under the fictitious or assumed name statutes from time to time in effect in the Cayman Islands and all other jurisdictions in which the Partnership conducts or plans to conduct its affairs, and (vi) any other instruments determined by the General Partner to be necessary or appropriate in connection with the proper conduct of the business of the Partnership and which do not adversely affect the interests of any of the Limited Partners. Such attorney-in-fact and agent shall not, however, have the right, power or authority to amend or modify this Agreement when acting in such capacities, except to the extent authorized herein. This power of attorney shall terminate upon the bankruptcy, dissolution, disability or incompetence of the General Partner. The power of attorney granted herein shall be deemed to be coupled with an interest, shall be irrevocable, shall survive and not be affected by the dissolution, bankruptcy or legal disability of any Limited Partner and shall extend to its successors and assigns; and may be exercisable by such attorney-in-fact and agent for all Limited Partners (or any of them) by listing all (or any) of such Limited Partners required to execute any such instrument, and executing such instrument acting as attorney-in-fact. Any Person dealing with the Partnership may conclusively presume and rely upon the fact that any instrument referred to above, and that is executed by such attorney-in-fact and agent, is authorized, regular and binding, without further inquiry. If required, each Limited Partner shall execute and deliver to the General Partner within five days after the receipt of a request therefor, such further designations, powers of attorney or other instruments as the General Partner shall reasonably deem necessary for the purposes hereof. 12.2. AMENDMENTS OF THIS AGREEMENT. (a) Except for any amendment to this Agreement made pursuant to Section 12.2(c), an amendment to this Agreement may be proposed by the General Partner by submitting to all Limited Partners the text of such amendment and a 33 statement of the purpose of such amendment. Subject to paragraph (c) below, the proposed amendment shall be deemed adopted 15 days after the General Partner submits such notice, unless Limited Partners holding two-thirds of outstanding Units have, by the end of such notice period, delivered their written disapproval thereof to the General Partner. (b) Notwithstanding any other provision of this Section to the contrary, no amendment may: (i) expand the obligations of any Partner under this Agreement or convert the Units of any Limited Partner into the interest of a General Partner or adversely affect the limited liability of any Limited Partner, in each case without the approval of such Partner; (ii) amend Section 6.3 or this Section 12.2 without the approval of all Partners; or (iii) modify the method provided in Article 7 or 8 of determining and allocating or distributing, as the case may be, Profits and Losses and distributable cash; without the approval of the General Partner and Limited Partners holding a majority of the outstanding Units that are adversely affected by such modification. (c) In addition to any amendments otherwise authorized hereby, this Agreement may be amended from time to time by the General Partner without the consent of any of the Limited Partners to add to the representations, duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein; to cure any ambiguity or correct or supplement any provisions hereof which may be inconsistent with any other provision hereof, or correct any printing, stenographic or clerical errors or omissions; to admit one or more additional Limited Partners or one or more substituted Limited Partners, or withdraw one or more Limited Partners, in accordance with the terms of this Agreement; PROVIDED that no amendment shall be adopted pursuant to this subsection (c) unless (x) in the case of any amendment referred to in clause (i) or (ii) of this subsection, such amendment would not adversely alter the interest of a Limited Partner in connection with the allocation of any income, gains or losses or distributions or the timing thereof without the consent of such Partner, and (y) such amendment would not, in the opinion of counsel for the Partnership (which opinion the Limited Partners are legally entitled to rely on), alter, or result in the alteration of, the limited liability of the Limited Partners or the status of the Partnership as a partnership for federal income tax purposes. The General Partner shall send each Limited Partner a copy of any amendment adopted pursuant to this paragraph (c). (d) Upon the adoption of any amendment to this Agreement, such amendment (or an amended restated Agreement) shall be executed by the General Partner for itself and on behalf of the Limited Partners pursuant to the power of attorney granted in Section 12.1, and, if such amendment affects the certificate of limited partnership of the Partnership under the Act, or any other filing made in any other state, the General Partner, pursuant to the power of attorney granted in Section 12.1, shall execute and file proper amendments and filings in the Cayman 34 Islands and in each jurisdiction in which such action is necessary for the Partnership to conduct business or to preserve the limited liability of the Limited Partners. 12.3. ARBITRATION. Any dispute, controversy or claim arising out of or in connection with or relating to this Agreement or any breach or alleged breach hereof shall (to the extent not prohibited by governing law) be determined and settled by arbitration in Bermuda pursuant to the rules then in effect of the American Arbitration Association. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in the courts of Bermuda. 12.4. NOTICES. Except as otherwise specifically provided herein, All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered, sent by electronic mail, or mailed, registered mail, first-class postage paid, if to any Limited Partner, at such Limited Partner's address or such Limited Partner's electronic mail address as set forth in such Limited Partner's Subscription Agreements, if to the Partnership, to the General Partner, c/o Robert Lusardi, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda, or to the General Partner by facsimile at (441) 292-8618, Attention: Robert Lusardi, or to such other person, electronic mail address or address as any Limited Partner shall have last designated by notice to the General Partner, and in the case of a change in address by the General Partner, by notice to the Limited Partners. Any notice shall be deemed to have been duly given if personally delivered, sent by electronic mail or sent by the mails and shall be deemed received, unless earlier received, (A) if sent by certified or registered mail, return receipt requested, when actually received, (B) if sent by overnight mail or courier, when actually received, (C) if sent by facsimile transmission, on the date sent provided confirmatory notice is sent by first-class mail, postage prepaid, (D) if delivered by electronic mail, when sent and (E) if delivered by hand, on the date of receipt. 12.5. BINDING PROVISIONS. The covenants and agreements contained herein shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective parties hereto. 12.6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Cayman Islands, without regard to principles of conflict of laws. In particular, the Partnership is formed pursuant to the Act, and the rights and liabilities of the Partners shall be as provided therein, except as herein otherwise expressly provided. 12.7. JURISDICTION; VENUE. (a) Any action or proceeding against the parties relating in any way to this Agreement may be brought and enforced in the courts of Bermuda, and the parties irrevocably submit to the non-exclusive jurisdiction of the foregoing courts in respect of any such action or proceeding. The parties irrevocably waive, to the fullest extent permitted by law, any objection that they may now or hereafter have to the laying of venue of any such action or proceeding in the courts of Bermuda and any claim that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (b) IN ADDITION, EACH OF THE PARTIES HERETO (IN ITS OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS EQUITY 35 HOLDERS) WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) RELATED TO OR ARISING OUT OF THIS AGREEMENT 12.8. COUNTERPARTS. This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that not all the parties have signed the same counterpart. The General Partner may execute any document by facsimile signature of a duly authorized officer. 12.9. SEPARABILITY OF PROVISIONS. If for any reason any provision or provisions hereof that are not material to the purposes or business of the Partnership or the Limited Partners' Units are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement that are valid. 12.10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties. This Agreement supersedes any prior agreement or understanding among the parties and may not be modified or amended in any manner other than as set forth herein. 12.11. PARAGRAPH TITLES. Article, section and paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. 12.12. WAIVER OF RIGHT OF PARTITION AND ACCOUNTING. Each Partner hereby waives its right of partition and accounting. 12.13. EFFECTIVENESS. This Agreement shall become effective as of the day and year first above written upon execution hereof by the General Partner and the Initial Limited Partner and, as to each additional Limited Partner, when the prescribed subscription hereto by such party has been accepted by the General Partner. (Signatures to follow) 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a deed on the date first above written. GENERAL PARTNER: XL CAPITAL PARTNERS CORPORATION By: _________________________________________________ Title: Name: INITIAL LIMITED PARTNER: _____________________________________________________ ________________, solely to reflect his withdrawal ADDITIONAL LIMITED PARTNERS: All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney now and hereafter executed in favor of and delivered to the General Partner. By: GENERAL PARTNER, as Attorney-in-Fact: XL CAPITAL PARTNERS CORPORATION By: ________________________________________ Title: Name: EX-10.57 9 c23420_ex10-57.txt AGREEMENT OF LIMITED PARTNERSHIP ================================================================================ XL PRINCIPAL PARTNERS I, L.P. AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ----------------------------------- DATED AS OF JUNE 28, 2001 ----------------------------------- ================================================================================ TABLE OF CONTENTS PAGE ARTICLE 1 Certain Defined Terms...............................................1 1.1. DEFINED TERMS...................................................1 ARTICLE 2 Formation, Name and Place of Business; Purpose and Limitation on Operations; Term; Conversion to Corporate Form...................6 2.1. FORMATION.......................................................6 2.2. NAME............................................................6 2.3. PRINCIPAL OFFICE................................................6 2.4. PURPOSE.........................................................6 2.5. ORGANIZATIONAL CERTIFICATES AND OTHER FILINGS; LIMITATIONS ON CONDUCT OF BUSINESS...............................6 2.6. TERM.............................................................7 2.7. REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS................7 2.8. FISCAL YEAR......................................................8 2.9. ALTERNATIVE INVESTMENT STRUCTURE.................................8 ARTICLE 3 General Partner; Relationship with XL Capital........................9 3.1. GENERAL PARTNER; MANAGEMENT OF GENERAL PARTNER...................9 3.2. NO COMPENSATION OF GENERAL PARTNER; EXPENSES.....................9 3.3. ADMINISTRATIVE SERVICES..........................................9 3.4. SERVICES BY XL CAPITAL; CHARGES AND EXPENSES.....................9 3.5. RELATED PARTNERSHIPS.............................................9 ARTICLE 4 Limited Partners....................................................10 4.1. INITIAL LIMITED PARTNER.........................................10 4.2. ADDITIONAL LIMITED PARTNERS.....................................10 4.3. LIST OF LIMITED PARTNERS........................................10 i PAGE 4.4. NO MANAGEMENT BY LIMITED PARTNERS...............................10 4.5. LIMITATION ON TRANSFER OF LIMITED PARTNERS' UNITS...............11 4.6. LIABILITIES OF THE LIMITED PARTNERS;............................11 ARTICLE 5 Powers of General Partner; Prohibited Transactions and Restrictions; Duties of General Partner; Liabilities; the Investment Committee; Indemnification and Contribution..........11 5.1. POWERS..........................................................11 5.2. RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER............12 5.3. DUTIES..........................................................12 5.4. INVESTMENT COMMITTEE............................................13 5.5. LIABILITY OF THE GENERAL PARTNER................................13 5.6. EXCULPATION, INDEMNIFICATION AND CONTRIBUTION...................13 5.7. GENERAL PARTNER LOANS...........................................13 ARTICLE 6 Capital Contributions; No Further Contributions Required; Interest; Accounting and Valuation..................................14 6.1. CAPITAL CONTRIBUTIONS...........................................14 6.2. SUBSEQUENT CLOSINGS.............................................15 6.3. FURTHER CAPITAL CONTRIBUTIONS...................................15 6.4. DEFAULTING LIMITED PARTNER......................................16 6.5. INTEREST........................................................16 6.6. TAXABLE YEARS...................................................17 ARTICLE 7 Tax Advances........................................................17 7.1. TAX ADVANCES....................................................17 ARTICLE 8 Distributions; Withdrawal...........................................17 8.1. GENERAL PARTNER DISCRETION......................................17 8.2. DISTRIBUTIONS...................................................18 8.3. NON-CASH DISTRIBUTIONS..........................................19 ii PAGE 8.4. WITHHOLDING.....................................................19 8.5. WITHDRAWAL......................................................19 8.6. REQUIRED WITHDRAWAL.............................................19 ARTICLE 9 Transferability of Interests; Vesting; Termination of Employment...19 9.1. RESTRICTIONS AND CONDITIONS ON TRANSFERS OF UNITS...............19 9.2. ASSIGNEES.......................................................20 9.3. SUBSTITUTED LIMITED PARTNERS....................................21 9.4. TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF LIMITED PARTNER.................................................21 9.5. DISPOSITION OF GENERAL PARTNER'S INTEREST.......................23 ARTICLE 10 Term and Dissolution of the Partnership............................23 10.1. EVENTS CAUSING DISSOLUTION.....................................23 10.2. WINDING UP.....................................................24 10.3. FINAL DISTRIBUTION.............................................24 ARTICLE 11 Books and Records; Accounting; Appraisal; Tax Matters and Elections......................................................25 11.1. BOOKS AND RECORDS..............................................25 11.2. ACCOUNTING BASIS; FISCAL YEAR..................................25 11.3. BANK ACCOUNTS..................................................25 11.4. APPRAISAL......................................................25 11.5. REPORTS........................................................26 11.6. TAX MATTERS....................................................26 ARTICLE 12 Miscellaneous Provisions...........................................26 12.1. POWER OF ATTORNEY..............................................26 12.2. AMENDMENTS OF THIS AGREEMENT...................................27 12.3. ARBITRATION....................................................28 12.4. NOTICES........................................................28 iii PAGE 12.5. BINDING PROVISIONS.............................................29 12.6. GOVERNING LAW..................................................29 12.7. JURISDICTION; VENUE............................................29 12.8. COUNTERPARTS...................................................29 12.9. SEPARABILITY OF PROVISIONS.....................................29 12.10. ENTIRE AGREEMENT..............................................29 12.11. PARAGRAPH TITLES..............................................30 12.12. WAIVER OF RIGHT OF PARTITION AND ACCOUNTING...................30 12.13. EFFECTIVENESS.................................................30 iv AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP XL PRINCIPAL PARTNERS I, L.P. This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, (this "Agreement") of XL PRINCIPAL PARTNERS I, L.P., an exempted limited partnership registered under the laws of the Cayman Islands (the "Partnership") is made this 28th day of June 2001, by and among XL Capital Partners Corporation, a Cayman Islands company, as general partner hereunder (the "General Partner"), the Initial Limited Partner (as described in Section 4.1 hereof) and the persons who have signed this Agreement and have been admitted as additional limited partners hereunder (the "Limited Partners") (the General Partner and the Limited Partners are collectively referred to as the "Partners"). W I T N E S S E T H : ------------------- WHEREAS, the General Partner and the Initial Limited Partner have entered into an agreement of limited partnership dated May 25, 2001 and formed an exempted limited partnership under the laws of the Cayman Islands under the name of XL Principal Partners I, L.P.; WHEREAS, the parties hereto desire to enter into this Amended and Restated Limited Partnership Agreement of the Partnership to permit the withdrawal of the Initial Limited Partner and the admission of the additional Limited Partners who have signed this Agreement and have been admitted as additional Limited Partners hereunder and further to make the modifications hereinafter set forth; and NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties hereto agree to amend and restate the Limited Partnership Agreement of the Partnership in its entirety to read as follows: ARTICLE 1 CERTAIN DEFINED TERMS 1.1. DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: Act The Exempted Limited Partnership Law (2001 Revision) of the Cayman Islands, as revised or amended from time to time Additional Share As defined in Section 9.4(e) 2 Affiliate Any person or entity that controls, is controlled by, or is under common control with, any other person or entity Agreement This Amended and Restated Agreement of Limited Partnership, as it may be amended, modified or supplemented from time to time Alternative Investment Vehicle As defined in Section 2.9 Board Board of Directors of the General Partner appointed from time to time by XL Capital as the sole shareholder of the General Partner Capital Contributions Amounts contributed to the Partnership or any Alternative Investment Vehicle by the Partners (i) The conviction of the Limited Partner of a felony involving moral turpitude or dishonesty, or (ii) The Limited Partner, in carrying out his or her duties for the XL Group has been guilty of (a) gross negligence or (b) willful misconduct; provided, however, that any act or failure to act by the Limited Partner shall not constitute Cause if such act or failure to act was committed, or omitted, by the Limited Partner in good faith and in a manner he or she reasonably believed to be in the overall best interests of the XL Group. The determination of whether the Limited Partner acted in good faith and that he or she reasonably believed such action to be in the XL Group's overall best interest will be made in the reasonable judgment of the General Counsel of XL Capital or, if the General Counsel shall have an actual or potential conflict of interest, the Compensation Committee, or the Board of Directors of XL Capital, or (iii) The Limited Partner's continued willful refusal to obey any appropriate policy or requirement duly adopted by the Chief Executive Officer or board of directors of any member of the XL Group and the continuance of such refusal after the receipt Cause of notice Closing The date of the initial closing of the Partnership Code United States Internal Revenue Code of 1986, as amended Commitment Period The period from the Closing to the earlier of (i) the date of full investment in Investments and the fifth anniversary of the Closing; PROVIDED, that the General Partner may extend this period for up to one year in respect of transactions that have been identified by the General Partner prior to such date, PROVIDED, FURTHER that the General Partner may terminate the Commitment Period at any time in its sole discretion. 3 Defaulting Limited Partner As defined in Section 6.4 Disability A disability which meets the criteria under the XL Group Long Term Disability Plan Disabling Event The transfer or assignment of the General Partner's interest in the Partnership, or the withdrawal, death, insanity, retirement, bankruptcy, commencement of liquidation proceedings, resignation, insolvency, dissolution or winding up of the General Partner. For purposes of this definition, the term "bankruptcy" shall be deemed to include the following: (i) the General Partner (A) making an assignment for the benefit of creditors, (B) filing a voluntary petition in bankruptcy, (C) being adjudged as bankrupt or insolvent or having entered against it an order for relief in any bankruptcy or insolvency proceeding, (D) filing a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, (E) filing an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of this nature or (F) seeking, consenting or acquiescing in the appointment of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties or (ii) if, 120 days after the commencement of any proceeding against the General Partner seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, the proceeding has not been dismissed, or if within 90 days after the appointment without its consent or acquiescence of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties, the appointment is not vacated or stayed, or if within 90 days after the expiration of any such stay, the appointment is not vacated Dissolution Sale All sales and liquidations by or on behalf of the Partnership of its assets in connection with or in contemplation of the winding-up of the Partnership Event of Dissolution As defined in Section 10.1 Final Distribution The distribution described in Section 10.3 Fiscal Year As defined in Section 2.8 Fixed Return Cumulative (but not compound) preferred annual return on the General Partner's aggregate Capital Contribution equal to 10% General Partner XL Capital Partners Corporation, a Cayman Islands company, as general partner of the Partnership 4 General Partner's Capital As defined in Section 5.5 Contribution Immediate Family Member With respect to any natural person, such person's spouse, children, grandchildren, parents and siblings Initial Limited Partner Huntlaw Nominees Ltd, as the Initial Limited Partner of the Partnership Initial Payment 50% of the amount subscribed for Investment Committee As defined in Section 5.4. Investment Company Act The Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder Investment As defined in Section 2.4 Limited Partner Payment The aggregate amount of the Capital Contribution of each Limited Partner which is to be paid upon execution and delivery of the Subscription Agreement Limited Partners Persons who have been admitted as limited partners to the Partnership pursuant to their purchase of Units as set forth in the Register of the Partnership Memorandum The Confidential Private Placement Memorandum dated March 2001, relating to the Partnership, as amended or supplemented from time to time Partners The General Partner and the Limited Partners, collectively Partnership XL Principal Partners I, L.P., the exempted limited partnership formed in accordance with this Agreement and under the laws of the Cayman Islands Person Any individual, partnership, corporation, limited liability company, unincorporated organization or association, trust (including the trustees thereof, in their capacity as such), government (or agency or political subdivision thereof) or other entity Pro Rata Share As defined in Section 9.4(e) Reference Rate The rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank (or its successor) as its prime rate in effect at its principal office in New York City or, if no such rate is announced, the rate quoted from time to time by a New York money center bank selected by the General Partner. 5 Register The register of the contributions of the Partners maintained at the registered office of the Partnership in accordance with the Act. Representative Any executor, administrator, trustee, committee, guardian, conservator or representative appointed by a court of competent jurisdiction to act on behalf of a Limited Partner or the estate of a Limited Partner Tax Advances As defined in Section 7.7 Transfer As defined in Section 9.1(a) Transfer Application Written and dated notification of a Transfer of all or any portion of the Units of a Limited Partner referred to in Section 9.2 Transferring Limited Partner As defined in Section 9.1(c) Units Units of limited partnership interests in the Partnership representing the entire rights owned by a Limited Partner, including the right to a share of the distributions of the Partnership, as offered pursuant to the Memorandum Unpaid Capital Commitment As to any Partner as of any time, an amount equal to: (i) such Partner's capital commitment, minus (ii) the aggregate amount of such Partner's Capital Contributions (and capital contributions to any Alternative Investment Vehicle) (but not additional amounts thereon pursuant to Section 6.2) made at or prior to such time. Unvested The unvested portion of each Limited Partner's interest in the Interest Partnership, determined in accordance with Section 9.4(a) Vesting Schedule The schedule according to which a Limited Partner's interest in the Partnership generally will vest, as set forth in Section 9.4(a) XL Capital XL Capital Ltd, a Cayman Islands company XL Group XL Capital and its subsidiaries and Affiliates 6 ARTICLE 2 FORMATION, NAME AND PLACE OF BUSINESS; PURPOSE AND LIMITATION ON OPERATIONS; TERM; CONVERSION TO CORPORATE FORM 2.1. FORMATION. The parties hereto continue a limited partnership formed on May 25, 2001 pursuant to the Act. 2.2. NAME. The name of the Partnership shall be "XL Principal Partners I, L.P." The General Partner is authorized to make any variations in the Partnership's name which the General Partner may deem necessary or advisable, PROVIDED (a) that such name shall contain the words "Limited Partnership" or the letters "L.P." or the equivalent translation thereof and any other designation required by applicable law and (b) that the General Partner shall notify the Registrar of Limited Partnerships in the Cayman Islands of any such change of name in accordance with the Act. All Partnership business shall be conducted in such name of the Partnership. 2.3. PRINCIPAL OFFICE. The Partnership shall maintain its principal office at, and its affairs shall be conducted from, Bermuda or such place or places as the General Partner may, with notice to the Limited Partners, decide. 2.4. PURPOSE. The purpose of the Partnership is to (a) achieve long-term capital appreciation for its investors through a portfolio of investments, including without limitation, private equity, venture capital and hedge funds; equity and equity-related securities of all types; investments in debt securities, preferred shares and other financial instruments; and securities issued by companies providing financial guarantee, insurance and reinsurance contracts. These investments are referred to collectively as the "Investments;" (b) to engage in any other business activities that may be lawful in or from within the Cayman Islands and to engage in any other business or activity that now or hereafter may be necessary, incidental, proper, advisable or convenient to accomplish the foregoing purposes (including, without limitation, obtaining financing) and that is not forbidden by the law of the jurisdiction in which the Partnership engages in that business; and (c) to act as manager or agent for, or consultant or adviser to the business of any exempted undertaking, as that expression is defined in the Bermuda Overseas Partnerships Act 1995. 2.5. ORGANIZATIONAL CERTIFICATES AND OTHER FILINGS; LIMITATIONS ON CONDUCT OF BUSINESS. (a) The General Partner has executed and caused to be filed with the Registrar of Exempted Limited Partnerships in the Cayman Islands a registration statement pursuant to Section 9 of the Act containing information required by the Act. The General Partner may cause the Partnership to qualify as a foreign limited partnership (or a partnership in which the Limited Partner has limited liability) in any other jurisdiction. (b) If requested by the General Partner, the Limited Partners shall promptly execute all certificates and other documents consistent with the terms of this Agreement necessary for the General Partner to accomplish all filing, recording, publishing and other acts as may be 7 appropriate to comply with all requirements for (i) the formation and operation of a limited partnership under the laws of the Cayman Islands, (ii) the operation of the Partnership as an entity or partnership in which the Limited Partners have limited liability, in all jurisdictions where the Partnership proposes to operate and (iii) all other filings required to be made by the Partnership. (c) The General Partner shall use its best efforts to cause the Partnership to maintain the limited liability of the Limited Partners. The General Partner shall cause the Partnership to be qualified or registered under assumed or fictitious names or foreign limited partnership statutes or similar laws in any jurisdiction in which the Partnership owns property or transacts business to the extent such qualification or registration is necessary or, in the judgment of the General Partner, advisable in order to protect the limited liability of the Limited Partners or to permit the Partnership to lawfully own property or transact business, and shall cause the Partnership not to own property or transact business in any such jurisdiction until it is so qualified or registered. The General Partner shall execute, file and publish all such certificates, notices, statements or other instruments necessary to permit the Partnership lawfully to own property and conduct business as a limited partnership in all jurisdictions where the Partnership elects to own property or transact business and to maintain the limited liability of the Limited Partners. 2.6. TERM. The Partnership shall continue until the close of business on December 31, 2027, or upon earlier termination by the General Partner. The Partnership is also subject to termination upon the occurrence of certain specific events as set forth in Section 10.1 hereof. Upon the dissolution of the Partnership, its liabilities are to be paid in the order provided herein. The General Partner shall cause Partnership assets to be sold in such manner as the General Partner, in its sole discretion, may determine. The General Partner may, to the extent permitted by applicable law, purchase from the Partnership any Partnership investments upon which there are significant restrictions or for which another purchaser willing to pay fair market value is not readily obtainable. The fair market value of any such investment shall be determined in good faith by the General Partner at the time of the transfer and shall be deemed fair and reasonable and not a violation of the General Partner's fiduciary duty to the Partnership, absent manifest error. Pending sale of Partnership assets, the General Partner shall have the right to continue to operate and otherwise to deal with Partnership assets. After the payment of the debts and liabilities of the Partnership and the setting up of reasonable reserves, the remaining proceeds of the liquidation shall be distributed to the Partners in proportion to their capital accounts in the Partnership. 2.7. REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS. The address of the Partnership's registered office in the Cayman Islands shall be at the offices of Huntlaw Corporate Services Ltd., Huntlaw Building, P.O. Box 1350GT, 75 Fort Street, Grand Cayman, Cayman Islands, and the address of its principal place of business shall be c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda. Such registered office and principal place of business may be changed by the General Partner with the prior written consent of the Minister of Finance of Bermuda; PROVIDED that the General Partner and its Affiliates shall notify the Limited Partners of such change within a reasonable period of time thereafter; and PROVIDED FURTHER that the registered office shall always be in the Cayman Islands. The Partnership may from time to 8 time have such other place or places of business within or outside the Cayman Islands as may be determined by the General Partner. 2.8. FISCAL YEAR. The fiscal year ("Fiscal Year") of the Partnership shall be the calendar year or, in the case of the first and last fiscal years of the Partnership, the fraction thereof commencing on the Closing or ending on the date on which the winding-up of the Partnership is completed, as the case may be. The General Partner shall have the authority to change the ending date of the Fiscal Year if the General Partner shall determine that such change is necessary or appropriate; PROVIDED that the General Partner shall promptly give notice of any such change to the Limited Partners. 2.9. ALTERNATIVE INVESTMENT STRUCTURE. (a) If the General Partner determines in good faith that for legal, tax, regulatory or other reasons it is in the best interests of some or all of the Partners that an Investment be made through an alternative investment structure, the General Partner shall be permitted to structure the making of all or any portion of such Investment outside of the Partnership, by requiring any Partner or Partners to make such Investment either directly (which shall not include a general partner interest or other similar interest) or indirectly through a partnership or other vehicle (other than the Partnership) that will invest on a parallel basis (and on effectively the same economic terms) with or in lieu of the Partnership, as the case may be (any such structure or vehicle, an "Alternative Investment Vehicle"). The Partners investing through such Alternative Investment Vehicle shall be required to make capital contributions to such Alternative Investment Vehicle to the same extent, for the same purposes and on the same terms and conditions as Partners are required to make Capital Contributions to the Partnership, and such capital contributions shall reduce the Unpaid Capital Commitments of the Limited Partners to the same extent as if Capital Contributions were made to the Partnership with respect thereto. Each Partner shall have the same economic interest in all material respects in Investments made pursuant to this Section 2.9 as such Partner would have if such Investment had been made solely by the Partnership, and the other terms of such Alternative Investment Vehicle shall be substantially identical in all material respects to those of the Partnership, to the maximum extent applicable; PROVIDED that such Alternative Investment Vehicle (or the entity in which such Alternative Investment Vehicle invests) shall provide for the limited liability of the Limited Partners as a matter of the organizational documents of such Alternative Investment Vehicle (or the entity in which such Alternative Investment Vehicle invests) and as a matter of local law; PROVIDED, FURTHER, that the General Partner or an Affiliate thereof will serve as the general partner or in some other similar fiduciary capacity with respect to such Alternative Investment Vehicle. (b) If the Partnership makes an Investment through an Alternative Investment Vehicle the General Partner may make a distribution to Limited Partners in order to permit them to fund the Alternative Investment Vehicle. 9 ARTICLE 3 GENERAL PARTNER; RELATIONSHIP WITH XL CAPITAL 3.1. GENERAL PARTNER; MANAGEMENT OF GENERAL PARTNER. XL Capital Partners Corporation shall be the sole general partner of the Partnership. The General Partner shall have complete control of the Partnership's business. Such control shall be exercised by XL Capital Partners Corporation, in its capacity as general partner of the Partnership, by the appropriate officers of the General Partner or their designees or agents. 3.2. NO COMPENSATION OF GENERAL PARTNER; EXPENSES. (a) No compensation shall be paid by the Partnership to the General Partner for its services as General Partner thereof, other than reimbursement for out-of-pocket expenses incurred in the course of conducting the business of the Partnership. The General Partner shall be reimbursed for (i) fees paid to others for Partnership accounting and communication services and (ii) certain other fees and expenses (including those paid to consultants, attorneys, accountants or other professionals) incurred by it on behalf of the Partnership, including, but not limited to, all fees and expenses of litigation and tax audits of the Partnership and for the outside valuation of securities or property obtained by the Partnership. (b) The costs and expenses incurred on behalf of the Partnership with respect to the organization of the Partnership, pre-offering activities and offering activities and the selling of Units including, but not limited to, travel, telephone, postage, legal and accounting expenses, shall be paid by the General Partner. Except as otherwise provided herein to the contrary, the Partnership shall bear all other expenses of its operations including fees and expenses of attorneys, accountants and experts, commitment and investment banking fees, and interest and all expenses related to investments or potential investments and to the acquisition, holding and sale or other disposition of investments. 3.3. ADMINISTRATIVE SERVICES. The day-to-day operations of the Partnership may be managed by XL Capital pursuant to such administrative services arrangements as the General Partner may enter into. 3.4. SERVICES BY XL CAPITAL; CHARGES AND EXPENSES. In connection with the investment activities of the Partnership, the XL Group may co-invest or have business relationships with, and may be entitled to receive certain fees, commissions or other benefits from, purchasers, sellers and portfolio companies (including other investment partnerships, funds or pooled investment vehicles) in connection with services rendered to these companies, including insurance and re-insurance services, strategic and financial services, and other lending, which fees may be higher or lower than competitive market rates. 3.5. RELATED PARTNERSHIPS. The General Partner and any of its Affiliates in the future may serve as the general partner of other partnerships formed for the benefit of officers, employees, partners and directors of the XL Group, which partnerships may have the same or a similar purpose and may invest or propose to invest in the same types of investments as the Partnership. 10 ARTICLE 4 LIMITED PARTNERS 4.1. INITIAL LIMITED PARTNER. (a) The Initial Limited Partner has become such only for the purpose of organizing the Partnership and has contributed $10.00 to the Partnership as a Capital Contribution. Upon the admission of one or more Limited Partners to the Partnership at the Closing, the Initial Limited Partner shall (i) receive a return of any capital contribution made by it in such capacity to the Partnership, (ii) withdraw as the Initial Limited Partner of the Partnership and (iii) have no further right, interest or obligation of any kind whatsoever as a Partner in the Partnership. (b) Unless the context otherwise specifically requires, references in this Agreement to the Limited Partners, their capital and their rights and obligations shall not be references to the Initial Limited Partner. 4.2. ADDITIONAL LIMITED PARTNERS. (a) The General Partner is authorized to admit Limited Partners to the Partnership pursuant to the terms of this Agreement and upon execution and delivery by each Limited Partner of a subscription agreement and such other documents as the General Partner deems necessary or advisable, each in form satisfactory to the General Partner, relating to the Units or any other limited partnership interests in the Partnership. The manner of the offering of the Units or such other limited partnership interests, the terms and conditions under which subscriptions for such Units or other limited partnership interests shall be accepted, and the manner of and conditions to the sale of Units or other limited partnership interests to subscribers therefor shall be as provided in this Agreement and the various subscription agreements between the Partnership and each Limited Partner, and subject to any provisions of any of them. A person shall be admitted as a Limited Partner upon acceptance of the subscription agreement by or on behalf of the Partnership and on the day his or her admission is reflected on the Register of the Partnership. Upon such admission the Limited Partner shall become a party to and be bound by the terms and conditions of this Agreement. The admission of additional Limited Partners hereunder shall not cause the dissolution of the Partnership. (b) The General Partner shall make such other adjustment to the interests of such new Limited Partners as are appropriate and required to properly reflect the interest of such new Limited Partner and interests of the Partners existing prior to the admission of such new Limited Partner including such amendments as are necessary to reflect the economic arrangements of the Partners including the manner in which distributions are shared among the Partners. 4.3. LIST OF LIMITED PARTNERS. The name, residence and business address of each Limited Partner and the amount of such Limited Partner's Capital Contribution shall be set forth in the Register of the Partnership. 4.4. NO MANAGEMENT BY LIMITED PARTNERS. No Limited Partner as such shall take part in the management of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. Limited Partners shall not participate in any investment decisions made on behalf of the Partnership. 11 4.5. LIMITATION ON TRANSFER OF LIMITED PARTNERS' UNITS. Except as set forth in Article 9 herein, no Limited Partner shall, directly or indirectly, Transfer any Units. 4.6. LIABILITIES OF THE LIMITED PARTNERS; LIMITED LIABILITY. Except as provided by the Act or other applicable law and subject to any obligations expressly set forth herein, including, without limitation, the obligations to make Capital Contributions pursuant to Article 6 and to indemnify the Partnership and the General Partner as provided in Section 7.7, no Limited Partner shall have any personal liability whatsoever in its capacity as a Limited Partner to the Partnership, to any of the Partners, or to the creditors of the Partnership, for the debts, liabilities, contracts, or other obligations of the Partnership or for any losses of the Partnership. No Limited Partner, as such, shall have any fiduciary duty to any other Partner, the Partnership or any other party. ARTICLE 5 POWERS OF GENERAL PARTNER; PROHIBITED TRANSACTIONS AND RESTRICTIONS; DUTIES OF GENERAL PARTNER; LIABILITIES; THE INVESTMENT COMMITTEE; INDEMNIFICATION AND CONTRIBUTION 5.1. POWERS. (a) In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, and except as limited, restricted or prohibited by the express provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purpose and business of the Partnership. These powers shall include, without limitation, the following powers: (i) to borrow money in the name of the Partnership for use in the Partnership business, and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device; (ii) to enter into transactions and make investments with or through Affiliates of the General Partner and to participate in transactions sponsored or managed by Affiliates of the General Partner or in customers of such Affiliates; (iii) to purchase interests in customers of Affiliates of the General Partner, or in which Affiliates of the General Partner have an interest, including, but not limited to, limited partnership interests in limited partnerships in which such Affiliates serve as general partner; (iv) to make temporary investments of Partnership capital in all types of securities, including, without limitation, deposits with members of the XL Group, short-term government and agency securities, certificates of deposit, interest-bearing deposits in banks, securities issued by or on behalf of countries, states, municipalities and 12 their instrumentalities, prime-grade commercial paper, repurchase agreements with respect to any of the foregoing, and prime-grade commercial paper issued by other investment companies; (v) to buy and sell securities and open brokerage and other accounts with entities including with Affiliates of the General Partner; (vi) to enter into contracts (including, without limitation, insurance policies and contracts, of any type and coverage) and make commitments on behalf of the Partnership and, in general, to do and perform everything which may be necessary, advisable, suitable or proper for the conduct of the Partnership's business and for the carrying out of the purposes and objects herein before enumerated, including the delegation to any person or persons of such functions and authority as the General Partner may determine; and (vii) to employ attorneys and accountants to represent and audit the books of the Partnership, which attorneys and accountants may also serve as counsel and auditors to the General Partner and any of its Affiliates. (b) Any person not a party to this Agreement dealing with the Partnership shall be entitled to rely conclusively upon the power and authority of any officer or director of the General Partner to bind the Partnership in all respects, and to execute agreements, instruments and other writings on behalf of and in the name of the Partnership. 5.2. RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER. Without the approval of a majority in interest of the Limited Partners, the General Partner shall not have the authority to alter the purpose of the Partnership. 5.3. DUTIES. (a) Other than with respect to temporary investments, and after setting aside suitable reserves, the General Partner shall use its reasonable efforts to invest the Capital Contributions of the Partners and reinvest the revenues of the Partnership in accordance with the purposes of the Partnership, monitor the investments of the Partnership and manage the related affairs of the Partnership. (b) Except as otherwise expressly provided herein, the General Partner shall take all action that may be necessary or appropriate for the continuation of the Partnership's valid existence as a limited partnership under the laws of the Cayman Islands, and for the acquisition, holding and disposition, in accordance with the provisions of this Agreement and applicable laws and regulations, of the investments of the Partnership. (c) The General Partner shall prepare or cause to be prepared and shall file on or before the due date (or any extension thereof) any United States federal, state or local tax returns required to be filed by the Partnership. The General Partner shall cause the Partnership to pay, from Partnership funds, any taxes payable by the Partnership. (d) The General Partner shall be under a fiduciary duty and obligation to conduct the affairs of the Partnership in the best interests of the Partnership, including the safekeeping and 13 use of all Partnership funds and assets (whether or not in the immediate possession or control of the General Partner) for the benefit of the Partnership. The General Partner shall at all times act with integrity and good faith and exercise due diligence in all activities relating to the conduct of the business of the Partnership and in resolving conflicts of interest. (e) The General Partner may delegate or assign any action that may be or is required to be taken by the General Partner to any third party, including without limitation, an Affiliate of the General Partner. 5.4. INVESTMENT COMMITTEE. All investment decisions by the General Partner shall be subject to the approval of a committee consisting of three to four members (the "Investment Committee"), two of whom will be outside directors of an Affiliate of the XL Group. 5.5. LIABILITY OF THE GENERAL PARTNER. Except as may be required by the Act, the General Partner shall not be required to contribute to the capital of the Partnership any funds in excess of 4.0 times the Limited Partners' aggregate Capital Contributions (the "General Partner's Capital Contribution"). Neither the General Partner nor any of its Affiliates shall have any personal liability for the return or repayment of the Capital Contributions of any Limited Partner. 5.6. EXCULPATION, INDEMNIFICATION AND CONTRIBUTION. Neither the General Partner, any of its officers, directors, representatives or agents, nor any member of the Investment Committee, nor any partners or principals of the XL Group (including any directors, officers, employees, agents or Affiliates thereof) nor any person who controls the General Partner or the XL Group (a "control person") within the meaning of Section 15 of the Securities Act of 1933, as amended, shall be liable to the Partnership or the Limited Partners for any act or failure to act relating in any way to the Partnership, its assets, business or affairs so long as such act or failure to act does not (i) have a material adverse effect on the Partnership and (ii) constitute such person's willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Partnership or such person's office. The General Partner and its officers, directors, agents, representatives, and members of the Investment Committee, and any partners or principals of the XL Group (including any directors, officers, employees, agents and Affiliates thereof) and control persons shall be indemnified by the Partnership to the fullest extent permitted by law for any and all losses, claims, damages and expenses arising out of or incurred in connection with any claim, action or demand against the General Partner, the Partnership or any such indemnified person relating to the Partnership, its assets, business or affairs (including, without limitation, attorneys' fees and expenses and any amounts paid in settlement or compromise of any such claim, action or demand); PROVIDED, HOWEVER, that the foregoing indemnification shall not apply if a court of competent jurisdiction makes a final decision that such claim, action or demand resulted directly from such indemnified person's willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Partnership or such person's office. 5.7. GENERAL PARTNER LOANS. Notwithstanding the provisions of Section 3.4, in the event that the Partnership at any time lacks sufficient funds to meet its financial obligations, the General Partner shall have the right to, but shall not be required to, lend money to the Partnership on terms, including interest rates, that are fair and reasonable to the Partnership (but in no event 14 less than the rate required under United States tax law to avoid compensation income to the Limited Partners) without any approval of the Limited Partners. The General Partner may execute written agreements governing any such loans on behalf of the Partnership. ARTICLE 6 CAPITAL CONTRIBUTIONS; NO FURTHER CONTRIBUTIONS REQUIRED; INTEREST; ACCOUNTING AND VALUATION 6.1. CAPITAL CONTRIBUTIONS. (a) Subscriptions for Units shall be accepted or rejected by the General Partner as it determines in its sole discretion. Each Unit represents a capital commitment of $25,000. The minimum Capital Contribution of each Limited Partner is one Unit ($25,000), or such fractional Unit as permitted in the General Partner's sole discretion. Additional whole Units may be purchased up to a maximum Capital Contribution as determined on a case-by-case basis by the General Partner in its sole discretion. The Initial Payment is due and payable upon execution and delivery of the related subscription agreement unless the General Partner shall specify one or more other dates on which the Initial Payment shall be due. The General Partner may invest such Capital Contributions in temporary investments until needed to fund one or more Partnership investments. Any Capital Contributions made to the Partnership by a Limited Partner must be paid in cash. The obligation of a Limited Partner to pay its Initial Payment Amount in full shall be limited by the provisions of this Section 6.1 and Section 9.4. The General Partner may decide not to make or participate in any further investments at any time in its sole discretion. (b) The remaining portion of each Limited Partner's Commitment shall be due upon a call date to be determined in the sole discretion of the General Partner. The Fund shall provide each Limited Partner with a written notice at least 20 days prior to the date of draw down (each, a "Capital Draw"); provided that the General Partner may not call more than 25% of a Limited Partner's Commitment (in addition to the Initial Payment) prior to the date designated by XL Capital for the payment of annual bonuses in 2002. Any Capital Contributions made to the Fund by a Limited Partner must be paid in cash. (c) Pending the making of investments for which the Partnership requires capital, payments for the purchase price of each Limited Partner's Units may be invested in temporary investments as the General Partner determines. Amounts invested in temporary investments may not be subject to redemption by Limited Partners, although income earned from temporary investments may be distributed to the Limited Partners in the General Partner's sole discretion. The General Partner shall dispose of temporary investments from time to time as needed to fund specific Partnership investments or otherwise fund Partnership expenses. Amounts held at the end of the Investment Period that have not been used for Partnership purposes and which the Partnership has not allocated for future use shall be distributed to the Limited Partners in proportion to their allocable share of amounts originally contributed to the Partnership. (d) The General Partner shall contribute to the capital of the Partnership an amount equal to 4.0 times the aggregate amount contributed by the Limited Partners. The General Partner shall 15 make its Capital Contributions at the time the Partnership funds its investments or otherwise to fund Partnership expenses. The General Partner's Capital Contribution shall receive the benefit of a preferred return (the "Fixed Return"), at the rate of 10% per annum. (e) METHOD OF FUNDING; NO COMPENSATION OR LOANS. Capital Contributions shall be made by check or wire transfer of immediately available funds or such other method as may be acceptable to the General Partner, to the account specified in the related Payment Notice. Other than as set forth in this Section 6.4, no Partner shall be entitled to any interest or compensation by reason of its Capital Contributions or by reason of serving as a Partner. No Partner shall be required to lend any funds to the Partnership; PROVIDED that the General Partner may in its sole discretion make loans to the Partnership on arms'-length terms based on the Reference Rate or the cost of borrowing such funds by XL Capital. (f) Upon the termination of the Commitment Period, a Limited Partner will not be required to make any further Capital Contributions to the Partnership, except to the extent necessary to (i) cover certain expenses borne by the Partnership and (ii) make follow-on Investments in existing Investments of the Partnership in an aggregate amount of up to 25% of the Partnership's aggregate capital commitments from the Partners. In no event will a Limited Partner be required to fund at any time an amount in excess of his or her undrawn capital commitment at such time. 6.2. SUBSEQUENT CLOSINGS. The General Partner may, in its sole discretion, admit additional Limited Partners or permit any existing Limited Partner to increase its Capital Contribution at one or more subsequent closings ("Subsequent Closings"), provided that no Subsequent Closing shall occur after the six-month anniversary of the Closing. No additional Limited Partner shall be admitted to the Partnership unless such Limited Partner has executed a subscription agreement in the form provided to it by the General Partner (and which subscription agreement has been accepted by the General Partner) and the conditions set forth in Sections 9.1, 9.2 and 9.3 are satisfied (with such conditions being interpreted as applying to the admission of an additional Limited Partner rather than an assignment or transfer of an interest in the Partnership). Each Limited Partner that is admitted or increases its Capital Contribution at a Subsequent Closing shall also make an additional contribution and/or payment, if any, determined by the General Partner in its sole discretion that represents the increase in the value of investments held by the Partnership, if any, plus an additional amount thereon at the rate calculated by the General Partner from the date of the initial closing. Limited Partners who are admitted to the Partnership after the Closing or who increase their commitments will be treated generally as if such subscriptions had been accepted at the date of the first closing. 6.3. FURTHER CAPITAL CONTRIBUTIONS. No Limited Partner shall be required to purchase additional Units or make any Capital Contribution to the Partnership in excess of such Limited Partner's Unpaid Capital Commitment. After all Capital Contributions have been made and all contributions, including required General Partner contributions, have been invested by the Partnership, if the General Partner determines it to be in the best interests of the Partnership, the Partnership may, subject to subsection 4.2(b), offer existing or new Limited Partners the opportunity to make additional contributions to the Partnership's capital on a PRO RATA basis, as determined by the General Partner. 16 6.4. DEFAULTING LIMITED PARTNER. (a) If any Limited Partner fails to make, when due, any portion of the Capital Contribution required to be contributed by such Limited Partner pursuant to this Agreement or such Limited Partner's Subscription Agreement or to make any other payment required to be made by such Limited Partner hereunder or thereunder when required to be made, then the General Partner may provide written notice of such failure to such Limited Partner. If such Limited Partner fails to make such Capital Contribution or other payment within ten (10) Business Days after receipt of such notice, then, (i) such Limited Partner shall be deemed a "Defaulting Limited Partner" and (ii) the following Sections 6.4(b) through (e) shall apply; PROVIDED that the General Partner in its sole discretion may choose not to designate a Limited Partner as a Defaulting Limited Partner and may agree to waive or permit the cure of any default by a Defaulting Limited Partner, subject to such conditions as the General Partner and the Defaulting Limited Partner may agree on. (b) A Defaulting Limited Partner shall forfeit to the General Partner, as recompense for damages suffered, as follows: (i) with respect to such Limited Partner's Pro Rata Share and related distributions, the General Partner shall assess a 25% reduction, (ii) with respect to such Limited Partner's interest in the vested portion of the Additional Share, the General Partner shall assess a 25% reduction and (iii) the General Partner shall cause such Defaulting Limited Partner to be excluded from any vote of the Limited Partners. Any proceeds forfeited by the Defaulting Limited Partner pursuant to the preceding sentence shall be distributed to the General Partner. (c) The General Partner may, in its sole discretion cancel such Defaulting Limited Partner's right to make further Capital Contributions and allocate such right to the General Partner or one of its Affiliates, and the Defaulting Limited Partner shall not be permitted to make any further Capital Contributions to the Partnership in the event of such cancellation. (d) No right, power or remedy conferred upon the General Partner in this Section 6.4 shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy whether conferred in this Section 6.4 or now or hereafter available at law or in equity or by statute or otherwise. No course of dealing between the General Partner and any Defaulting Limited Partner and no delay in exercising any right, power or remedy conferred in this Section 6.4 or now or hereafter existing at law or in equity or by statute or otherwise shall operate as a waiver or otherwise prejudice any such right, power or remedy. (e) The powers conferred upon the General Partner in this Article VI shall not limit any actions available at law or in equity or by statute that the General Partner may undertake against a Defaulting Limited Partner. Each Limited Partner acknowledges by its execution of a Subscription Agreement that it has been admitted to the Partnership in reliance upon the terms of this Agreement, that the General Partner may have no adequate remedy at law for a breach hereof and that damages resulting from a breach hereof may be impossible to ascertain at the time hereof or of such breach. 6.5. INTEREST. No Limited Partner shall receive interest on such Limited Partner's Capital Contributions. 17 6.6. TAXABLE YEARS. The taxable year of the Partnership shall be the calendar year unless otherwise required under the Code. Subject to such requirements, the General Partner shall have the authority to change the ending date of the tax year if the General Partner shall determine that such change is necessary or appropriate; PROVIDED that the General Partner shall promptly give notice of any such change to the Limited Partners. ARTICLE 7 TAX ADVANCES 7.1. TAX ADVANCES. To the extent the General Partner reasonably determines that the Partnership is required by law to withhold or to make tax payments on behalf of or with respect to any Partner ("Tax Advances"), the General Partner may withhold such amounts and make such tax payments as so required. All Tax Advances (together with interest thereon at the Reference Rate if such Tax Advance took the form of a tax payment rather than withholding) made on behalf of a Partner shall, at the option of the General Partner, (i) be paid promptly to the Partnership by the Partner on whose behalf such Tax Advances were made or (ii) be repaid by reducing the amount of the current or next succeeding distribution or distributions which would otherwise have been made to such Partner or, if such distributions are not sufficient for that purpose, by so reducing the proceeds of liquidation otherwise payable to such Partner. Whenever the General Partner selects option (ii) pursuant to the preceding sentence for repayment of a Tax Advance by a Partner, for all other purposes of this Agreement such Partner shall be treated as having received all distributions (whether before or upon liquidation) unreduced by the amount of such Tax Advance. Each Partner hereby agrees to indemnify and hold harmless the Partnership and the other Partners from and against any liability (including, without limitation, any liability for taxes, penalties, additions to tax, interest or failure to withhold taxes) with respect to income attributable to or distributions or other payments to such Partner. ARTICLE 8 DISTRIBUTIONS; WITHDRAWAL 8.1. GENERAL PARTNER DISCRETION. Distributions may be made in cash or in kind in the General Partner's sole discretion. The General Partner may in its sole discretion offer Limited Partners the right to elect whether to receive cash or in kind distributions in connection with any distribution and, following any such election, may (but shall not be required to) make a distribution to some Limited Partners in cash and to others in kind. The General Partner shall have no obligation to make cash or non-cash distributions to the Limited Partners prior to termination of the Partnership, and may invest the earnings on and proceeds of any of the Partnership's investments in temporary investments in its sole discretion. The General Partner in its sole discretion shall determine the aggregate amount of and payment dates for any cash and non-cash distributions to Partners after establishing such reasonable reserves as the General 18 Partner deems appropriate in its sole discretion for working capital, contingencies or other items and for the satisfaction of liabilities (including, without limitation, contingent liabilities and the Fixed Return) as they come due or may come due. 8.2. DISTRIBUTIONS. (a) Distributions from the Partnership generally shall be made in the following order and priority: (i) first, 100% to the General Partner until the amount received by the General Partner is equal to the General Partner's Fixed Return; (ii) second, 100% to the General Partner until the General Partner has received an amount from that distribution (not including the amount received in (i) above) equal to the Capital Contributions made by the General Partner; (iii) third, 100% to the Limited Partners until the Limited Partners have received an amount equal to the Limited Partners' Capital Contributions; and (iv) thereafter, 90% to the Limited Partners and 10% to the General Partner. Provided that for the avoidance of doubt nothing in this Agreement shall be construed as giving a Limited Partner a direct interest in the assets of the Partnership or any particular asset of the Partnership. (b) Distributions to Limited Partners shall be apportioned among each Limited Partner based upon a fraction, the numerator of which is the Capital Contributions by such Limited Partner (or his or her predecessor in interest) and the denominator of which is the aggregate Capital Contributions of all Limited Partners. (c) Notwithstanding Section 8.2(a), amounts otherwise distributable to the Partners shall be paid instead to the Partners (other than any Defaulting Limited Partners, regardless of their tax status) such that in a fiscal year each Partner has received an amount equal to 40% of the amount of taxable income that would be allocated to such Partner if the Partnership were treated as a flow-through entity for tax purposes; PROVIDED that the General Partner may, at its sole discretion, vary the amounts distributed pursuant to this Section 8.2(c); PROVIDED, FURTHER, that the timing of any distribution, pursuant to this Section 8.2(c) shall be determined by the General Partner in its sole discretion. The amount distributable to any Partner pursuant to any clause of Section 8.2 shall be reduced by the amount distributed to such Partner pursuant to this Section 8.2(c) and the amount so distributed under this Section 8.2(c) shall be deemed to have been distributed to the extent of such reduction pursuant to such clause of Section 8.2 for purposes of making the calculations required by Sections 8.2. (d) As provided further in Section 9.4(a), distributions which would otherwise be made to a Limited Partner pursuant to the foregoing may instead be made to the General Partner with respect to the Unvested Interest of such Limited Partner whose employment with a member of the XL Group has terminated other than due to such Limited Partner's death or Disability. 19 8.3. NON-CASH DISTRIBUTIONS. Whenever possible non-cash distributions, including distributions under Sections 10.3(a) and (b), shall be made PRO RATA among the Partners in accordance with the terms of Section 8.2. The value of any non-cash assets that are distributed shall be determined by the General Partner in accordance with Section 11.4 hereof. 8.4. WITHHOLDING. The Partnership shall withhold from any amounts otherwise distributable to any Partner the amounts required by law to be withheld for income tax or other purposes. Any amounts so withheld and any taxes paid or withheld with respect to the income of the Partnership (or any entity in which it invests including the Investment Company) shall be treated as having been distributed to the Partners in respect of which such payments were made (as reasonably determined by the General Partner) for all purposes of this Agreement. 8.5. WITHDRAWAL. No Partner shall have the right to withdraw such Partner's Capital Contribution or any part thereof from the Partnership or to receive a return of such Partner's Capital Contribution or any part thereof except upon termination and dissolution of the Partnership, except as may be permitted by the General Partner in its sole discretion. 8.6. REQUIRED WITHDRAWAL. (a) A Limited Partner may be required to withdraw from the Partnership if the General Partner determines, in its sole discretion, that such withdrawal is necessary or advisable because (i) by virtue of that Limited Partner's interest in the Partnership, the Partnership is reasonably likely to be subject to any reporting requirement under the Securities Exchange Act of 1934, as amended, (ii) the Limited Partner is no longer employed by a member of the XL Group or, in the case of Immediate Family Members, is no longer an Immediate Family Member of an employee of the XL Group or (iii) by virtue of that Limited Partner's interest in the Partnership, the Partnership is likely to experience a significant delay, extraordinary expense or other material adverse effect on the Partnership or any of its Affiliates or any of its investments or prospective investments. (b) Withdrawals pursuant to this Section 8.6 shall be effected by the Partnership's purchase of the Limited Partner's interest in the Partnership at a price equal to the fair market value of such interests as determined from time to time by the General Partner in its sole discretion. ARTICLE 9 TRANSFERABILITY OF INTERESTS; VESTING; TERMINATION OF EMPLOYMENT 9.1. RESTRICTIONS AND CONDITIONS ON TRANSFERS OF UNITS. (a) No direct or indirect sale, exchange, transfer, assignment, pledge, creation of a security interest in, or encumbrance on, or other disposition by a Limited Partner of all or any portion of such Limited Partner's Units or any economic interest therein (including without limitation by means of any participation or swap transaction (each, a "Transfer")) shall be made except, with the prior written consent of the General Partner (which consent may be withheld in the sole discretion of the General Partner), and then only to Immediate Family Members of the transferor Limited Partner, trusts or to other 20 investment vehicles established for the benefit of the Limited Partner or his or her Immediately Family Members or to the General Partner. The General Partner may not transfer any of its interest in the Partnership. (b) Any Transfer otherwise permitted under this Article 9 may only be made if: (i) such transfer would not violate the Securities Act or any state securities or "Blue Sky" or other securities laws applicable to the Partnership or the interest to be transferred; and (ii) such transfer would not cause the Partnership to become subject to the Investment Company Act. (c) The General Partner, each Limited Partner, the Partnership and their respective officers, directors, agents and control persons shall be indemnified by a Limited Partner (the "Transferring Limited Partner") to the fullest extent permitted by law for any and all losses, claims, damages and expenses arising out of or reasonably incurred in connection with any claim, action or demand against the General Partner, the Partnership or any such indemnified person relating to the Partnership, its properties, business or affairs (including, without limitation, attorneys' fees and expenses and any amounts paid in settlement or compromise of any such claim, action or demand) against expenses for which the Partnership, the General Partner or such other person has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by them in connection with such action, suit or proceeding and arising out of, relating to, or in connection with, any Transfer of all or any portion of such Transferring Limited Partner's Units, or in connection with the admission of a substituted Limited Partner to the Partnership; PROVIDED, HOWEVER, that the foregoing indemnification shall not apply if a court of competent jurisdiction makes a final decision that such claim, action or demand resulted primarily from such indemnified person's willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Partnership or such person's office. (d) Subject to Section 6.1 and Section 9.4, no Unit may be subdivided into fractional Units. 9.2. ASSIGNEES. (a) The Partnership shall not recognize for any purpose any purported Transfer of all or any portion of the Units of a Limited Partner unless the provisions of Section 9.1 shall have been complied with and there shall have been filed with the Partnership a Transfer Application, in form satisfactory to the General Partner, executed and acknowledged by both the seller, transferor or assignor and the purchaser, transferee or assignee and such Transfer Application contains the acceptance by the purchaser, transferee or assignee of all of the terms and provisions of this Agreement, represents that such Transfer was made in accordance with all applicable laws and regulations and contains the purchaser's, transferee's or assignee's power of attorney identical to that provided in Section 12.1 and, in addition, appoints the General Partner his or her attorney-in-fact to execute this Agreement on behalf of such purchaser, transferee or assignee. Any Transfer shall be recognized by the Partnership as effective as of the date on which such Transfer Application is filed with the Partnership. 21 (b) Any Limited Partner who shall assign all of his or her Units shall not cease to be a Limited Partner unless and until a substituted Limited Partner is admitted in his or her stead. (c) A person who is the assignee of all or any portion of the Units of a Limited Partner, but does not become a substituted Limited Partner and desires to make a further assignment of such Units, shall be subject to all the provisions of this Article 9 to the same extent and in the same manner as any Limited Partner desiring to effect a Transfer of his or her Units. 9.3. SUBSTITUTED LIMITED PARTNERS. (a) No Limited Partner shall have the right to substitute a purchaser, assignee, transferee, donee, heir, legatee, distributee or other recipient of all or any portion of such Limited Partner's Units as a Limited Partner in his or her place. Any such purchaser, assignee, transferee, donee, heir, legatee, distributee or other recipient of Units shall be admitted to the Partnership as a substituted Limited Partner only with the consent of the General Partner, which consent shall be granted or withheld in the sole and absolute discretion of the General Partner and may be arbitrarily withheld, and executed by all necessary parties and recorded, as and to the extent required by law, in the proper records of each jurisdiction in which such recordation is necessary to qualify the Partnership to conduct business or to preserve the limited liability of the Limited Partners. The Limited Partners hereby consent to the admission of a substituted Limited Partner whose admission has been consented to by the General Partner. Any such consent by the General Partner and the Limited Partners may be evidenced by the execution by the General Partner of an amendment to this Agreement on its behalf and on behalf of all Limited Partners evidencing the admission of such person as a Limited Partner and the making of any filing required by law. (b) To the extent required by law, the General Partner shall file an amended certificate of limited partnership with the appropriate authorities of each jurisdiction in which the Partnership transacts business for the purpose of adding as substituted Limited Partners all assignees of Units previously approved by the General Partner for admission as substituted Limited Partners and deleting any person who is no longer a Limited Partner or reflecting accurately Capital Contributions of the Limited Partners or to receive any interest thereon. (c) No person shall become a substituted Limited Partner until such person shall have delivered a Transfer Application as provided in Section 9.2(a) and become a party to this Agreement. For the purpose of allocating profits, losses and distributable cash, a person shall be treated as having become, and as appearing in the records of the Partnership as, a Limited Partner on such date as the Transfer to such person was recognized by the Partnership pursuant to Section 9.2(a). 9.4. TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF LIMITED PARTNER. (a) GENERALLY. If a Limited Partner's employment with a member of the XL Group is terminated for any reason (other than termination of employment for Cause or due to such Limited Partner's death or Disability), then the General Partner shall have the right, exercisable in its sole discretion by written notice sent by certified mail (or its equivalent) or via overnight courier to such Limited Partner (or his or her Representative) within 30 days following such termination of employment, to allocate and distribute profits and losses that are realized after the date of termination in respect of the unvested portion of such Limited Partner's interest in the 22 Partnership (the "Unvested Interest"), including distributions pursuant to Article 8, to the General Partner. Vested Interest shall be determined according to the schedule set forth below (the "Vesting Schedule"). The General Partner shall conclusively determine in its sole and absolute discretion the closing date for purposes of the Vesting Schedule.
PERCENTAGE OF VESTED ON OR AFTER BUT PRIOR TO INTEREST IN ADDITIONAL SHARE - ------------------------------------------------------------------------------------------------------------------- Immediately First Anniversary of Closing 0.00% First Anniversary of Closing Second Anniversary of Closing 25.00% Second Anniversary of Closing Third Anniversary of Closing 50.00% Third Anniversary of Closing Fourth Anniversary of Closing 75.00% Fourth Anniversary of Closing N/A 100.00%
The Limited Partner whose employment has been terminated shall continue to receive an allocation and distribution of profits and losses on his or her Units equal to the aggregate of (i) such Limited Partner's Pro Rata Share and (ii) the vested portion of such Limited Partner's Additional Share of such profits and losses as of the termination date. In such event of termination, the Limited Partner shall not be required to return to the Partnership any cash or assets that were distributed prior to the date of termination. (b) TERMINATION FOR CAUSE. Upon a Limited Partner's termination of employment by the XL Group for Cause, the General Partner shall have the right, exercisable in its sole discretion, to purchase such Limited Partner's Units including (i) such Limited Partner's Pro Rata Share and (ii) the vested portion of such Limited Partner's Additional Share of Units at the lower of their cost price or fair market value as determined by the General Partner in its sole discretion. (c) TERMINATION DUE TO DEATH OR DISABILITY. Upon a Termination due to death or Disability, a Limited Partner's interest in the Additional Share shall immediately vest in full. Such departed Limited Partner shall therefore be entitled to share fully in distributions and allocations of Partnership profits and losses equal to the aggregate of (i) such Limited Partner's Pro Rata Share and (ii) the full amount of such Limited Partner's Additional Share. (d) If a Limited Partner's employment with any member of the XL Group is terminated for any reason (including death), the Partnership shall have the right to require that Limited Partner to withdraw from the Partnership in accordance with Section 8.6(a). Upon such withdrawal, the Partnership shall purchase the Limited Partner's Units in accordance with Section 8.6(b). 23 (e) RELATED DEFINITIONS (i) A Limited Partner's "Pro Rata Share" of profits is such Limited Partners share of profits based upon the percentage that his or her capital commitments represent of the total capital commitments to the Partnership; (ii) A Limited Partner's "Additional Share" of profits is such Limited Partner's share in excess of the Pro Rata Share and includes such Limited Partner's pro rata share of the profits on the General Partner's Commitment. (iii) A "Limited Partner" for purposes of reference to employment shall be the individual employee of the XL Group to whom a Limited Partner Interest was originally offered, notwithstanding any subscription by, or transfer to, a Immediate Family Member or other Person in accordance with this Agreement at the request of such individual employee of the XL Group. 9.5. DISPOSITION OF GENERAL PARTNER'S INTEREST. The General Partner shall not dispose of its interest in the Partnership as a general partner. No disposition of the General Partner's interest shall be effective, and the General Partner shall not cease to be a general partner of the Partnership. ARTICLE 10 TERM AND DISSOLUTION OF THE PARTNERSHIP 10.1. EVENTS CAUSING DISSOLUTION. The Partnership shall be dissolved upon the expiration of its term as set forth in Section 2.6 hereof, or sooner upon the happening of any of the following events (each an "Event of Dissolution"): (a) the resignation, withdrawal, dissolution, bankruptcy commencement of liquidation proceedings or insolvency of the General Partner or the occurrence of any other event that causes the General Partner to cease to be a general partner of the Partnership under the Act; PROVIDED that the Partnership shall not be dissolved or required to be wound up upon the happening of such event if at the time of such event there is at least one remaining general partner of the Partnership and such remaining general partner carries on the business of the Partnership or within 90 days after such event, all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional general partners; or (b) the conversion of the Partnership to corporate form pursuant to Section 2.6 hereof. Upon dissolution, the General Partner shall file a notice of dissolution with the Registrar of Exempted Limited Partnership in accordance with the Act. The Partnership shall not be dissolved until the assets of the Partnership have been distributed as provided in Section 11.2, and the notice of dissolution has been filed by the General Partner as aforesaid. 24 10.2. WINDING UP. Upon the occurrence of an Event of Dissolution, the Partnership shall be wound up and liquidated The General Partner or, if there is no general partner or following an Event of Dissolution, a liquidator appointed by XL Capital, shall proceed with the Dissolution Sale and the Final Distribution. In the Dissolution Sale, the General Partner or such liquidator shall use its best efforts to reduce to cash and cash equivalent items such assets of the Partnership as the General Partner or such liquidator shall deem it advisable to sell, subject to obtaining fair value for such assets and any tax or other legal considerations (including legal restrictions on the ability of a Limited Partner to hold any assets to be distributed in kind). 10.3. FINAL DISTRIBUTION. After the Dissolution Sale, the proceeds thereof and the other assets of the Partnership shall be distributed in one or more installments in the following order of priority: (a) to satisfy all creditors of the Partnership, including the payment of the expenses of the winding-up, liquidation and dissolution of the Partnership and in accordance with the terms agreed among them and otherwise on a pro rata basis, Partners who are creditors (other than with respect to distributions owing to them or to former Partners hereunder) either by the payment thereof or the making of reasonable provision therefor, which shall include establishing reserves, in amounts determined by the General Partner or such liquidator, which the General Partner or such liquidator may deem necessary to meet any other obligations or liabilities (whether contingent, unforeseen or otherwise) of the Partnership other than to the Partners or former partners in respect of distributions owing to them hereunder, which reserves may be paid over by the General Partner or such liquidator to any attorney at law or other acceptable party, as escrow agent, to be held for disbursement in payment of any such liabilities or obligations. At the expiration of such period as shall be deemed advisable by the General Partner or such liquidator, any balance shall be distributed in accordance with this Section 10.3; and (b) The remaining proceeds, if any, plus any remaining assets of the Partnership, shall be applied and distributed to the Partners in the same manner as distributions under Section 8.2 . The General Partner or such liquidator shall use its reasonable best efforts to sell the assets of the Partnership and distribute the proceeds therefrom in cash to the Partners. Notwithstanding the foregoing, if assets other than cash are to be distributed, such distribution shall be subject to the provisions of Section 8.2. To the extent deemed desirable by the General Partner or such liquidator, distributions may be made into a liquidating trust or other appropriate entity, and reserves may be established for contingencies; PROVIDED, HOWEVER that the time during which distributions may be withheld by such trust or other entity may not extend beyond the term of the Partnership pursuant to Section 2.6 without the consent of a majority in interest of the Limited Partners, unless such distribution would be illegal. If a Limited Partner shall, upon the advice of counsel, determine that there is a reasonable likelihood that any distribution in kind of an asset would cause such Limited Partner to be in violation of any law, regulation or order, such Limited Partner and the General Partner or the liquidator shall each use its best efforts to make alternative arrangements for the sale or transfer into an escrow account of any such distribution on mutually agreeable terms. 25 ARTICLE 11 BOOKS AND RECORDS; ACCOUNTING; APPRAISAL; TAX MATTERS AND ELECTIONS 11.1. BOOKS AND RECORDS. The General Partner shall keep or cause to be kept complete and appropriate records and books of account of the Partnership and the Register. The books and records of the Partnership, including information relating to the sale by the General Partner or any of its Affiliates of securities, property, goods or services to the Partnership, shall be maintained by the General Partner at the office of the Partnership or of the General Partner and shall be available for examination there by any Limited Partner or his or her duly authorized Representatives at any and all reasonable times for any purpose reasonably related to the Limited Partner's interest as a limited partner of the Partnership, subject to certain reasonable limitations, to address concerns with respect to, among other things, the confidentiality of certain information. Such information shall be used only for a purpose reasonably related to the Limited Partner's interest as a limited partner of the Partnership. The Register shall reflect the name and address of each of the Partners, the amount and date of the Capital Contribution or Contributions of each Partner and the amount and date of any payment to any of the Limited Partners representing a return of any part of their Capital Contributions in the event of any such distribution. The Register shall be open to inspection by the public during normal business hours in the Cayman Islands. The Partnership may maintain such other books and records and may provide such financial or other statements as the General Partner in its sole discretion deems advisable. 11.2. ACCOUNTING BASIS; FISCAL YEAR. The books and records and the financial statements and reports of the Partnership shall be kept on such basis as the General Partner shall determine. The fiscal year of the Partnership shall be the calendar year. 11.3. BANK ACCOUNTS. The General Partner shall maintain the Partnership bank accounts and brokerage accounts, and withdrawals shall be made only in the regular course of the Partnership business on such signature or signatures as the General Partner may determine. Temporary investments are deemed activities in the ordinary course of Partnership business. 11.4. APPRAISAL. If at any time the value of one or more non-cash assets of the Partnership is required to be determined under this Agreement, the General Partner shall value such assets, taking into account all relevant factors, including without limitation restrictions on transfer, other legal or contractual restrictions and the costs and expenses of disposition of such assets. In the sole discretion of the General Partner, the valuation of any non-cash assets may be made by independent third parties appointed by the General Partner and deemed qualified by the General Partner to render an opinion as to the value of Partnership assets, using such methods and considering such information relating to such assets as such persons may deem appropriate. The valuation of Partnership assets reflected in an appraisal made in good faith by the General Partner or any adviser or consultant retained for such purpose shall be conclusive and binding on the Limited Partners. 26 11.5. REPORTS. Within 180 days after the end of each fiscal year, or as soon as practicable thereafter, the General Partner shall send to each person who was a Limited Partner at any time during the fiscal year then ended (i) such tax information as shall be necessary for the preparation by such Limited Partner of his or her United States federal and state income tax returns; (ii) a report of the investment activities of the Partnership during such year; and (iii) financial statements of the Partnership audited by its accountants. 11.6. TAX MATTERS(a) . The General Partner may cause the Partnership to make all elections required or permitted to be made by the Partnership under the Code and not otherwise expressly provided for in this Agreement. NOTWITHSTANDING THE FOREGOING, THE PARTNERSHIP WILL ELECT TO BE TREATED AS A CORPORATION FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, AND NO ELECTION TO THE CONTRARY SHALL BE MADE. ARTICLE 12 MISCELLANEOUS PROVISIONS 12.1. POWER OF ATTORNEY. Each Limited Partner hereby irrevocably constitutes and appoints the General Partner, with full power of substitution to its Affiliates or successors permitted hereunder, the true and lawful attorney-in-fact and agent of such Limited Partner, to execute, acknowledge, verify, swear to, deliver, record and file, in its or its assignee's name, place and stead, all in accordance with the terms of this Agreement, all instruments, documents and certificates which may from time to time be required by the laws of the Cayman Islands, any other jurisdiction in which the Partnership conducts or plans to conduct its affairs in the future, or any political subdivision or agency thereof to effectuate, implement and continue the valid existence and affairs of the Partnership, including, without limitation, the power and authority to verify, swear to, acknowledge, deliver, record and file: (i) all certificates and other instruments, including any amendments to this Agreement, which the General Partner deems appropriate to form, qualify or continue the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the Cayman Islands and all other jurisdictions in which the Partnership conducts or plans to conduct its affairs, (ii) any amendments to this Agreement or any other agreement or instrument which the General Partner deems appropriate to (A) effect the addition, substitution or removal of any Limited Partner or General Partner pursuant to this Agreement or (B) effect any other amendment or modification to this Agreement, but only if such amendment or modification is duly adopted in accordance with the terms hereof, (iii) all conveyances and other instruments which the General Partner deems appropriate to reflect the dissolution and termination of the Partnership pursuant to the terms hereof, 27 (iv) all instruments relating to transfers of interests of Limited Partners or to the admission of any substitute Limited Partner undertaken as permitted hereunder, (v) all certificates of assumed name and such other certificates and instruments as may be necessary under the fictitious or assumed name statutes from time to time in effect in the Cayman Islands and all other jurisdictions in which the Partnership conducts or plans to conduct its affairs, and (vi) any other instruments determined by the General Partner to be necessary or appropriate in connection with the proper conduct of the business of the Partnership and which do not adversely affect the interests of any of the Limited Partners. Such attorney-in-fact and agent shall not, however, have the right, power or authority to amend or modify this Agreement when acting in such capacities, except to the extent authorized herein. This power of attorney shall terminate upon the bankruptcy, dissolution, disability or incompetence of the General Partner. The power of attorney granted herein shall be deemed to be coupled with an interest, shall be irrevocable, shall survive and not be affected by the dissolution, bankruptcy or legal disability of any Limited Partner and shall extend to its successors and assigns; and may be exercisable by such attorney-in-fact and agent for all Limited Partners (or any of them) by listing all (or any) of such Limited Partners required to execute any such instrument, and executing such instrument acting as attorney-in-fact. Any Person dealing with the Partnership may conclusively presume and rely upon the fact that any instrument referred to above, and that is executed by such attorney-in-fact and agent, is authorized, regular and binding, without further inquiry. If required, each Limited Partner shall execute and deliver to the General Partner within five days after the receipt of a request therefor, such further designations, powers of attorney or other instruments as the General Partner shall reasonably deem necessary for the purposes hereof. 12.2. AMENDMENTS OF THIS AGREEMENT. (a) Except for any amendment to this Agreement made pursuant to Section 12.2(c), an amendment to this Agreement may be proposed by the General Partner by submitting to all Limited Partners the text of such amendment and a statement of the purpose of such amendment. Subject to paragraph (c) below, the proposed amendment shall be deemed adopted 15 days after the General Partner submits such notice, unless Limited Partners holding two-thirds of outstanding Units have, by the end of such notice period, delivered their written disapproval thereof to the General Partner. (b) Notwithstanding any other provision of this Section to the contrary, no amendment may: (i) expand the obligations of any Partner under this Agreement or convert the Units of any Limited Partner into the interest of a General Partner or adversely affect the limited liability of any Limited Partner, in each case without the approval of such Partner; (ii) amend Section 6.3 or this Section 12.2 without the approval of all Partners; or 28 (iii) modify the method provided in Article 8 of distributing distributable cash; without the approval of the General Partner and Limited Partners holding a majority of the outstanding Units that are adversely affected by such modification. (c) In addition to any amendments otherwise authorized hereby, this Agreement may be amended from time to time by the General Partner without the consent of any of the Limited Partners to add to the representations, duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein; to cure any ambiguity or correct or supplement any provisions hereof which may be inconsistent with any other provision hereof, or correct any printing, stenographic or clerical errors or omissions; to admit one or more additional Limited Partners or one or more substituted Limited Partners, or withdraw one or more Limited Partners, in accordance with the terms of this Agreement; PROVIDED that no amendment shall be adopted pursuant to this subsection (c) unless (x) in the case of any amendment referred to in clause (i) or (ii) of this subsection, such amendment would not adversely alter the interest of a Limited Partner in connection with the allocation of any income, gains or losses or distributions or the timing thereof without the consent of such Partner, and (y) such amendment would not, in the opinion of counsel for the Partnership (which opinion the Limited Partners are legally entitled to rely on), alter, or result in the alteration of, the limited liability of the Limited Partners or the status of the Partnership as a corporation for federal income tax purposes. The General Partner shall send each Limited Partner a copy of any amendment adopted pursuant to this paragraph (c). (d) Upon the adoption of any amendment to this Agreement, such amendment (or an amended restated Agreement) shall be executed by the General Partner for itself and on behalf of the Limited Partners pursuant to the power of attorney granted in Section 12.1, and, if such amendment affects the certificate of limited partnership of the Partnership under the Act, or any other filing made in any other state, the General Partner, pursuant to the power of attorney granted in Section 12.1, shall execute and file proper amendments and filings in the Cayman Islands and in each jurisdiction in which such action is necessary for the Partnership to conduct business or to preserve the limited liability of the Limited Partners. 12.3. ARBITRATION. Any dispute, controversy or claim arising out of or in connection with or relating to this Agreement or any breach or alleged breach hereof shall (to the extent not prohibited by governing law) be determined and settled by arbitration in Bermuda pursuant to the rules then in effect of the American Arbitration Association. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in the courts of Bermuda. 12.4. NOTICES. Except as otherwise specifically provided herein, All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered, sent by electronic mail, or mailed, registered mail, first-class postage paid, if to any Limited Partner, at such Limited Partner's address or such Limited Partner's electronic mail address as set forth in such Limited Partner's Subscription Agreements, if to the Partnership, to the General Partner, c/o Robert Lusardi, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda, or to the General Partner by facsimile at (441) 292-8618, 29 Attention: Robert Lusardi, or to such other person, electronic mail address or address as any Limited Partner shall have last designated by notice to the General Partner, and in the case of a change in address by the General Partner, by notice to the Limited Partners. Any notice shall be deemed to have been duly given if personally delivered, sent by electronic mail or sent by the mails and shall be deemed received, unless earlier received, (A) if sent by certified or registered mail, return receipt requested, when actually received, (B) if sent by overnight mail or courier, when actually received, (C) if sent by facsimile transmission, on the date sent provided confirmatory notice is sent by first-class mail, postage prepaid, (D) if delivered by electronic mail, when sent and (E) if delivered by hand, on the date of receipt. 12.5. BINDING PROVISIONS. The covenants and agreements contained herein shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective parties hereto. 12.6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Cayman Islands, without regard to principles of conflict of laws. In particular, the Partnership is formed pursuant to the Act, and the rights and liabilities of the Partners shall be as provided therein, except as herein otherwise expressly provided. 12.7. JURISDICTION; VENUE. (a) Any action or proceeding against the parties relating in any way to this Agreement may be brought and enforced in the courts of Bermuda, and the parties irrevocably submit to the non-exclusive jurisdiction of the foregoing courts in respect of any such action or proceeding. The parties irrevocably waive, to the fullest extent permitted by law, any objection that they may now or hereafter have to the laying of venue of any such action or proceeding in the courts of Bermuda and any claim that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (b) IN ADDITION, EACH OF THE PARTIES HERETO (IN ITS OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS EQUITY HOLDERS) WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) RELATED TO OR ARISING OUT OF THIS AGREEMENT 12.8. COUNTERPARTS. This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that not all the parties have signed the same counterpart. The General Partner may execute any document by facsimile signature of a duly authorized officer. 12.9. SEPARABILITY OF PROVISIONS. If for any reason any provision or provisions hereof that are not material to the purposes or business of the Partnership or the Limited Partners' Units are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement that are valid. 12.10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties. This Agreement supersedes any prior agreement or understanding among the parties and may not be modified or amended in any manner other than as set forth herein. 30 12.11. PARAGRAPH TITLES. Article, section and paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. 12.12. WAIVER OF RIGHT OF PARTITION AND ACCOUNTING. Each Partner hereby waives its right of partition and accounting. 12.13. EFFECTIVENESS. This Agreement shall become effective as of the day and year first above written upon execution hereof by the General Partner and the Initial Limited Partner and, as to each additional Limited Partner, when the prescribed subscription hereto by such party has been accepted by the General Partner. (Signatures to follow) 31 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a deed on the date first above written. GENERAL PARTNER: XL CAPITAL PARTNERS CORPORATION By: ______________________________________________ Title: Name: INITIAL LIMITED PARTNER: __________________________________________________ ________________, solely to reflect his withdrawal ADDITIONAL LIMITED PARTNERS: All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney now and hereafter executed in favor of and delivered to the General Partner. By: GENERAL PARTNER, as Attorney-in-Fact: XL CAPITAL PARTNERS CORPORATION By: _____________________________________ Title: Name: EX-12.1 10 c23420_ex12-1.txt RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 XL CAPITAL LTD RATIO OF EARNINGS TO FIXED CHARGES FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999, 1998 AND 1997 (U.S. dollars in thousands)
2001 2000 1999 1998 1997 ---------------------------------------------------------------- Earnings: Pre-tax income from continuing operations ......................... $(833,916) $376,734 $390,252 $636,670 $776,550 Fixed charges .......................... 70,072 38,166 41,215 36,898 33,250 --------- -------- -------- -------- -------- Distributed income of equity investees.. 3,662 4,987 1,266 25,319 30,564 ---------------------------------------------------------------- Subtotal ............................... (760,182) 419,887 432,733 698,887 840,364 Less: Minority interest ................ 2,113 1,093 220 749 308 ---------------------------------------------------------------- Total earnings ............................ (762,295) 418,794 432,513 698,138 840,056 ---------------------------------------------------------------- FIXED CHARGES: Interest costs ......................... 65,350 32,147 37,378 33,444 29,622 Rental expense at 30% (1) .............. 4,722 6,019 3,837 3,454 3,628 ---------------------------------------------------------------- Total fixed charges ....................... 70,072 38,166 41,215 36,898 33,250 ---------------------------------------------------------------- RATIO OF EARNINGS TO FIXED CHARGES (2)..... -- 11.0 10.5 18.9 25.3 ================================================================
(1) 30% represents a reasonable approximation of the interest factor. (2) For the year ended December 31, 2001, earnings were insufficient to cover fixed charges by $832.4 million. EX-21.1 11 c23420_ex21-1.txt LIST OF SUBSIDIARIES Exhibit 21.1 EXEL HOLDINGS LIMITED - CAYMAN ANNUITY & LIFE RE (HOLDINGS) LTD (6.73%) - BERMUDA EXEL Acquisition Ltd. - CAYMAN* GCR Holdings Limited - CAYMAN (IN LIQUIDATION) Reeve Court Holdings Ltd - BERMUDA* XL Life Ltd - BERMUDA* Reeve Court General Partner Limited - BERMUDA Reeve Court 4 Limited Partnership - BERMUDA Reeve Court 6 Limited Partnership - BERMUDA XL Insurance (Bermuda) Ltd - BERMUDA* Element Reinsurance Ltd -BERMUDA EXEL Cumberland Limited - UK Pareto Partners (30%) - UK Pareto Australia - AUSTRALIA Vision Loyal Ltd. (30%) - UK Financial Security Assurance International Ltd. (20%) - BERMUDA InQuisCapital Holdings (Bermuda) Limited - BERMUDA InQuisLogic (Bermuda) Limited - BERMUDA RiskConnect Limited - BERMUDA IPT Compliance Limited - UK Sovereign Risk Insurance Ltd. (50%) - BERMUDA XL Winterthur International (Bermuda) Ltd - BERMUDA XL Winterthur International Services Ltd - BERMUDA International Insurance Consulting Services Limited - BERMUDA XL Capital Products Ltd - BERMUDA XL Financial Assurance Ltd. (85%) - BERMUDA XL Financial Solutions Ltd - BERMUDA XL Global Services (Bermuda) Ltd. - BERMUDA X.L. Holdings Barbados Ltd. - BARBADOS X.L. America, Inc. - DE XL Capital Investment Partners, Inc. - DE Brockbank Insurance Services, Inc. - CA ECS INC. - PA ECS Alternative Market Services, Inc. - PA ECS Childcare Center, Inc. - PA ECS Claims Administrators, Inc. - PA ECS Holdings, Inc. - DE ECS International, Inc. - DE ECS Asesores en Seguros Medioambientales,S.A.R.L. - SPAIN ECS Asesores en Aseguramiento de Riesgos Ambientales S.A. de C.V. (1%) - MEXICO The ECS Group, Ltd - UK ECS Underwriting ltd. - UK ECS Asesores en Aseguramiento de Riesgos Ambientales S.A. de C.V. (99.9%) - MEXICO Risk & Insurance Services, Inc. - BARBADOS ECS Risk Control, Inc. - PA ECS Underwriting, Inc. - PA Element Re Advisors Inc. - DE Element Re Capital Products Inc. - DE Global Credit Analytics, Inc. - DE NAC Re Corporation - DE XL Reinsurance America Inc. - NY Greenwich Insurance Company - CA Warranty Support Services, Inc. - NY Indian Harbor Insurance Company - ND Intercargo Corporation - DE Intercargo International Limited - BVI International Advisory Services Inc. - IL XL Specialty Insurance Company - IL Intercargo Insurance Company H.K. Ltd. - HK NAC Re Financial Services, Inc. - DE NAC Re Investment Holdings, Inc. - DE XL Capital Assurance Inc. - NY XL Insurance Company of New York, Inc. - NY Winterthur International America Insurance Company - WISCONSIN Winterthur International America Underwriters Insurance Co. - OKLAHOMA Winterthur International Services of America Inc. - WISCONSIN XLCA Admin LLC - NY XLCDS LLC - NY XL Financial Administrative Services - DE XL Global, Inc. - DE XL Insurance, Inc. - DE X.L. Global Services, Inc. - DE XL Life and Annuity Holding Company - DE XL Investments Ltd - BERMUDA First Cumberland Bank, Inc. - BARBADOS Garrison Investments Inc. - BARBADOS Annuity & Life Re (Holdings) Ltd (5.6%) - BERMUDA InQuisLogic Ltd. - BARBADOS InQuisLogic Inc. - DE Kensington Investments Inc. - BARBADOS XLB Partners Inc. - BARBADOS IBC Cumberland Holdings, Inc. - DE Cumberland California, Inc. - DE Pareto Hughes Research (30%) - DE Pareto Partners (30%) - CA Cumberland New York, Inc. - DE Pareto (30%) - NY RiskConnect Ltd. - BARBADOS RiskConnect Inc. - DE X.L. Investment Private Trustee Ltd. - BERMUDA X.L. Investments (Barbados) Inc. - BARBADOS TAM Investment Holdings Inc. - DE XL (Luxembourg) SaRL LUXEMBOURG XL (Finance) SaRL - LUXEMBOURG XL (International) SaRL - LUXEMBOURG XL (Services) SaRL LUXEMBOURG XL (Specialty) SaRL LUXEMBOURG XL (Western Europe) SaRL LUXEMBOURG Le Mans Re - FRANCE XL Swiss Holdings Ltd - SWITZERLAND XL Re Latin America Ltd SWITZERLAND XL Latin America Investments Ltd BERMUDA Latin America Reinsurance Servicos Ltda. BRAZIL XL Winterthur International Insurance (Switzerland) SWITZERLAND XL Winterthur International Re (WIRE) SWITZERLAND XL Winterthur (UK) Holdings Limited - UK XL Winterthur International Insurance Company Limited - UK Winterthur International Employee Benefits, S.A. - SPAIN Winterthur Properties Limited - UK Winterthur International Argentina SA Compania de Seguros - ARGENTINA Winterthur Holdings (Proprietary) Limited - SOUTH AFRICA Winterthur Properties (Proprietary) Limited - SOUTH AFRICA Winterthur International Insurance Company Limited - SOUTH AFRICA X.L. One Ltd. - BERMUDA XL Europe Ltd (50%) - REPUBLIC OF IRELAND XL Trading Partners Ltd (90%) - BERMUDA X.L. Two Ltd. - BERMUDA XL Financial Services (Ireland) Ltd XL Europe Ltd (50%) - REPUBLIC OF IRELAND XL Australia Pty Ltd - AUSTRALIA XL Prevent Ltd - UK X.L. Property Holdings Limited - BERMUDA* MID OCEAN LIMITED - CAYMAN Mid Ocean Holdings Limited - BERMUDA* Ridgewood Holdings Limited - BERMUDA Admiral Group Limited (10%) XL London Market Group plc - UK Brockbank Holdings Limited - UK Baltusrol Holdings Limited - BERMUDA County Down Limited - UK Dornoch Limited - UK Stonebridge Underwriting Limited - UK XL London Market Services Ltd - UK Brockbank Personal Lines Limited - Syndicates 253/2253 Cassidy Brockbank Limited (Dormant) Denham Syndicate Management Limited Brockbank Syndicate Services Limited Sextant International Limited (25%) XL London Market Ltd- SYNDICATES 588/861/990/1209 XL Capital International Limited - UK XL Capital Finance (Europe) plc - UK XL Financial Products Ltd - UK XL Re Ltd - BERMUDA ECS Reinsurance Company Inc. - BARBADOS Global Capital Underwriting Ltd. - UK NAC Re International Holdings - UK NAC Reinsurance International Limited - UK XL Services UK Limited - UK Sunshine State Holdings Corporation (24%) - FL The Shipowners Insurance and Guaranty Company Ltd. (4.6%) - BERMUDA XL INVESTMENT MANAGEMENT LTD - BERMUDA XL CAPITAL PARTNERS CORPORATION - CAYMAN (General Partner of each of XL Capital Partners I, L.P. and XL Principal Partners I, L.P.) XL Capital Partners I, L.P. - CAYMAN (Managing Member of XL Capital Principal Partners I, L.L.C.) XL Capital Principal Partners I, L.L.C. - DE XL Principal Partners I, L.P. - CAYMAN (Managing Member of XL Capital Principal Partners I, L.L.C.) XL Capital Principal Partners I, L.L.C. - DE * Held through EXEL Holdings Limited EX-23.1 12 c23420_ex23-1.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 [PRICEWATERHOUSECOOPERS LLP LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of XL Capital Ltd on Form S-3 (File No. 333-76988), Form S-3 (File No. 333-75240), Form S-3 (File No. 333-73410), Form S-3 (File No. 333-72018), Form S-3 (File No. 333-66976), Form S-3 (File No. 333-62257), Form S-8 and Form S-3 (File No. 333-62137), Form S-8 (File No. 333-81451) and Form S-8 (File No. 333-46250) of our report dated February 12, 2002 on our audits of the financial statements and financial statement schedules of XL Capital Ltd as at December 31, 2001. PRICEWATERHOUSECOOPERS LLP New York, New York March 21, 2002 EX-99.5 13 c23420_ex99-5.txt FINANCIAL STATEMENTS Exhibit 99.5 XL CAPITAL ASSURANCE INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 XL CAPITAL ASSURANCE INC. DECEMBER 31, 2001, 2000 AND 1999 CONTENTS TO AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- PAGE Report of Independent Accountants 1 Balance Sheets at December 31, 2001 and 2000 2 Statements of Operations and Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 3 Statements of Changes in Shareholder's Equity for the years ended December 31, 2001, 2000 and 1999 4 Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 5 Notes to Financial Statements 6-22 [LOGO OMITTED] - -------------------------------------------------------------------------------- PRICEWATERHOUSECOOPERS LLP 1177 Avenue of the Americas New York NY 10036 Telephone (646) 471 4000 Facsimile (646) 471 4100 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of XL Capital Assurance Inc.: In our opinion, the accompanying balance sheets and the related statements of operations and comprehensive income, of changes in shareholder's equity and of cash flows present fairly, in all material respects, the financial position of XL Capital Assurance Inc. (the "Company"), a wholly owned subsidiary of XL Reinsurance America, Inc. (formerly known as NAC Reinsurance Corporation), at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York March 12, 2002 XL CAPITAL ASSURANCE INC. 2 BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (U.S. DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- AS OF DECEMBER 31, 2001 2000 ASSETS Investments Fixed maturities available for sale, at fair value (amortized cost: 2001 - $76,940; 2000 - $80,962) $ 78,586 $ 82,425 Short-term investments, at fair value, which approximates cost 38,681 - -------- -------- TOTAL INVESTMENTS 117,267 82,425 Cash and cash equivalents 39,204 5,004 Premiums receivable 1,070 27 Accrued investment income 897 986 Reinsurance balances recoverable on unpaid losses 1,786 6 Deferred acquisition costs, net (1,118) - Prepaid reinsurance premiums 41,727 - Current Federal income tax recoverable 1,651 - Deferred Federal income tax benefit 3,495 - Intangible assets - acquired licenses 11,529 - Other assets 922 313 -------- -------- TOTAL ASSETS $218,430 $ 88,761 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Deferred premium revenue $ 44,933 $ - Unpaid losses and loss adjustment expenses 1,846 7 Reinsurance premiums payable 17,648 19 Payable for securities purchased 12,974 - Current Federal income tax payable - 321 Accounts payable and accrued expenses 3,767 877 Intercompany payable to affiliates 11,309 4,121 Deferred Federal income tax liability - 532 -------- -------- TOTAL LIABILITIES 92,477 5,877 -------- -------- Shareholder's Equity Common stock (par value $7,500 and $6,000 for December 31, 2001 and December 31, 2000, 2,000 shares authorized, issued and outstanding for December 31, 2001 and 2,500 shares authorized, issued and outstanding for December 31, 2000) 15,000 15,000 Additional paid-in capital 119,154 70,000 Accumulated other comprehensive income (net of deferred Federal income tax liability of: 2001 - $592; 2000 - $512) 1,054 951 Accumulated deficit (9,255) (3,067) -------- -------- TOTAL SHAREHOLDER'S EQUITY 125,953 82,884 -------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $218,430 $ 88,761 ======== ======== See accompanying notes to financial statements. XL CAPITAL ASSURANCE INC. 3 STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001 2000 1999 REVENUES Gross premiums written $ 52,285 $ 27 $ - Ceded premiums written (48,843) (26) - -------- -------- -------- Net premiums written 3,442 1 - Change in net unearned premiums (3,206) - - -------- -------- -------- Net premiums earned (net of ceded earned premium of $7,116 in 2001 and $26 in 2000) 236 1 - Net investment income 5,719 5,517 4,859 Net realized capital gains (losses) 776 (621) (6,276) -------- -------- -------- Total revenues 6,731 4,897 (1,417) -------- -------- -------- EXPENSES Net losses and loss adjustment expenses (net of ceded losses and loss adjustment expenses of $1,779 in 2001 and $6 in 2000) 59 1 - Policy acquisition costs (124) - - Operating expenses 18,918 6,459 163 -------- -------- -------- Total expenses 18,853 6,460 163 -------- -------- -------- Loss before Federal income tax benefit (12,122) (1,563) (1,580) -------- -------- -------- Current Federal income tax (benefit) expense (1,829) (414) 802 Deferred Federal income tax (benefit) expense (4,105) 27 (7) -------- -------- -------- (5,934) (387) 795 -------- -------- -------- NET LOSS (6,188) (1,176) (2,375) -------- -------- -------- Other comprehensive income (loss) 103 2,325 (1,677) -------- -------- -------- COMPREHENSIVE (LOSS) INCOME $ (6,085) $ 1,149 $ (4,052) ======== ======== ========
See accompanying notes to financial statements. XL CAPITAL ASSURANCE INC. 4 STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001 2000 1999 COMMON SHARES Number of shares, beginning of year 2,500 2,500 4,000 Shell acquisition - retirement of XL Capital Assurance Inc. shares (2,500) - - Shell acquisition - issue new XL Capital Assurance Inc. shares 2,000 - - 25% Predecessor Company stock dividend - - 1,000 Merger retirement of Predecessor Company shares - - (5,000) Issuance of Company shares - - 25,000 -------- -------- -------- Number of shares, end of year 2,000 2,500 25,000 ======== ======== ======== COMMON STOCK Balance-beginning of year $ 15,000 $ 15,000 $ 2,000 25% Predecessor Company stock dividend - - 500 Merger par value increase from adjusted $1,000 to $6,000 per share - - 12,500 -------- -------- -------- Balance-end of year 15,000 15,000 15,000 -------- -------- -------- ADDITIONAL PAID-IN CAPITAL Balance-beginning of year 70,000 70,000 98,000 Contribution of The London Assurance of America Inc. 24,154 - - Capital contribution 25,000 - - Predecessor Company extraordinary dividend - - (15,000) Predecessor Company 25% stock dividend - - (500) Merger par value increase from adjusted $1,000 to $6,000 per share - - (12,500) -------- -------- -------- Balance-end of year 119,154 70,000 70,000 -------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance-beginning of year 951 (1,374) 303 Net change in unrealized appreciation of investments, net of deferred Federal tax expense of $80 in 2001, expense of $512 in 2000 and benefit of $163 in 1999 103 2,325 (1,677) -------- -------- -------- Balance-end of year 1,054 951 (1,374) -------- -------- -------- ACCUMULATED DEFICIT Balance-beginning of year (3,067) (1,891) 484 Net loss (6,188) (1,176) (2,375) -------- -------- -------- Balance-end of year (9,255) (3,067) (1,891) -------- -------- -------- TOTAL SHAREHOLDER'S EQUITY $125,953 $ 82,884 $ 81,735 ======== ======== ========
See accompanying notes to financial statements. XL CAPITAL ASSURANCE INC. 5 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001 2000 1999 CASH PROVIDED BY OPERATING ACTIVITIES: Net loss $ (6,188) $ (1,176) $ (2,375) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Net realized (gains) losses on sale of investments (776) 621 6,276 Amortization of premium on bonds 117 120 100 Amortization of fair value of acquired licenses 244 - - Increase in unpaid losses and loss adjustment expenses, net 59 1 - Increase in unearned premiums, net 3,206 - - Deferred acquisition costs 1,118 - - Increase in reinsurance premiums payable 17,629 19 - Increase in premiums receivable (1,043) (27) - Decrease (increase) in accrued investment income 89 (151) (391) (Decrease) increase in current Federal income tax (1,972) (414) 600 Deferred Federal income tax liability (4,105) 27 (7) Increase in accounts payable and accrued expenses 2,892 750 127 Increase (decrease) in intercompany payable to affiliates 7,188 4,201 (80) Other (1,308) (313) - -------- -------- -------- Total adjustments 23,338 4,834 6,625 -------- -------- -------- Net cash provided by operating activities 17,150 3,658 4,250 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed maturities and short-term investments 74,052 15,215 162,747 Proceeds from sale of preferred stock - 3,708 - Proceeds from maturity of fixed maturities and short-term investments 132,394 24,235 1,041 Purchase of fixed maturities and short-term investments (238,649) (45,069) (185,735) Payable for securities purchased 12,974 - - Purchase of preferred stock - - (2,045) -------- -------- -------- Net cash used in investing activities (19,229) (1,911) (23,992) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash of contributed company 11,279 - - Capital contribution 25,000 - - Predecessor company extraordinary dividend - - (15,000) -------- -------- -------- Net cash provided by financing activities 36,279 - (15,000) -------- -------- -------- Increase (decrease) in cash and cash equivalents 34,200 1,747 (34,742) Cash and cash equivalents-beginning of year 5,004 3,257 37,999 -------- -------- -------- Cash and cash equivalents-end of year $ 39,204 $ 5,004 $ 3,257 ======== ======== ======== Taxes paid $ 143 $ - $ 202 ======== ======== ========
See accompanying notes to financial statements. XL CAPITAL ASSURANCE INC. 6 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND BUSINESS XL Risk Solutions, Inc. (the "Predecessor Company") was formed on October 8, 1998 by XL America, Inc. ("XLA") and was licensed as a Connecticut property and casualty insurer on January 22, 1999. The Predecessor Company did not write any direct or assumed business and was re-licensed as a Connecticut financial guarantee insurer and re-domesticated to New York on September 30, 1999, where it immediately merged with XL Capital Assurance Inc. (the "Company"). The Company is a licensed New York financial guarantee insurer focused on providing credit enhancement for domestic and international asset-backed structured finance, essential infrastructure project finance and public finance transactions. The Company was formed on September 13, 1999 and is the survivor by merger on September 30, 1999 with the Predecessor Company. During 2000, the Company obtained approval from the Monetary Authority of Singapore to form and license a financial guarantee branch office. On November 30, 1999, all of the Company's common stock was purchased from XLA by XL Reinsurance America, Inc. ("XL RE AM"), formerly known as NAC Reinsurance Corporation, which is an indirect wholly owned subsidiary of XLA. XLA is an indirect wholly owned subsidiary of XL Insurance (Bermuda) Ltd ("XL Insurance"). XL Insurance is an indirect wholly owned subsidiary of XL Capital Ltd ("XL Capital"), a financial service holding company registered in the Cayman Islands. XLA is XL Capital's U.S. Holding Company. On February 22, 2001, XL RE AM acquired all the outstanding shares of The London Assurance of America, Inc. ("LAA"). Prior to its purchase by XL RE AM, LAA was a New York domiciled property and casualty insurance company that was licensed in 44 states and the District of Columbia. LAA was incorporated in New York on July 25, 1991. The business previously underwritten through LAA, together with all the liabilities of LAA, were ceded effective July 1, 2000 to an affiliate of LAA under an assumption reinsurance arrangement. XL RE AM caused the Company to merge with and into LAA on the day of acquisition (with LAA as the surviving entity) and for LAA to simultaneously adopt the name of XL Capital Assurance Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which for insurance companies differ in certain respects from the accounting practices prescribed or permitted by the New York Insurance Department ("NYID") (See Note 13). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the Company's balance sheets at December 31, 2001 and 2000 and the reported amounts of revenue and expenses in the statement of operations for the years ended December 31, 2001, 2000 and 1999. Actual results may differ from those estimates. Certain comparative figures have been reclassified to conform with current year's presentations. INVESTMENTS All the Company's investments in fixed maturity securities (bonds and preferred stocks) are designated as available for sale and accordingly are carried at fair value. The fair value of investments is based on quoted market prices received from a nationally recognized pricing service or dealer quotes. Any resulting unrealized gains or losses are reflected as a separate component of shareholder's equity and included in other comprehensive income, net of applicable deferred federal XL CAPITAL ASSURANCE INC. 7 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- income taxes. Bond discount and premium are amortized on the effective yield method over the remaining terms of securities acquired. For mortgage-backed securities for which prepayment risk may be significant, assumptions regarding prepayments are evaluated periodically and revised as necessary. Any adjustments required due to the resulting change in effective yields are recognized in current income. Short-term investments comprise securities with maturities equal to or greater than ninety days but less than one year. Short-term investments purchased with an original maturity of ninety days or less are classified as cash equivalents. All investment transactions are recorded on a trade date basis. Realized gains and losses on sale of investments are determined on the basis of specific identification. Investment income is recognized when earned. PREMIUM REVENUE RECOGNITION Up-front premiums are earned pro-rata to the amount of risk outstanding over the expected period of coverage. The amount of risk outstanding is equal to the sum of the par amounts of debt insured. Premiums are allocated to each bond maturity and are earned on a straight-line basis over the term of each maturity. Installment premiums are earned over each installment period - typically a month or quarter. Deferred premium revenue and prepaid reinsurance premiums represent the portion of premiums written which is applicable to the unexpired terms of policies in force. If an insured issue is retired or defeased prior to the end of the expected period of coverage, the remaining deferred premium, less any amount credited to a refunding issue reinsured by the Company, will be recognized in income at that time. LOSSES AND LOSS ADJUSTMENT EXPENSES The Company maintains a non-specific general reserve which is based on industry loss experience. This reserve is available to be applied to new case basis reserves that may be established for claims on current outstanding insured principal and interest in the future. This general reserve is established for expected levels of losses associated with currently insured issues and is based on a portion of premiums earned to date. The Company will, on an ongoing basis, monitor these reserves and may periodically adjust such reserves based on the Company's actual loss experience, its future mix of business, and future economic condition. Losses and loss adjustment expenses in the accompanying balance sheets are reflected gross of reinsurance. DEFERRED ACQUISITION COSTS Certain costs incurred, primarily relating to and varying with the production of new business, have been deferred. These costs include direct and indirect expenses related to underwriting, marketing and policy issuance, rating agency fees and premium taxes, net of reinsurance ceding commissions. The Company considers the present value of future premiums under installment contracts written when determining the recoverability of deferred acquisition costs. The deferred acquisition costs are amortized over periods in which the related premiums are earned. REINSURANCE In the normal course of business, the Company seeks to reduce the loss that may arise from events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance premiums ceded and commissions recorded thereon are earned on a pro-rata basis over the period the reinsurance coverage is provided. INTANGIBLE ASSETS - ACQUIRED LICENSES The fair value of acquired licenses represents the excess of the cost of acquisition over the tangible net assets acquired. This intangible asset, attributed to the acquisition of The London Assurance of America, Inc., is amortized by the straight-line method over 40 years. XL CAPITAL ASSURANCE INC. 8 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- INCOME TAXES Deferred Federal income taxes are provided for temporary differences between the tax and financial reporting basis of assets and liabilities that will result in deductible or taxable amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. SPECIAL PURPOSE VEHICLES The Company utilizes special purpose vehicles to a limited extent both directly and indirectly in the ordinary course of the Company's business. The Company provides financial guaranty insurance of structured transactions backed by pools of assets of specified types, municipal obligations supported by the issuers' ability to charge fees for specified services or projects, and corporate risk obligations including essential infrastructure projects and obligations backed by receivables from future sales of commodities and other specified services. The obligations related to these transactions are often securitized through off-balance sheet vehicles. In synthetic transactions, the Company guarantees payment obligations of counterparties, including special purpose vehicles, through credit default swaps referencing asset portfolios. The Company only provides financial guaranty insurance of these vehicles for fixed premiums at market rates but does not hold any equity positions or subordinated debt in these off-balance sheet arrangements. Accordingly, these vehicles are not consolidated. SEGMENT REPORTING As a monoline financial guaranty insurer, the Company has no reportable operating segments. 3. INVESTMENTS Bonds with a par value of $5,492,000 and a fair value of $5,594,102 at December 31, 2001 were on deposit with twelve states, the Commonwealth of Puerto Rico and the Republic of Singapore as required by those Insurance Regulatory Departments. The credit quality of fixed maturity securities at December 31, 2001 was as follows: PERCENT OF FIXED MATURITY RATING SECURITIES ------ -------------- AAA 91.3% AA 1.1% A 7.6% The high credit quality of the Company's investment portfolio of fixed maturity securities is primarily due to strict adherence to conservative investment guidelines. Unrealized gains and losses are deemed to be temporary and result from general interest rate movements. XL CAPITAL ASSURANCE INC. 9 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The amortized cost and fair value for fixed maturities as of December 31, 2001 and 2000 are as follows:
DECEMBER 31, 2001 ----------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ----------- ------------ --------- (DOLLARS IN THOUSANDS) Bonds U.S. Government and government agencies and authorities $ 51,525 $ 1,400 $ (74) $ 52,851 Special revenue and assessment obligations of agencies and authorities of government and political subdivisions 434 - (7) 427 Industrial and miscellaneous 24,981 619 (292) 25,308 -------- -------- -------- -------- TOTAL BONDS $ 76,940 $ 2,019 $ (373) $ 78,586 -------- -------- -------- --------
DECEMBER 31, 2000 ----------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ----------- ------------ --------- (DOLLARS IN THOUSANDS) Bonds U.S. Government and government agencies and authorities $ 66,277 $ 1,011 $ (23) $ 67,265 Special revenue and assessment obligations of agencies and authorities of government and political subdivisions 4,103 74 - 4,177 Industrial and miscellaneous 10,582 442 (41) 10,983 -------- -------- -------- -------- TOTAL BONDS $ 80,962 $ 1,527 $ (64) $ 82,425 -------- -------- -------- --------
The change in net unrealized gains (losses) consisted of:
YEAR ENDED DECEMBER 31, 2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) Fixed maturity securities $ 183 $ 2,377 $ (1,330) Preferred stock - 460 (510) -------- -------- -------- Change in net unrealized gains (losses) $ 183 $ 2,837 $ (1,840) -------- -------- --------
Fair value is based on the quoted market price or dealer quotes obtained from an independent source. The amortized cost and fair value of bonds at December 31, 2001 by contractual maturity is shown below. Actual maturity may differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. XL CAPITAL ASSURANCE INC. 10 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- AMORTIZED FAIR COST VALUE --------- --------- (DOLLARS IN THOUSANDS) Within one year $ - $ - Due after one year through five years 10,583 10,602 Due after five years through ten years 7,894 7,983 Due after ten years 8,057 8,212 --------- -------- Subtotal 26,534 26,797 Government agencies, authorities and other mortgage-backed securities 50,406 51,789 --------- -------- TOTAL $ 76,940 $ 78,586 ========= ======== The net investment income for the years ended December 31, 2001, 2000 and 1999 was as follows: 2001 2000 1999 ------- -------- -------- (DOLLARS IN THOUSANDS) Bonds U.S. Government and government agencies and authorities $ 3,201 $ 4,674 $ 1,010 Special revenue and assessment obligations of agencies and authorities of government and political subdivisions 3 98 2,770 Industrial and miscellaneous 1,779 476 63 Preferred stock - 142 184 Short-term investments 457 114 604 Cash equivalents 451 211 445 ------- ------- ------- SUBTOTALS 5,891 5,715 5,076 Less: investment expenses 172 198 217 ------- ------- ------- Net investment income $ 5,719 $ 5,517 $ 4,859 ======= ======= ======= Proceeds from sales of fixed maturities for the years ended December 31, 2001, 2000 and 1999 were $66,095,164, $15,215,182, and $80,605,573, respectively. The gross realized gains and gross realized losses for the years ended December 31, 2001, 2000 and 1999 related to the sale of investments were as follows (dollars in thousands): 2001 2000 1999 GAINS LOSSES GAINS LOSSES GAINS LOSSES ------- -------- ------ -------- ------- -------- Bonds $ 1,987 $ (1,032) $ 91 $ (126) $ 7 $ (6,310) Preferred stock - - - (586) 27 - ------- -------- ------ -------- ------- -------- TOTAL $ 1,987 $ (1,032) $ 91 $ (712) $ 34 $ (6,310) ======= ======== ====== ======== ======= ======== XL CAPITAL ASSURANCE INC. 11 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note: The net realized capital gains (losses) recorded in the 2001 Statement of Operations and Comprehensive Income includes a loss of $179, relating to the change in fair value of credit derivatives. 4. DEFERRED ACQUISITION COSTS Acquisition costs and ceding commissions are deferred for amortization against future periods. The commission income and costs deferred and related amortization are as follows (dollars in thousands): Year ended December 31, 2001: Balance, beginning of year $ - Costs deferred during the year -------- Ceding commission income (12,322) Premium taxes 591 Compensation and other acquisition costs 10,489 -------- Total (1,242) -------- Net deferred acquisition costs amortized during the year (124) -------- BALANCE, END OF YEAR $ (1,118) ======== 5. INFORMATION CONCERNING PARENT AND AFFILIATES EXPENSE SHARING AGREEMENT The Company entered into an Expense Sharing Agreement effective July 1, 2000 with an affiliated company, Global Credit Analytics, Inc. ("GCA"), a wholly owned subsidiary of XLA, that was approved by the NYID. GCA employs substantially all the personnel of the Company and provides the office space and furniture and equipment used by the Company. Under the terms of this agreement, operating expenses are allocated based on the requirements of Regulation 30 of the NYID. In 2001, operating expenses relating to infrastructure start up, rating agency financial strength ratings and business development activities were allocated to the Company under this agreement in the amount of $23,400,469. EMPLOYEE BENEFIT PLANS XLA maintains a qualified defined contribution pension plan for the benefit of all eligible employees and a non-qualified deferred compensation plan for the benefit of certain employees of GCA and some other subsidiaries (collectively, the "Plans"). GCA's discretionary contributions to both Plans are based on a fixed percentage of employee contributions and compensation as defined by the Plans. The Company's share of allocated pension expense, which is funded as accrued, was $670,889 and $97,206 for 2001 and 2000, respectively. FACULTATIVE QUOTA SHARE REINSURANCE TREATY On October 6, 1999, the Company entered into a Facultative Quota Share Reinsurance Treaty ("Treaty") with XL Financial Assurance Ltd. ("XLFA"), a Bermuda financial guarantee insurer, which is 86.8% owned by XL Insurance (Bermuda) Ltd. The remaining 13.2% is owned by Financial Security Assurance Holdings Ltd., an unrelated company. The Treaty was amended and restated on June 22, 2001. Under the terms of this agreement XLFA agrees to reinsure up to 90% of the Company's acceptable risks. The Company is allowed a 30% ceding commission on premiums written ceded under the terms of this agreement. XL Insurance (Bermuda) Ltd entered into a reinsurance agreement guarantee dated October 6, 1999 with the Company, that unconditionally and irrevocably guarantees the full and complete performance of all obligations of XLFA to the Company under the above described facultative quota XL CAPITAL ASSURANCE INC. 12 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- share reinsurance treaty. In connection with the amendment and restatement of the Treaty, XL Insurance entered into another reinsurance agreement guarantee on June 22, 2001. SURPLUS MAINTENANCE AGREEMENT The Company has entered into a Surplus Maintenance Agreement dated February 20, 2001 pursuant to which XL RE AM has agreed to maintain the Company's capital and surplus of at least $75,000,000. OFFICE SPACE SUB-LEASE The Company has entered into a sub-lease agreement effective June 1, 2000, and expiring September 30, 2002 for office space with XL Re Ltd (formerly XL Mid Ocean Reinsurance Ltd.), an affiliate, for its Singapore branch office. 6. NET PREMIUMS EARNED Premiums earned are comprised of: YEAR ENDED DECEMBER 31, 2001 2000 (DOLLARS IN THOUSANDS) Direct premium written $ 50,329 $ 27 Assumed premium written 1,956 - Reinsurance premium ceded (48,843) (26) -------- ------- Net premium written 3,442 1 Changed in unearned premiums (3,206) - -------- ------- Net premiums earned $ 236 $ 1 ======== ======= 7. REINSURANCE The Company utilizes reinsurance principally to increase aggregate premium capacity and to reduce the risk of loss on financial guarantee business underwritten. This reinsurance includes the Facultative Quota Share Reinsurance Treaty with an affiliate discussed in footnote 5 as well as other facultative reinsurance with non-affiliated reinsurers. The Company is liable with respect to reinsurance ceded to the extent that any reinsurance company fails to meet its obligation to the Company. The Company regularly monitors the financial condition of its reinsurers and believes there is no material unrecoverable reinsurance. 2001 -------------------------------------- AFFILIATE NON-AFFILIATE TOTAL ----------- ------------- -------- (DOLLARS IN THOUSANDS) Year ended December 31 Ceded premium written $ 47,359 $ 1,484 $ 48,843 Ceded premium earned 6,750 366 7,116 At December 31 Principal outstanding ceded 7,362,550 412,075 7,774,625 Unpaid losses and loss adjustment expense ceded 1,688 91 1,779 XL CAPITAL ASSURANCE INC. 13 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. OUTSTANDING EXPOSURE AND COLLATERAL The Company's policies insure the scheduled payments of principal and interest on asset-backed, structured single risk, and municipal obligations. The net exposure retained on any risk is subject to formalized underwriting guidelines. In year 2000, shortly after receiving its financial strength ratings, the Company issued one policy that insured the scheduled payment of principal and interest on an underlying obligation of $250,000,000 (before reinsurance). In 2001, the Company diversified its book of business both domestically and internationally, across multiple industries and by type of obligations insured. The principal amount insured as of December 31, 2001 (gross par outstanding and net of amounts ceded to reinsurers) categorized by risk class is as follows: RISK CLASSES - PAR EXPOSURES % OF (DOLLARS IN THOUSANDS) GROSS NET TOTAL NET --------- --------- ---------- Municipal risks $1,233,542 $123,354 18.5% Structured single risks 2,560,489 162,596 24.5% Asset backed risks 4,645,764 379,220 57.0% ---------- -------- ------- $8,439,795 $665,170 100.0% ========== ======== ====== The principal amounts insured as of December 31, 2001 and the terms of maturity are as follows:
YEARS TO MATURITY - PAR EXPOSURE MUNICIPAL NON-MUNI (DOLLARS IN THOUSANDS) GROSS NET GROSS NET ----------- --------- ----------- --------- 0 to 5 years $ 11,000 $ 1,100 $ 434,165 $ 43,416 5 to 10 years 80,895 8,089 4,140,678 235,258 10 to 15 years 92,685 9,269 951,650 95,165 15 to 20 years 415,745 41,574 691,738 69,174 20 years and beyond 633,217 63,322 988,022 98,803 ----------- --------- ----------- --------- $ 1,233,542 $ 123,354 $ 7,206,253 $ 541,816 =========== ========= =========== =========
The Company limits its exposure to losses from writing financial guarantees through a formal credit approval process and by maintaining a surveillance function which monitors insured transactions. Additionally, the Company mitigates credit risk by underwriting investment grade transactions, diversifying its portfolio and maintaining rigorous collateral requirements on asset-backed obligations, as well as through reinsurance. XL CAPITAL ASSURANCE INC. 14 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The gross principal amount of insured obligations in the asset-backed insured portfolio are backed by the following types of collateral:
ASSET -BACKED COLLATERAL TYPE - PAR EXPOSURE % OF TOTAL (DOLLARS IN THOUSANDS) GROSS NET NET PORTFOLIO ----------- --------- ------------- Collateralized debt $ 3,777,600 $ 292,403 43.9% Corporate assets 376,459 37,646 5.7% Consumer assets 491,705 49,171 7.4% ----------- --------- ------------- TOTAL $ 4,645,764 $ 379,220 57.0% =========== ========= =============
In its asset-backed business, the Company considers geographic concentration as a factor in its underwriting process. However, the existence of first loss protection in a typical asset-backed securitization, in addition to other factors, makes it difficult to attribute geographic exposure to deals collateralized by diversified pools of obligations. For asset-backed transactions, the Company considers a seller/servicer, industry, and type of collateral to be more relevant measures of diversification. The Company seeks to maintain a diversified portfolio of insured municipal obligations designed to spread its risk across a number of geographic areas. The following table sets forth, by state, the par outstanding of insured municipal securities as of December 31, 2001:
MUNICIPAL GEOGRAPHIC DISTRIBUTION - % OF PAR EXPOSURE % OF TOTAL NET (DOLLARS IN THOUSANDS) GROSS NET TOTAL NET PORTFOLIO ---------- -------- --------- --------- New York $ 608,455 $ 60,846 49.3% 9.1% California 399,195 39,919 32.3% 6.0% Puerto Rico 113,505 11,350 9.2% 1.7% Canada 99,387 9,939 8.1% 1.5% South Carolina 13,000 1,300 1.1% 0.2% ---------- -------- --------- --------- TOTAL $1,233,542 $123,354 100.0% 18.5% ========== ======== ========= =========
9. INCOME TAXES The Company's Federal income tax return is consolidated with XLA and its subsidiaries. Under a tax sharing agreement with XLA, tax charges and refunds to the Company are based on a separate return basis. At December 31, 2001 and 2000 the Company and/or the Predecessor Company had a federal tax receivable of $1,651,000 from and a payable of $321,000 to XLA, respectively. XL CAPITAL ASSURANCE INC. 15 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The U.S. Federal income tax rate applicable to ordinary income is 35%. The actual tax expense on income from operations differs from the "expected" amount for the following reasons:
2001 2000 1999 --------------------- ------------------- ------------------- PERCENT PERCENT PERCENT OF OF OF PRE-TAX PRE-TAX PRE-TAX AMOUNT LOSS AMOUNT INCOME AMOUNT INCOME ---------- -------- --------- -------- --------- -------- (DOLLARS IN THOUSANDS) "Expected" tax benefit $ (4,263) (35.0%) $ (546) (35.0%) $ (553) (35.0%) Adjustments: Fair value of licenses acquired 85 0.6% - 0.0% - 0.0% Valuation allowance (2,414) (19.8%) 217 14.0% 2,197 139.1% Other 658 5.4% (58) (3.8%) (849) (53.8%) --------- ------- -------- ------- --------- ------- ACTUAL TAX (BENEFIT) EXPENSE $ (5,934) (48.8%) $ (387) (24.8%) $ 795 50.3% ========= ======= ======== ======= ========= =======
The components of the net deferred Federal income tax position of the Company as of December 31, 2001 and 2000 were as follows:
DECEMBER 31, 2001 2000 ------- -------- (DOLLARS IN THOUSANDS) Deferred tax assets: Realized capital loss carryforward $ - $ 2,414 Net operating loss carryforward 3,754 - Deferred acquisition costs 391 - Other - net (57) 7 Less valuation allowance - (2,414) ------- ------- 4,088 7 ------- ------- Deferred tax liabilities: Unrealized appreciation of investments (561) (512) Accretion of discount (32) (27) ------- ------- NET DEFERRED FEDERAL INCOME TAX BENEFIT (LIABILITY) $ 3,495 $ (532) ======= =======
At December 31, 2001, the Company has net operating and capital loss carry-forwards available to offset future income and capital gains of $11,567,748. The majority of the net operating and capital loss carryforwards will expire in 2021. The Company believes that a valuation allowance is unnecessary in connection with the deferred tax asset. XL CAPITAL ASSURANCE INC. 16 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 10. ACCUMULATED OTHER COMPREHENSIVE INCOME The related tax effects allocated to the unrealized gains or losses component of other comprehensive income are as follows: BEFORE TAX NET OF TAX EXPENSE TAX ------- ------- ------- (DOLLARS IN THOUSANDS) Year ended December 31, 2001 Unrealized gains (losses) on investments Beginning balance $ 1,463 $ 512 $ 951 ------- ------ ------- Unrealized gains arising during year Other comprehensive income (unrealized gains arising during year) 183 80 103 ------- ------ ------- Ending balance $ 1,646 $ 592 $ 1,054 ======= ====== ======= Year ended December 31, 2000 Unrealized gains (losses) on investments Beginning balance $(1,374) $ - $(1,374) ------- ------ ------- Unrealized gains arising during year 3,458 512 2,946 Less: reclassification adjustments for losses realized in income (621) - (621) ------- ------ ------- Other comprehensive income 2,837 512 2,325 ------- ------ ------- Ending balance $ 1,463 $ 512 $ 951 ======= ====== ======= Year ended December 31, 1999 Unrealized gains (losses) on investments Beginning balance $ 466 $ 163 $ 303 ------- ------ ------- Unrealized losses arising during year (8,116) (163) (7,953) Less: reclassification adjustments for losses realized in operations (6,276) - (6,276) ------- ------ ------- Other comprehensive income (1,840) (163) (1,677) ------- ------ ------- Ending balance $(1,374) $ - $(1,374) ======= ====== ======= 11. COMMITMENTS The Company has entered into a sub-lease arrangement for office space with an affiliate, as more fully described in footnote 5 and also entered into a housing lease for a Singapore branch office employee. Future minimum rental payments are as follows: AFFILIATE NON-AFFILIATE TOTAL --------- ------------- ----- (DOLLARS IN THOUSANDS) 2002 $ 72.4 $ 48.1 $ 120.5 Rent expense for the year ended December 31, 2001 for affiliates and non-affiliates was $89.1 and $67.0, respectively. XL CAPITAL ASSURANCE INC. 17 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company is obligated to Citibank NA Singapore for an unsecured bank guarantee for approximately U.S. $292,000 should the Monetary Authority of Singapore draw down on this guarantee for the branch office's operations. 12. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS The following estimated fair values have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret the data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Investments: The fair value of fixed maturity investments is based primarily on quoted market prices received from a nationally recognized pricing service or dealer quotes. Cash and cash equivalents, receivable for investments sold, and payable for investments purchased: The carrying amounts of these items are a reasonable estimate of their fair value. Premiums receivable and reinsurance premiums payable: The fair value of receivables from insured and reinsurance premiums payable are assumed to approximate carrying value. Losses and loss expenses, net of reinsurance balances recoverable: The carrying value is assumed to be fair value, because the provision is established for non-specific expected levels of losses resulting from credit failures. Installment premiums: Consistent with industry practice, there is no carrying amount for installment premiums since the Company will receive premiums on an installment basis over the term of the insurance contract. The fair value is derived by calculating the present value of the estimated future cash flow stream (net premium and ceding commissions) discounted at 7%.
2001 2000 1999 -------------------- -------------------- -------------------- CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) ASSETS Fixed maturity investments $ 78,586 $ 78,586 $ 82,425 $ 82,425 $ 74,584 $ 74,584 Short-term investments 38,681 38,681 - - - - Cash 39,204 39,204 5,004 5,004 3,257 3,257 Preferred stock - - - 3,834 3,834 LIABILITIES Deferred premium revenue, net of prepaid reinsurance premiums 3,206 3,206 - - - - Loss and loss adjustment expenses, net of reinsurance recoverable on unpaid losses 60 60 1 1 - - Payable for securities purchased 12,974 12,974 - - - - OFF-BALANCE SHEET INSTRUMENTS Installment premiums - 31,987 - 122 - -
XL CAPITAL ASSURANCE INC. 18 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 13. STATUTORY ACCOUNTING PRACTICES AND DIVIDEND RESTRICTIONS GAAP differs in certain significant respects from accounting practices prescribed or permitted by the NYID. The following summarizes the significant differences between statutory accounting practices and GAAP.
2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) Net income: GAAP net loss $ (6,188) $ (1,176) $ (2,375) Statutory adjustments: Net losses and loss adjustment expenses 59 1 - Deferred Federal income tax (benefit) expense (4,105) 27 (7) Amortization of intangible assets 244 - - Deferred acquisition costs and ceding commissions, net 1,118 - - Purchase accounting adjustments for merged company 429 - - FAS 133 - change in fair value of credit derivatives 179 - - Other (22) (68) 111 -------- -------- -------- STATUTORY NET LOSS $ (8,286) $ (1,216) $ (2,271) ======== ======== ======== Shareholder's equity: GAAP shareholder's equity $125,953 $ 82,884 $ 81,735 Statutory adjustments: Deferred Federal income tax (benefit) liability (3,495) 532 (7) Net unpaid losses and loss adjustment expenses 60 1 - Contingency reserve (160) (1) - Non-admitted assets (828) (313) - Intangible assets - acquired licenses (11,529) - - Deferred acquisition costs and ceding commissions, net 1,118 - - Unrealized (appreciation) depreciation of investments (1,646) (1,463) 1,374 Other 70 44 111 -------- -------- -------- STATUTORY POLICYHOLDERS' SURPLUS $109,543 $ 81,684 $ 83,213 ======== ======== ========
The principal differences result from the following statutory accounting practices: o Bonds and redeemable preferred stock are carried at amortized cost rather than designated as available for sale and carried at market value. Unrealized gains or losses are not recognized as a separate component of shareholder's equity net of applicable deferred Federal income tax. o Assets such as furniture and equipment, leasehold improvements, prepaid expenses and deposits are non-admitted and are charged directly to policyholders' surplus. o A formula based contingency reserve is established by an appropriation of unassigned surplus. This reserve is calculated at the greater of a prescribed percentage applied to insured outstanding principal or 50% of premiums written, net of ceded reinsurance. The prescribed percentage varies by the type of outstanding principal. The reserve is available to be applied to new case basis reserves that are established for claims on current outstanding insured principal and interest in the future. A non-specific general reserve is not recorded. o Federal income taxes are provided only on taxable income for which income taxes are currently payable. o Purchase accounting adjustments are not recognized. XL CAPITAL ASSURANCE INC. 19 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- o Acquisition costs, net of ceding commissions, are charged to operations as incurred rather than as related premiums are earned. o Upfront premiums, on municipal business for example, are recognized as earned when related principal and interest have expired rather than over the expected coverage period. The National Association of Insurance Commissioners ("NAIC") adopted a new Statutory Accounting Principles Manual (referred to as the "Codification") effective January 1, 2001. The Codification replaces the prior Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting. The NYID adopted the Codification effective January 1, 2001, except where it is in conflict with New York Insurance Law and with certain specific prescribed additional practices and procedures. The Company adopted the requirements of Codification effective January 1, 2001 without any significant changes in opening statutory policyholders' surplus or in the way it reported its 2001 statutory financial position and results of operations. Under New York Insurance Law, the Company may pay dividends to XL RE AM, without the prior approval of the Superintendent of the NYID, only from earned statutory policyholders' surplus subject to the maintenance of the minimum capital and surplus requirement. In addition, the dividend, together with all other dividends declared or distributed by the Company during the preceding twelve months, may not exceed the lesser of 10% of its policyholders' surplus as shown in the Company's last filed statement, or adjusted net investment income, as defined, for such twelve-month period. As of December 31, 2001, the Company had no earned surplus available for the payment of dividends during the next twelve months. 14. SHAREHOLDER'S EQUITY The Predecessor Company was organized in the State of Connecticut on October 8, 1998 as a wholly owned subsidiary of XLA. The Commissioner of the Connecticut Insurance Department approved a pre-re-domestication extraordinary dividend in the amount of $15,000,000 by the Predecessor Company that was declared on September 24, 1999 and paid on November 10, 1999 to XLA. On September 24, 1999, the Predecessor Company declared a 25% stock dividend, comprising 1,000 shares of common stock with a par value of $500 per share, payable on September 30, 1999 to XLA to satisfy the NYID's minimum capitalization requirement for re-domestication. The Company was formed on September 13, 1999, with 2,500 shares of common stock at a par value of $6,000 per share. On September 30, 1999, the Company merged with the Predecessor Company immediately upon its re-domestication to New York. In the merger process, the 5,000 outstanding shares of the Predecessor Company's stock were retired and $12,500,000 of additional paid in capital was transferred to common stock of the Company to bring the par value of the 2,500 outstanding common shares from an adjusted $1,000 to $6,000 per share. On February 22, 2001, XL RE AM acquired all the outstanding shares of The London Assurance of America, Inc. ("LAA") for $24,154,000. Prior to its purchase by XL RE AM, LAA was a New York domiciled property and casualty insurance company that was licensed in 44 states and the District of Columbia. The business previously underwritten through LAA, together with all the liabilities of LAA, were ceded effective July 1, 2000 to an affiliate of LAA under an assumption reinsurance arrangement. XL RE AM caused the Company to merge with LAA on the day of acquisition and for LAA to simultaneously adopt the name of XL Capital Assurance Inc. In the merger process, the Company repurchased 500 shares of common stock with a par value of $6,000. The remaining 2,000 outstanding shares of common stock, $7,500 par value, were immediately converted into issued and outstanding shares of the merged company. This transaction had no effect on the Company's stated capital. XL CAPITAL ASSURANCE INC. 20 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- On August 23, 2001 XL Capital Assurance Inc. received a $25,000,000 cash infusion from XL America, the parent company as additional paid-in capital. The capital will be used for general working capital purposes and to support the Company's business strategy. 15. CREDIT DEFAULT SWAPS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activity," in June, 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activity. It requires that an entity recognize all derivatives as either other assets or other liabilities in the balance sheet and measure those instruments at fair value. The Company adopted SFAS No. 133, as amended, as of January 1, 2001. XL Capital Ltd., the Company's ultimate parent, established a committee and completed an implementation plan to identify all derivatives, evaluate risk management hedging strategies and determine appropriate valuation methodologies to assess the continuing impact that adoption of this statement will have on its financial position and results of operations. Credit default swaps meet the definition of a derivative under SFAS 133. The Company has recorded these products at management's estimate of fair value. Credit default swaps are considered by the Company to be, in substance, financial guaranty contracts as the Company has the intent to hold them to maturity. Therefore, the change in fair value is split between premiums, losses and loss adjustment expenses, and adjustments to fair value, which are reported in "net realized capital gains/losses". The level of fair value adjustments is dependent upon a number of factors including changes in interest rates, credit spreads and other market factors. The net fair value adjustment for the period ended December 31, 2001 was a loss of $138,000, which was recorded as follows: Earned premiums (net of ceded earned premiums of $989,000) $ 54,000 Losses and loss adjustment expenses (net of ceded incurred losses of $247,000) (13,000) Change in fair value of credit derivatives (179,000) ----------- Total fair value adjustment $ (138,000) ===========
16. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which states that all business combinations are to be accounted for using one method - the purchase method. It requires that business combinations be accounted for the same way as asset acquisitions are accounted for, based on values exchanged. On February 22, 2001, XL RE AM acquired all the outstanding shares of The London Assurance of America, Inc. for $24,154,000. The fair value of net assets acquired amounted to $24,770,000. The Company has estimated the fair value of intangible assets acquired, which represents insurance licenses, to be approximately $11,772,000. The merger with The London Assurance of America, Inc. was accounted for using the purchase method of accounting. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which changes the accounting for goodwill and other intangible assets in business combinations from an amortization approach to an impairment-only approach. The adoption of SFAS No. 142 on January 1, 2002 will result in the Company's discontinuation of amortization of its intangible asset since the intangible asset has an indefinite life. However, the Company will be required to test its intangible asset for impairment under the new standard, which could require an adjustment of the intangible asset balance if impairment is determined. Amortization of the intangible asset for the year ended XL CAPITAL ASSURANCE INC. 21 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- December 31, 2001 was $244,000. Management believes the implementation of this standard will not have a material effect on the Company's financial position. 17. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The company's liability for losses and loss adjustment expenses consists of general reserves. Activity in the liability for losses and loss adjustment expenses is summarized as follows (in thousands): 2001 2000 Balance at January 1 $ 7 $ - Less reinsurance recoverable 6 - ------- ------ Net balance at January 1 1 - Incurred losses and loss adjustment expense Current year 49 1 Prior years 10 - Recovered losses and loss adjustment expenses, net Current year - - Prior years - - ------- ------ Net balance December 31 60 1 Plus reinsurance recoverable 1,786 6 ------- ------ Balance at December 31 $ 1,846 $ 7 ======= ====== In 2000, the Company issued one policy and established a general reserve for $1,000 for origination of new business. During 2001, the Company increased its general reserve by $59,000, of which $49,000 was for originations of new business and $10,000 was for business originated in the prior year. XL CAPITAL ASSURANCE INC. 22 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (IN THOUSANDS) 2001 FIRST SECOND THIRD FOURTH FULL YEAR Gross premiums written $ 1,624 $ 7,778 $ 14,766 $ 28,117 $ 52,285 Net premiums written 130 727 1,425 1,160 3,442 Net premiums earned 10 50 126 50 236 Net investment income 941 1,880 1,456 1,442 5,719 Loss and loss expenses 3 12 32 12 59 Income (loss) before taxes (4,988) (897) (3,576) (2,661) (12,122) Net income (loss) (3,444) (1,069) (206) (1,469) (6,188) (IN THOUSANDS) 2000 FIRST SECOND THIRD FOURTH FULL YEAR Gross premiums written $ - $ - $ - $ 27 $ 27 Net premiums written - - - 1 1 Net premiums earned - - - 1 1 Net investment income 1,282 1,315 1,448 1,472 5,517 Loss and loss expenses - - - 1 1 Income (loss) before taxes 1,263 536 732 (4,094) (1,563) Net income (loss) 1,036 154 484 (2,850) (1,176) EX-99.6 14 c23420_ex99-6.txt FINANCIAL STATEMENTS [PRICEWATERHOUSECOOPERS LLP LETTERHEAD] - -------------------------------------------------------------------------------- XL FINANCIAL ASSURANCE LTD. (Incorporated in Bermuda) Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD ENDED DECEMBER 31, 1999 (expressed in U.S. dollars) [PRICEWATERHOUSECOOPERS LLP LETTERHEAD] - -------------------------------------------------------------------------------- FEBRUARY 12, 2002 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF XL FINANCIAL ASSURANCE LTD. In our opinion, the accompanying balance sheet and the related statements of income and comprehensive income, changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of XL FINANCIAL ASSURANCE LTD at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the two years ended December 31, 2001 and for the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS CHARTERED ACCOUNTANTS XL FINANCIAL ASSURANCE LTD. Balance Sheets AS AT DECEMBER 31, 2001 AND 2000 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 2001 2000 $ $ -------------------------- ASSETS: Investments : Fixed maturities, at fair value (amortized cost: 2001 - $418,904,214; 2000 - $363,291,817) 420,914,072 367,210,274 Short-term investments, at fair value (amortized cost: 2001 - $18,780,468; 2000 - $19,239,330) 18,768,561 19,252,538 -------------------------- Total investments available for sale 439,682,633 386,462,812 Cash and cash equivalents 50,242,839 17,154,237 Accrued investment income 3,088,280 3,576,509 Reinsurance balances receivable 22,170,762 4,163,774 Deferred acquisition costs 15,184,237 1,472,170 Prepaid reinsurance premiums 10,965,592 467,500 Unpaid losses & loss expenses recoverable 593,725 -- Amounts due from parent and affiliates 1,523,216 41,744 Other assets 87,275 27,713 -------------------------- TOTAL ASSETS 543,538,559 413,366,459 ========================== LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued liabilities 1,767,661 470,304 Derivative liabilities 17,939,200 -- Deferred premium revenue 83,755,805 8,329,921 Unpaid losses and loss expenses 11,831,159 3,240,940 Reinsurance premiums payable 4,863,196 385,000 Net payable for investments purchased 122,314,835 118,670,894 Dividend payable on preferred shares 1,931,720 834,246 -------------------------- TOTAL LIABILITIES 244,403,576 131,931,305 -------------------------- REDEEMABLE PREFERRED SHARES: Redeemable preferred shares (par value of $120 per share; 10,000 shares authorized; 363 issued and outstanding as at December 31, 2001 and 2000, respectively) 43,560 43,560 Additional paid-in capital 38,956,440 38,956,440 -------------------------- TOTAL REDEEMABLE PREFERRED SHARES 39,000,000 39,000,000 -------------------------- SHAREHOLDERS' EQUITY: Common shares (par value of $120 per share; 10,000 shares authorized; 2,057 issued and outstanding as at December 31, 2001 and 2000, respectively) 246,840 246,840 Additional paid-in capital 220,653,160 220,653,160 Accumulated other comprehensive income 1,997,951 3,931,665 Retained earnings 37,237,032 17,603,489 -------------------------- TOTAL SHAREHOLDERS' EQUITY 260,134,983 242,435,154 -------------------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY 543,538,559 413,366,459 ========================== The accompanying notes are an integral part of these financial statements. 1 XL FINANCIAL ASSURANCE LTD. Statements of Income and Comprehensive Income FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 2001 2000 1999 $ $ $ ------------------------------------- REVENUES : Net premiums earned 29,354,131 11,559,399 2,450,255 Net investment income 18,939,551 9,522,569 7,081,637 Net realized gains (losses) on investments 11,096,125 (953,838) (2,032,558) Net realized and unrealized losses on derivative instruments (16,589,202) -- -- ------------------------------------- Total revenues 42,800,605 20,128,130 7,499,334 ------------------------------------- EXPENSES : Losses and loss expenses 7,483,527 2,763,068 477,872 Acquisition costs 5,832,942 2,726,779 563,970 Operating expenses 5,911,550 1,581,277 144,414 ------------------------------------- Total expenses 19,228,019 7,071,124 1,186,256 ------------------------------------- Net income before cumulative effect of accounting change 23,572,586 13,057,006 6,313,078 Cumulative effect of accounting change (1,349,998) -- -- -------------------------------------- Net income before dividends on preferred shares 22,222,588 13,057,006 6,313,078 Dividends on preferred shares (2,589,045) (834,246) (932,349) -------------------------------------- Net income for common shareholders 19,633,543 12,222,760 5,380,729 ====================================== COMPREHENSIVE INCOME Net income for common shareholders 19,633,543 12,222,760 5,380,729 Unrealized appreciation (depreciation) of investments 9,162,411 5,694,673 (4,749,404) Less: reclassification for gains (losses) realized in income 11,096,125 (953,838) (2,032,558) -------------------------------------- Other comprehensive (loss) income (1,933,714) 6,648,511 (2,716,846) -------------------------------------- Comprehensive income 17,699,829 18,871,271 2,663,883 ====================================== The accompanying notes are an integral part of these financial statements. 2 XL FINANCIAL ASSURANCE LTD. Statements of Changes in Shareholders' Equity FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
ADDITIONAL PAID-IN CAPITAL - ACCUMULATED OTHER COMMON COMMON COMPREHENSIVE RETAINED SHARES SHAREHOLDERS INCOME (LOSS) EARNINGS TOTAL $ $ $ $ $ ------------------------------------------------------------------------------------------- BALANCE, OCTOBER 14, 1998 0 0 0 0 0 Issuance of common shares 102,000 84,798,000 84,900,000 Net income for common shareholders for the period 5,380,729 5,380,729 Other comprehensive loss (2,716,846) (2,716,846) ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 102,000 84,798,000 (2,716,846) 5,380,729 87,563,883 Issuance of common shares 144,840 135,855,160 136,000,000 Net income for common shareholders for the year 12,222,760 12,222,760 Other comprehensive income 6,648,511 6,648,511 ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 246,840 220,653,160 3,931,665 17,603,489 242,435,154 Net income for common shareholders for the year 19,633,543 19,633,543 Other comprehensive loss (1,933,714) (1,933,714) ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 246,840 220,653,160 1,997,951 37,237,032 260,134,983 ===========================================================================================
The accompanying notes are an integral part of these financial statements. 3 XL FINANCIAL ASSURANCE LTD. Statements of Cash Flows FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
2001 2000 1999 $ $ $ -------------------------------------------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income for the year and period 23,572,586 13,057,006 6,313,078 Adjustments to reconcile net income to net cash provided by operating activities: Realized (gains) losses on investments (11,096,125) 953,838 2,032,558 Net realized and unrealized (losses) gains on derivative instruments 16,589,202 -- -- Amortization of discount on fixed maturities (991,409) (848,229) (325,725) Accrued investment income 488,229 (2,713,175) (863,334) Reinsurance premiums receivable (18,006,988) 3,255,948 (7,419,722) Deferred acquisition costs (9,155,601) (438,587) (1,033,583) Prepaid reinsurance premiums (10,498,092) (467,500) -- Unpaid losses & loss expenses recoverable (593,725) -- -- Amounts due from parent and affiliates (1,481,472) 185,015 (226,759) Other assets and liabilities (59,562) (27,713) -- Accounts payable and accrued liabilities 1,297,357 380,304 90,000 Reinsurance premiums payable 4,478,196 385,000 -- Deferred premium revenue 45,713,035 1,391,520 6,938,401 Unpaid losses and loss expenses 8,077,252 2,763,068 477,872 Portfolio transfer 25,669,350 -- -- -------------------------------------------- Total adjustments 50,429,647 4,819,489 (330,292) -------------------------------------------- Net cash provided by operating activities 74,002,233 17,876,495 5,982,786 -------------------------------------------- CASH FLOWS USED IN INVESTING ACTIVITIES : Proceeds from sale of fixed maturities and short-term investments 2,285,558,567 489,539,036 523,989,228 Proceeds from redemption of fixed maturities and short-term investments 18,959,285 2,150,000 747,565 Purchase of fixed maturities and short-term investments (2,343,939,912) (554,305,693) (595,768,147) -------------------------------------------- Net cash used in investing activities (39,422,060) (62,616,657) (71,031,354) -------------------------------------------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES : Proceeds on issue of redeemable preferred shares -- 24,000,000 19,900,000 Redemption of redeemable preferred shares -- -- (4,900,000) Proceeds on issue of common shares -- 3,975,316 84,900,000 Dividends paid on preferred shares (1,491,571) (858,746) (73,603) -------------------------------------------- Net cash used in financing activities (1,491,571) 27,116,570 99,826,397 -------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,088,602 (17,623,592) 34,777,829 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR AND PERIOD 17,154,237 34,777,829 -- -------------------------------------------- CASH AND CASH EQUIVALENTS - END OF YEAR AND PERIOD 50,242,839 17,154,237 34,777,829 ============================================
NON-CASH TRANSACTIONS - SEE NOTE 10 The accompanying notes are an integral part of these financial statements. 4 XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 1. ORGANIZATION AND BUSINESS XL Financial Assurance Ltd. (the "Company") was incorporated with limited liability under the Bermuda Companies Act 1981 on October 14, 1998 and is registered as a Class 3 insurer under The Insurance Act 1978, amendments thereto and related regulations ("The Act"). At December 31, 2001 and 2000, the Company was approximately 85% owned by XL Insurance (Bermuda) Ltd (a wholly-owned subsidiary of XL Capital Ltd); 6% by FSA Insurance Company (a wholly-owned subsidiary of Financial Security Assurance Holdings Ltd) and 9% by Financial Security Assurance International Ltd. (owned 20% by XL Insurance (Bermuda) Ltd and 80% by FSA Insurance Company). The Company is an integral part of a joint venture agreement between XL Capital Ltd and Financial Security Assurance Holdings Ltd. The Company is primarily engaged in the business of providing reinsurance of financial guaranties on asset-backed and municipal obligations underwritten by XL Insurance (Bermuda) Ltd, FSA Insurance Company and XL Capital Assurance Inc. (a wholly-owned subsidiary of XL Capital Ltd) and other monoline and multiline insurance companies. This may be in the form of traditional financial guaranty insurance or via a credit default swap execution. The Company's underwriting policy is to provide reinsurance of asset-backed and municipal obligations that would be of a lower investment-grade quality without the benefit of the Company's reinsurance. The asset-backed obligations reinsured by the Company are generally issued in structured transactions and are backed by pools of assets such as residential mortgages loans, consumer or trade receivables, securities or other assets having ascertainable cash flows or market value. The municipal obligations reinsured by the Company consist primarily of general obligation bonds that are supported by the issuers' taxing power and of special revenue bonds and other special obligations of states and local governments that are supported by the issuers' ability to impose and collect fees and charges for public services or specific projects. Reinsurance written by the Company guarantees payment when due of scheduled payments on an issuers' obligation. In the case of a payment default on an insured obligation, the Company is generally required to pay the principal, interest or other such amounts due in accordance with the obligations' original payment schedule or, at its option, to pay such amounts on an accelerated basis. The Company conducts surveillance on its exposures to try and ensure early identification of any loss events. In addition, in the normal course of business, the Company seeks to reduce the loss that may arise from such events by reinsuring certain levels of risks in various areas of exposure with other insurance enterprises or reinsurers. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain comparative figures have been reclassified to conform with the current year's presentation. (1) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) PREMIUMS AND ACQUISITION COSTS Up-front premiums written and assumed are earned on a pro-rata basis over the period the coverage is provided. Installment premiums are recorded as written when reported and earned over the related installment period, which is generally one year or less. Deferred premium revenue represents the portion of reinsurance premiums written which is applicable to the unexpired terms of policies in force. When a policy is retired or defeased prior to the end of the expected period of coverage, the remaining deferred premium, less any amount credited to a refunding issue reinsured by the Company, is recognized in income at that time. Certain costs incurred, primarily relating to and varying with the production of new business, have been deferred. These costs include mostly ceding commissions paid to the insured. The Company considers the present value of future premiums under installment contracts written when determining the recoverability of deferred acquisition costs. The deferred acquisition costs are amortized over periods in which the related premiums are earned. REINSURANCE In the normal course of business, the Company seeks to reduce the loss that may arise from events that could cause unfavourable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance premiums ceded are expensed and commissions recorded thereon are earned on a pro-rata basis over the period the reinsurance coverage is provided. Prepaid reinsurance premiums represent the portion of premiums ceded that is applicable to the unexpired term of policies in force. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Provision is made for any estimated unrecoverable reinsurance. INVESTMENTS All the Company's investments in fixed maturity securities are designated as available for sale and accordingly are carried at fair value. The fair value of investments is based on quoted market prices received from recognized pricing services or dealer quotes. Any resulting unrealized gains or losses are reflected as a separate component of shareholders' equity and included in other comprehensive income. Bond discount and premium are amortized on the effective yield method over the remaining terms of securities acquired. Short-term investments comprise securities with maturities equal to or greater than ninety days but less than one year. Short-term investments purchased with an original maturity of ninety days or less are classified as cash equivalents. All investment transactions are recorded on a trade date basis. Realized gains and losses on sales of investments are determined on the basis of specific identification. Investment income is recognized when earned. (2) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) LOSSES AND LOSS EXPENSES A case specific reserve for unpaid losses and loss expenses is recorded when, in management's opinion, the likelihood of a future loss is probable and determinable at the balance sheet date. The Company also maintains an incurred but not reported loss reserve, which is estimated by management from an actuarial analysis of earned premium, par amount outstanding, and other credit risk characteristics inherent in the demographics of the pooled exposures. Management of the Company periodically re-evaluates its estimates for losses and loss expenses and establishes reserves that management believes are adequate to cover the ultimate net cost of claims. Estimates of loss and allocated loss expenses are subject to large potential errors of estimation, due to the fact that the ultimate dispositions of claims incurred prior to the financial statement date, whether reported or not, are subject to the outcome of events that have not yet occurred. Examples of these events include changes in the level of interest rates, changes in the rate of exchange of currency, currency inconvertibility or inability to withdraw funds held in a foreign country resulting from restrictions imposed by a government authority, and changes in the value of specific assets or commodities. Any estimate of future costs is subject to the inherent limitation on management's ability to predict the aggregate course of future events. It should therefore be expected that the actual emergence of losses and loss expenses will vary, perhaps materially, from any estimate. Management believes they have employed techniques and assumptions that are appropriate, and the conclusions contained herein are reasonable, given the information currently available. However, it should be recognized that future loss emergence will likely deviate, perhaps materially, from management's estimates. The Company will, on an ongoing basis, monitor these reserves and may periodically adjust such reserves based on updated actuarial review. Any such adjustments are reflected in income in the year in which the adjustments are made. CASH AND CASH EQUIVALENTS Cash equivalents include fixed interest deposits with a maturity of under 90 days when purchased. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of certain assets and liabilities are based on published market values, if available, or estimates of fair value of similar issues. Fair values are reported in notes 3 and 17. DERIVATIVE INSTRUMENTS The Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," (FAS 133) in June 1998. FAS 133, establishes accounting and reporting standards for derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activity. It requires that an entity recognize all derivatives as either derivative assets or derivative liabilities in the balance sheet and measure those instruments at fair value. The Company adopted FAS 133, as amended, as of January 1, 2001. Credit default swaps issued by the Company meet the definition of a derivative under FAS 133. Effective January 1, 2001, the Company has recorded these products at management's estimate of fair value. In accordance with the transitional provisions of FAS 133, the Company recorded a transitional adjustment loss of $1,349,998 to (3) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) recognize the difference between the carrying values and the fair values of the credit default swaps as of the adoption date. The Company considers credit default swaps to be financial guaranty contracts, in substance, and the Company has the intent to hold them to maturity. Therefore, the change in fair value is split between premiums, losses and loss expenses and net realized and unrealized (losses) gains on derivative instruments. The level of fair value adjustments is dependent upon a number of factors including changes in interest rates, credit spreads and other market factors. The Company previously presented the net results from its credit default swaps in "other income". In addition, the unpaid loss and loss expenses on the credit default swaps were presented in "other liabilities" in the balance sheet. During the period, the Company elected to revise the presentation of its credit default swaps. Accordingly, the premiums, acquisition costs and losses and loss expenses on its credit default swaps are now included in the respective line items in the statement of income. In addition, the unpaid loss and loss expenses previously included in other liabilities is now included in unpaid loss and loss expenses in the balance sheet. This change in presentation has been retroactively applied. There was no impact on net income. SPECIAL PURPOSE VEHICLES The Company accounts for its investments in and relationships with special purpose vehicles in accordance with GAAP. The Company considers several factors to determine whether effective control exists. These factors include, but are not limited to, the initial equity investment made in the vehicle, the degree of exposure to the risks of the underlying assets and liabilities of the vehicle and the potential to benefit from the rewards. Those special purpose vehicles that the Company deems necessary to consolidate are consolidated. Those which the Company does not consider should be consolidated, are accounted for in accordance with the terms of the transactions and contractual agreements in place. At December 31, 2001, the Company has not consolidated any special purpose vehicles. GAAP is potentially subject to change during 2002 and this accounting policy will be amended if necessary. 3. INVESTMENTS Net investment income is derived from the following sources: 2001 2000 1999 ----------------------------------------- Fixed maturities, short-term investments and cash and cash equivalents $19,499,516 $9,642,123 $7,258,213 ----------------------------------------- Investment expenses (559,965) (119,554) (176,576) ----------------------------------------- Net investment income $18,939,551 $9,522,569 $7,081,637 ========================================= (4) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) Proceeds from sales of fixed maturity securities and short-term investments during the years and period ended December 31, 2001, 2000 and 1999 were $2,285,558,567, $489,539,036 and $523,989,228, respectively. Gross gains of $49,587,916, $8,134,354 and $5,525,502 and gross losses of $38,491,791, $9,088,192 and $7,558,060 were realized on these sales for the year and period ended December 31, 2001, 2000 and 1999, respectively. The amortized cost, market value and related unrealized gains (losses) of investments are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET DECEMBER 31, 2001 COST GAINS LOSSES VALUE - ------------------ ------------------------------------------------------------- FIXED MATURITIES: U.S. Government and Government agencies $215,867,982 $ 2,035,270 $ (1,061,217) $216,842,035 Corporate bonds 172,247,520 2,740,725 (2,080,265) 172,907,980 Non-U.S. Sovereign Government bonds 30,788,712 728,389 (353,044) 31,164,057 ------------------------------------------------------------- Total fixed maturities $418,904,214 $ 5,504,384 $ (3,494,526) $420,914,072 ============================================================= SHORT-TERM INVESTMENTS : U.S. Government and Government agencies $ 3,404,537 $ 9,153 $ (27,002) $ 3,386,688 Corporate bonds 14,646,766 24,501 (27,127) 14,644,140 Non-U.S. Sovereign Government bonds 729,165 8,568 -- 737,733 ------------------------------------------------------------- Total short-term investments $ 18,780,468 $ 42,222 $ (54,129) $ 18,768,561 =============================================================
(5) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET DECEMBER 31, 2000 COST GAINS LOSSES VALUE - ------------------ ---------------------------------------------------------- FIXED MATURITIES: U.S. Government and Government agencies $218,131,247 $3,394,962 $ (197,578) $221,328,631 Corporate bonds 123,185,724 1,465,313 (1,573,180) 123,077,857 Non-U.S. Sovereign Government bonds 21,974,846 1,063,249 (234,309) 22,803,786 ---------------------------------------------------------- Total fixed maturities $363,291,817 $5,923,524 $(2,005,067) $367,210,274 ========================================================== SHORT-TERM INVESTMENTS : U.S. Government and Government agencies $ 536,587 $ -- $ -- $ 536,587 Corporate bonds 18,102,847 14,818 (1,114) 18,116,551 Non-U.S. Sovereign Government bonds 599,896 -- (496) 599,400 ---------------------------------------------------------- Total short-term investments $ 19,239,330 $ 14,818 $ (1,610) $ 19,252,538 ==========================================================
Any unrealized depreciation in value considered by management to be other than temporary is charged to income in the period that it is determined. An other than temporary decline is also considered to occur in investments where there has been a sustained reduction in market value and the Company has considered any mitigating factors. For the year ended December 31, 2001, no provision for declines in fair value considered to be other than temporary was deemed necessary. The contractual maturities of fixed maturity securities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:
DECEMBER 31, 2001 DECEMBER 31, 2000 AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ------------------------------- -------------------------------- Due after 1 year through 5 years $ 62,678,401 $ 62,710,167 $ 57,533,176 $ 57,745,933 Due after 5 through 10 years 63,019,437 63,494,141 56,089,670 56,857,148 Due after 10 through 15 years 8,392,233 8,512,902 12,056,308 11,891,879 Due after 15 years 80,226,663 80,708,781 86,679,983 88,321,254 Mortgage-backed investments 204,587,480 205,488,081 150,932,680 152,394,060 ------------------------------- -------------------------------- Total fixed maturities $418,904,214 $420,914,072 $363,291,817 $367,210,274 =============================== ================================
(6) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 4. PORTFOLIO TRANSFER AND PRINCIPAL AMOUNTS REINSURED During 2000, the Company assumed certain risks from XL Insurance (Bermuda) Ltd. Effective January 1, 2001 the Company entered into a portfolio transfer arrangement to assume these risks directly. As part of that arrangement, the existing reinsurance contracts between the Company and XL Insurance (Bermuda) Ltd were no longer required and were cancelled. Net deferred premium revenue of $29,712,849, net deferred acquisition costs of $4,556,466, net unpaid loss and loss expenses of $512,967 and cash of $25,669,350 have been transferred to the Company. The effect of the portfolio transfer was to increase the principal amounts reinsured from $5.374 billion at December 31, 2000 to $10.393 billion as at January 1, 2001. 5. DEFERRED ACQUISITION COSTS Acquisition costs deferred for amortization against future income and related amortization charged to expenses are as follows: 2001 2000 ------------------------------ Balance, beginning of year 1,472,170 1,033,583 Costs deferred during the year: Assumed commission expense 18,697,519 3,253,585 Ceding commission income (3,708,976) (88,219) Portfolio transfer (note 4) 4,556,466 -- ------------------------------ Total 19,545,009 3,165,366 Costs amortized during the year (5,832,942) (2,726,779) ------------------------------ Balance end of year 15,184,237 1,472,170 ============================== (7) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 6. UNPAID LOSSES AND LOSS EXPENSES The Company's liability for losses and loss expenses consists entirely of a reserve for losses incurred but not reported. Activity in the liability for losses and loss expenses was as follows: 2001 2000 1999 --------------------------------------- Unpaid losses and loss expenses at beginning of year $ 3,240,940 $ 477,872 $ -- --------------------------------------- Losses and loss expenses incurred in respect of losses occurring in: Current year 7,483,527 680,631 477,872 Prior year -- -- -- --------------------------------------- Total 7,483,527 680,631 477,872 --------------------------------------- Portfolio Transfer (note 4) 512,967 -- -- --------------------------------------- Re-presentation of loss reserves on credit default swaps (note 2) -- 2,082,437 -- --------------------------------------- Losses and loss expenses paid -- -- -- --------------------------------------- Unpaid losses and loss expenses at end of year (net of reinsurance 2001: $593,725 - 2000: $nil - 1999: $nil) $11,237,434 $3,240,940 $477,872 ======================================= 7. PREMIUMS AND REINSURANCE The Company utilizes reinsurance agreements principally to increase aggregate capacity and to reduce the risk of loss on business assumed. The Company's reinsurance agreements provide for recovery of a portion of losses and loss expenses from reinsurers and reinsurance recoverables are recorded as assets. The Company is liable if the reinsurers are unable to satisfy their obligations under the agreements. The effect of reinsurance activity on premiums written and earned is shown below: 2001 2000 1999 ------------------------------------------- Reinsurance premiums assumed $ 74,672,749 $ 12,993,419 $ 9,388,656 Direct premiums written 3,285,568 -- -- Reinsurance premiums ceded (13,389,243) (510,000) -- ------------------------------------------- Net premiums assumed 64,569,074 12,483,419 9,388,656 Change in deferred premiums and prepaid reinsurance premiums (35,214,943) (924,020) (6,938,401) ------------------------------------------- Net reinsurance premiums earned $ 29,354,131 $ 11,559,399 $ 2,450,255 =========================================== (8) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) During the years and period ended December 31, 2001, 2000 and 1999 the Company assumed premiums of $18,518,693, $3,306,405 and $8,892,903, respectively, from XL Insurance (Bermuda) Ltd. In addition, the Company assumed premiums of $8,758,641, $1,207,267 and $495,753, respectively, from FSA Insurance Company. During the years and period ended December 31, 2001, 2000 and 1999, the Company assumed premiums of $46,909,256, $23,975 and $nil, respectively, from XL Capital Assurance Inc. The Company has deferred premium revenue of $6,636,199 and $8,329,921 as at December 31, 2001 and 2000, respectively, from XL Insurance (Bermuda) Ltd. In addition, the Company has deferred premium revenue of $40,383,852 and $nil as at December 31, 2001 and 2000, respectively, from XL Capital Assurance Inc. Deferred premium revenue assumed from FSA Insurance Company as at December 31, 2001 and 2000 was $36,735,754 and $nil, respectively. As of December 31, 2001 and 2000 the Company had premiums receivable (net of ceding commission) of $5,096,119 and $4,020,104, respectively, from XL Insurance (Bermuda) Ltd; $309,650 and $126,887, respectively, from FSA Insurance Company; and $16,764,993 and $16,783, respectively, from XL Capital Assurance Inc. As of December 31, 2001 and 2000 the Company had reinsurance premiums payable (net of ceding commission) of $3,374,420 and $nil, respectively, due to XL Insurance Company. Included in operating expenses at December 31, 2001, 2000 and 1999 was $50,000, $50,000 and $58,000, respectively for consultancy services provided to the Company from FSA Insurance Company and Financial Security Assurance International Ltd. 8. LETTERS OF CREDIT XL Capital Ltd, the ultimate parent of the Company, has established a letter of credit facility with a syndicate of commercial banks. Letters of credit issued under this facility are unsecured. Letters of credit totaling $66,400,027 and $554,861 related to the Company were outstanding as of December 31, 2001 and 2000, respectively. 9. DERIVATIVE INSTRUMENTS The following table summarizes the change in fair value recognized in income for the year ended December 31, 2001. Net premiums earned 11,039,330 Losses and loss expenses (2,759,833) Net realized and unrealized (losses) gains on derivative instruments (16,589,202) ----------- Total fair value adjustment (8,309,705) =========== Credit default swaps issued by the Company meet the definition of a derivative under FAS 133. Effective January 1, 2001, the Company has recorded these products at fair value, modeled on prevailing market conditions and certain other factors relating to the structure of the transaction. The Company considers credit default swaps to be, in substance, financial guaranty contracts as the Company has the intent to hold them to maturity. The change resulting from movement in credit spreads is unrealized as the credit default swaps are not traded to realize this value and is (9) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) included in net unrealized gains and losses on derivatives. Other elements of the change in fair value are based on pricing established at the inception of the contract. Credit default swaps generally enhance a synthetic portfolio of securities. The credit ratings of the underlying securities vary and a single rating is calculated for the portfolio at the inception of the transaction by an independent agency. In order to effectively price and market the transaction, different tranches are modeled for the purpose of assigning credit ratings based upon the level of subordination. Generally, a primary layer is created to enable the originator of the transaction to participate in the risks. The Company generally participates in senior or rated tranches of a risk. Credit default swaps where the Company participates in the rated tranche are considered, in substance, financial guaranty transactions as the Company intends to hold them to maturity. The rated tranches are therefore fair valued using changes in credit spreads to reflect current market conditions. The Company will also consider the characteristics and credit ratings of the underlying portfolio in order to apply the model to obtain an estimate of fair value. The change in fair value recorded for the rated tranches as of December 31, 2001 was a loss of $8.3 million. In accordance with FAS 133, the Company recorded a transition adjustment to recognize the difference between the carrying values and the fair values of the credit default swaps at January 1, 2001. 10. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED SHARES The Company was initially incorporated with an authorized share capital of $120,000 comprising 1,000 common shares of a par value $120 each. These shares were issued to XL Insurance (Bermuda) Ltd on October 28, 1998. On November 3, 1998 the Company increased its authorized capital to $2,400,000 divided into 10,000 common shares of a par value $120 each and 10,000 cumulative participating voting redeemable preferred shares ("Redeemable Preferred Shares") of par value $120 each. Immediately thereafter, the Company issued 200 Redeemable Preferred Shares to FSA Insurance Company for a consideration of $99,500 each and issued 800 common shares to XL Insurance (Bermuda) Ltd for a consideration of $100,000 each. Thereafter, the initial 1,000 common shares were repurchased pursuant to a share repurchase agreement at par. On February 3, 1999 the Company repurchased 50 Redeemable Preferred Shares for a consideration of $98,000 each from FSA Insurance Company. Simultaneously, the Company issued an additional 50 common shares to XL Insurance (Bermuda) Ltd for a consideration of $100,000 each, of which 98% ($4,900,000) was paid. On December 6, 2000 the Company, pursuant to a share subscription agreement, issued an additional 213 Redeemable Preferred Shares for a cash consideration of $24,000,000 to Financial Security Assurance International Ltd. and an additional 1,207 Common Shares for a consideration of $136,000,000 to XL Insurance (Bermuda) Ltd. The consideration in respect of the Common Shares was settled in part with fixed maturity securities with a fair market value of $132,024,684. The remainder was settled with cash. The holder of the Common Shares is entitled to three votes per share and to such dividends as the Board of Directors may from time to time declare. In the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for the purpose of a reorganization or otherwise or upon any distribution of capital, the Common Shareholder shall be entitled to the surplus assets of the Company remaining after distributions to the Redeemable Preferred Shareholder. (10) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) The holders of the Redeemable Preferred Shares are entitled to one vote per share and are entitled to receive a 5% Fixed Dividend on the amount initially paid for the Redeemable Preferred Shares, plus, a participating dividend, the formula for which was defined in the Company's By-Laws in 2001 and applied retroactively to 2000. No participating dividend was payable in respect of the period ended December 31, 1999. At any time, the Redeemable Preferred Shares are redeemable by the Company in whole but not in part at its sole option at a redemption price equal to the sum of (i) the fair market value of such Redeemable Preferred Shares, subject to the Cap (maximum calculated rate return of 19%) and the Floor (minimum calculated rate return of 8%), plus (ii) the excess, if any, of (A) 91.5% of the Company's Earnings, if any, in the fiscal year in which the date of redemption occurs up to the date of the redemption, as calculated by the Company over (B) Total Dividends paid to the Redeemable Preferred Shareholders in such fiscal year; provided that the sum of the accreted value of all distributions to Redeemable Preferred Shareholders plus the redemption price shall not exceed 15% of the sum of the accreted value of all distributions plus the aggregate fair market value of the capital stock of the Company. At any time after the tenth anniversary of the date of the initial issue, the Preferred Shares are redeemable in whole but not in part at the election of the Preferred Shareholders at their sole option at a redemption price equal to fair market value provided that the sum of the accreted value of all distributions to Redeemable Preferred Shareholders plus the redemption price shall not exceed 15% of the sum of the accreted value of all distributions plus the aggregate fair market value of the capital stock of the Company. The fair market value for redemption purposes shall be determined by mutual agreement of both Preferred and Common Shareholders. In the event of a winding-up or dissolution of the Company whether voluntary or involuntary or for the purposes of a reorganization or otherwise, or upon any distribution of capital, the Redeemable Preferred Shareholders shall be entitled, to the extent of the availability of assets of the Company and in priority to the Common Shareholders, to receive an amount (the "Dissolution Amount") equal to the sum of (i) the amount initially paid for the Redeemable Preferred Shares, (ii) additional capital contributions paid by the Redeemable Preferred Shareholders, (iii) any accrued and unpaid Fixed Dividends and (iv) 91.5% of cumulative Earnings of the Company from inception through the date of distribution less the amount of Earnings distributed to the Redeemable Preferred Shares during such period, provided that the sum of the accreted value of all distributions to Redeemable Preferred Shareholders plus the Dissolution Amount shall not exceed 15% of the sum of the accreted value of all distributions to all shareholders plus the aggregate fair market value of the capital stock of the Company and provided further that the Redeemable Preferred Shareholders shall not be entitled to any further or other right of participation in the assets of the Company. 11. DIVIDENDS During the year and period ended December 31, 2001, 2000 and 1999, fixed dividends of $1,950,000, $834,246 and $932,349, respectively, were accrued on the Redeemable Preferred Shares. In addition to the regular fixed 5% dividend, the participating preferred shareholders are subject to receive a participating dividend calculated based on strict guidelines as established in the Company's Bye-laws. These guidelines were formally ratified at a Board of Directors meeting held on April 27, 2001 and were retroactively applied to the fiscal year 2000. Accordingly, at that date a participating dividend of $639,045 was calculated for the fiscal year 2000 and paid. No amount for the fiscal year 2001 has been accrued at December 31, 2001, as preliminary information indicates that the criteria for paying a participating dividend will not be met. (11) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 12. TAXATION Bermuda presently imposes no income tax, withholding tax or capital gains taxes and the Company is exempted until March 2016 from any such future taxes pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and Amended Act 1987. 13. STATUTORY FINANCIAL DATA Under The Act, the company is required to prepare Statutory Financial Statements and to file a Statutory Financial Return. The Act also requires the company to meet certain minimum capital and surplus requirements. To satisfy these requirements, the Company was required to maintain a minimum level of statutory capital and surplus of $9.9 million, $2.2 million and $1.7 million at December 31, 2001, 2000 and 1999, respectively. The Company's statutory capital and surplus at December 31, 2001, 2000 and 1999 was $283.9 million, $279.8 million and $101.5 million, respectively, of which $259.9 million, $259.9 million and $99.9 million, respectively, is represented by share capital and additional paid-in capital, and accordingly there is no restriction on the payment of dividends to shareholders from retained earnings. The Company is also required to maintain a minimum liquidity ratio whereby the value of its relevant assets are not less than 75% of the amount of its relevant liabilities. At December 31, 2001, 2000 and 1999, the Company was required to maintain relevant assets of at least $161.1 million, $98.7 million and $6.3 million, respectively. At those dates relevant assets were approximately $515.2 million, $411.4 million and $126.7 million, respectively, and the minimum liquidity ratio was therefore met. The primary difference between statutory net income and statutory capital and surplus for the Company as shown above, and net income and shareholder's equity presented in accordance with generally accepted accounting principles are deferred acquisition costs. 14. RETIREMENT PLANS The Company maintains a defined contribution plan. Plan assets are invested principally in equity securities and fixed maturities. The plan is managed externally and employees and the Company contribute a certain percentage of the employee's gross salary into the plan each month. The Company's contribution generally vests over 5 years. The Company's expenses for its defined contribution plan were $193,260, $55,763 and nil for the years and period ended December 31, 2001, 2000 and 1999, respectively. 15. AMOUNTS DUE FROM PARENT AND AFFILIATES Amounts due from XL Insurance (Bermuda) Ltd and affiliates of the Company are interest free and have no set terms of repayment. The balances arise as a result of the Company's operating activities. (12) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 16. OUTSTANDING EXPOSURE AND COLLATERAL The Company's policies reinsure the scheduled payments of principal and interest on asset-backed and municipal obligations. The principal amount reinsured (in millions) as of December 31, 2001 and 2000 and the terms to maturity are as follows:
DECEMBER 31, 2001 DECEMBER 31, 2001 ASSET-BACKED ASSET-BACKED MUNICIPAL MUNICIPAL TERMS TO MATURITY OBLIGATIONS GROSS OBLIGATIONS NET GROSS NET ------------------------------------------------------------------------------ 0 to 5 Years 5,969 5,459 302 281 5 to 10 Years 2,641 2,189 286 247 10 to 15 Years 1,922 1,887 351 338 15 to 20 Years 1,771 1,771 982 652 20 Years and Above 757 647 2,433 2,205 ------------------------------------------------------------------------------ Total 13,060 11,953 4,354 3,723 ============================================================================== DECEMBER 31, 2000 DECEMBER 31, 2000 ASSET-BACKED ASSET-BACKED MUNICIPAL MUNICIPAL TERMS TO MATURITY OBLIGATIONS GROSS OBLIGATIONS NET GROSS NET ------------------------------------------------------------------------------ 0 to 5 Years 3,185 3,185 -- -- 5 to 10 Years 341 341 250 250 10 to 15 Years 1,335 1,335 171 171 15 to 20 Years -- -- 37 37 20 Years and Above -- -- 55 55 ------------------------------------------------------------------------------ Total 4,861 4,861 513 513 ==============================================================================
The Company limits its exposure to losses from writing financial guaranties by underwriting investment-grade obligations and diversifying its portfolio and maintaining rigorous collateral requirements on asset-backed obligations. The gross principal amounts of reinsured obligations in the asset-backed reinsured portfolio are backed by the following types of collateral (in millions): (13) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 2000 TYPES OF COLLATERAL GROSS NET GROSS NET --------------------------------------------------------------------------------- Collateralized debt 8,003 8,003 3,347 3,347 Corporate assets 2,760 1,906 774 774 Consumer assets 2,297 2,044 740 740 --------------------------------------------------------------------------------- Total asset-backed obligations 13,060 11,953 4,861 4,861 =================================================================================
In its asset-backed business, the Company considers its overall geographic concentration as a factor in underwriting reinsurance covering securitizations of pools of such assets as residential mortgages or consumer receivables. In writing reinsurance for other types of asset-backed obligations, such as securities primarily backed by government or corporate debt, geographic concentration is not deemed by the Company to be significant, given other more relevant measures of diversification, such as issuer or industry. The Company seeks to maintain a diversified portfolio of reinsured municipal obligations designed to spread its risk across a number of geographic areas. The following table sets forth, by state and territory of the United States, those states and territories in which municipalities located therein issued an aggregate of 2% or more of the Company's par amount outstanding of reinsured municipal securities as of December 31, 2001 and 2000 (in millions): 2001 PAR AMOUNT OUTSTANDING PERCENT OF TOTAL ------------------------------------------- STATE/TERRITORY GROSS NET NET - ---------------------------------- ------------------------------------------- New York 1,724 1,327 35.6% Puerto Rico 557 467 12.5% California 399 324 8.7% New Jersey 229 229 6.2% District of Columbia 115 115 3.1% Massachussetts 94 73 2.0% Other U.S. states 848 848 22.8% International 388 340 9.1% ------------------------------------------- Total 4,354 3,723 100.0% =========================================== (14) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 2000 PAR AMOUNT OUTSTANDING PERCENT OF TOTAL ------------------------------------------- STATE/TERRITORY GROSS NET NET - ---------------------------------- ------------------------------------------- Puerto Rico 188 188 36.6% New York 177 177 34.5% New Jersey 112 112 21.9% District of Columbia 25 25 4.9% Texas 11 11 2.1% ------------------------------------------- Total 513 513 100.0% =========================================== 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair values have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret the data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Fixed maturities and Short-term investments - The carrying amount represents fair value. The fair value is based upon quoted market prices. Cash and cash equivalents, receivables for investments sold and payables for investments purchased - The carrying amounts approximate fair value because of the short maturity term of these instruments. Deferred premium revenue - The carrying amount of deferred premium revenue, represents the Company's future premium revenue on policies where the premium was received at the inception of the reinsurance contract. The fair value of deferred premium revenue is an estimate of the premiums that would be paid under a reinsurance agreement with a third party to transfer the remaining term of the Company's financial guaranty risk, net of that portion of the premiums retained by the Company to compensate it for originating and servicing the reinsurance contract. Installment premiums - Consistent with industry practice, there is no carrying amount for future installment premiums since the Company will receive premiums on an installment basis over the term of the reinsurance contract. Similar to deferred premium revenue premiums, the fair value of installment premiums is the estimated present value of the future contractual premium revenues that would be paid under a reinsurance agreement with a third party to transfer the remaining term of the Company's financial guaranty risk, net of that portion of the premium retained by the Company to compensate it for originating and servicing the reinsurance contract. At December 31, 2001 and 2000, the fair value of such installment premiums was approximately $138.7 million and $48.6 million, respectively. (15) XL FINANCIAL ASSURANCE LTD. Notes to Financial Statements FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND FOR THE PERIOD FROM OCTOBER 14, 1998 TO DECEMBER 31, 1999 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) Unpaid losses and loss expenses - The carrying amount is fair value, which is the present value of the expected cash flows for specifically identified claims and potential losses in the Company's reinsured portfolio.
2001 2000 ------------------------------- ------------------------------ CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE $ $ $ $ ----------- ----------- ----------- ----------- ASSETS Fixed maturities 420,914,072 420,914,072 367,210,274 367,210,274 Short-term investments 18,768,561 18,768,561 19,252,538 19,252,538 Cash and cash equivalents 50,242,839 50,242,839 17,154,237 17,154,237 LIABILITIES Deferred premium revenue 83,755,805 83,755,805 8,329,921 8,329,921 Unpaid losses and loss expenses 11,831,159 11,831,159 3,240,940 3,240,940 Net payable for investments purchased 122,314,835 122,314,835 118,670,894 118,670,894 OFF BALANCE SHEET INSTRUMENTS Installment premiums -- 138,748,877 -- 48,575,919
18. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of the unaudited quarterly financial data for 2001 and 2000. 2001 (IN THOUSANDS) FIRST SECOND THIRD FOURTH FULL YEAR Gross premiums written 10,923 12,554 18,643 35,838 77,958 Net premiums written 10,923 12,421 14,601 26,624 64,569 Net premiums earned 5,557 9,094 3,585 11,118 29,354 Net investment income 4,786 4,875 4,736 4,543 18,940 Loss and loss expenses 574 1,240 2,855 2,815 7,484 Net income (loss) 13,269 6,921 5,593 (3,561) 22,222 2000 (IN THOUSANDS) FIRST SECOND THIRD FOURTH FULL YEAR Gross premiums written 3,897 2,163 3,118 3,815 12,993 Net premiums written 3,897 2,163 3,118 3,305 12,483 Net premiums earned 2,212 2,543 2,979 3,825 11,559 Net investment income 1,781 2,029 2,371 3,342 9,523 Loss and loss expenses 460 639 749 915 2,763 Net income 1,744 3,071 3,603 4,639 13,057 (16) -----END PRIVACY-ENHANCED MESSAGE-----