-----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, FOJb0zRU5mlHDJLnsc90Nror2LyXVx0+RfabJTZqP4+2n7FkarzrCZn57U0Izao7 9W5ciOXlSysdWFQ0Cw6Rrw== 0000930413-02-002437.txt : 20020806 0000930413-02-002437.hdr.sgml : 20020806 20020806131442 ACCESSION NUMBER: 0000930413-02-002437 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020806 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10804 FILM NUMBER: 02720431 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-Q 1 c25171_10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 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, HAMILTON, BERMUDA HM11 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (441) 292-8515 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 [_] As of August 2, 2002, there were 135,780,655 outstanding Class A Ordinary Shares, $0.01 par value per share, of the registrant. XL CAPITAL LTD INDEX TO FORM 10-Q Page No ------------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as at June 30, 2002 and December 31, 2001 (Unaudited) ............................. 3 Consolidated Statements of Income and Comprehensive Income for the Three Months Ended June 30, 2002 and 2001 (Unaudited) and the Six Months Ended June 30, 2002 and 2001 (Unaudited) ...................................... 4 Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2002 and 2001 (Unaudited) ....... 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited) ........... 6 Notes to Unaudited Consolidated Financial Statements ...... 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ........................ 19 Item 3. Quantitative and Qualitative Disclosure about Market Risk ...................................................... 36 PART II. OTHER INFORMATION Item 1. Legal Proceedings ......................................... 39 Item 4. Submission of Matters to a Vote of Shareholders ........... 39 Item 6. Exhibits and Reports on Form 8-K .......................... 39 Signatures 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) -------------------------- JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ A S S E T S Investments: Fixed maturities at fair value (amortized cost: 2002, $12,009,617; 2001, $10,945,568) ............................ $11,922,363 $10,831,927 Equity securities, at fair value (cost: 2002, $715,702; 2001, $575,090) ........ 662,138 547,805 Short-term investments, at fair value (amortized cost: 2002, $891,485; 2001, $1,050,015) ............................. 881,819 1,050,113 ----------- ----------- Total investments available for sale ... 13,466,320 12,429,845 Investments in affiliates ....................... 1,234,174 1,037,344 Other investments ............................... 223,059 273,528 ----------- ----------- Total investments ...................... 14,923,553 13,740,717 Cash and cash equivalents ......................... 2,278,754 1,863,861 Accrued investment income ......................... 196,990 180,305 Deferred acquisition costs ........................ 631,977 394,258 Prepaid reinsurance premiums ...................... 1,023,610 846,081 Premiums receivable ............................... 3,397,482 2,182,348 Reinsurance balances receivable ................... 1,448,156 1,246,106 Unpaid losses and loss expenses recoverable ....... 4,727,297 5,033,952 Goodwill and other intangible assets .............. 1,648,475 1,616,943 Deferred tax asset, net ........................... 389,675 419,222 Other assets ...................................... 523,296 439,282 ----------- ----------- Total assets ........................... $31,189,265 $27,963,075 =========== =========== 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 ................... $12,396,503 $11,825,680 Deposit liabilities and policy benefit reserves ... 2,828,755 2,374,164 Unearned premiums ................................. 4,145,201 2,682,089 Notes payable and debt ........................... 1,863,816 1,604,877 Reinsurance balances payable ...................... 2,027,837 1,672,122 Net payable for investments purchased ............. 1,453,400 1,247,027 Other liabilities ................................. 1,045,000 1,071,402 Minority interest ................................. 53,222 48,530 ----------- ----------- Total liabilities ...................... $25,813,734 $22,525,891 ----------- ----------- Commitments and Contingencies Shareholders' Equity: Authorized, 999,990,000 Class A ordinary shares, par value $0.01 Issued and outstanding: (2002, 135,755,752; 2001, 134,734,491) ........ $ 1,358 $ 1,347 Contributed surplus ............................... 3,439,868 3,378,549 Accumulated other comprehensive loss .............. (193,051) (213,013) Deferred compensation ............................. (38,038) (27,177) Retained earnings ................................. 2,165,394 2,297,478 ----------- ----------- Total shareholders' equity ............. $ 5,375,531 $ 5,437,184 ----------- ----------- Total liabilities and shareholders' equity ................. $31,189,265 $27,963,075 =========== =========== See accompanying Notes to Consolidated Financial Statements 3 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------- 2002 2001 2002 2001 ----------- --------- ----------- ---------- Revenues: Net premiums earned - general operations ......................... $ 1,068,160 $ 640,984 $ 2,101,113 $1,183,138 Net premiums earned - life operations ............................ 10,497 -- 49,690 -- Net investment income ............................................ 174,743 151,168 345,870 294,264 Net realized (losses) gains on investments ....................... (110,002) (36,098) (216,022) 26,437 Net realized and unrealized (losses) gains on derivative instruments ................................................... (6,713) 5,026 (19,913) 2,662 Equity in net income of investment affiliates .................... 7,931 23,196 40,116 43,570 Fee income and other ............................................. 23,452 11,493 32,320 18,562 ----------- --------- ----------- ---------- Total revenues ................................................ $ 1,168,068 $ 795,769 $ 2,333,174 $1,568,633 ----------- --------- ----------- ---------- Expenses: Net losses and loss expenses incurred - general operations ....... $ 844,627 $ 386,951 $ 1,491,551 $ 717,155 Claims and policy benefit reserves - life operations ............. 18,816 -- 66,579 -- Acquisition costs ................................................ 174,260 143,202 359,992 269,074 Operating expenses ............................................... 180,906 81,898 326,051 154,956 Exchange (gains) losses .......................................... (23,206) 7,608 (31,570) 6,438 Interest expense ................................................. 40,139 26,168 81,761 47,425 Amortization of intangible assets ................................ 11 14,703 625 29,171 ----------- --------- ----------- ---------- Total expenses ................................................. $ 1,235,553 $ 660,530 $ 2,294,989 $1,224,219 ----------- --------- ----------- ---------- (Loss) income before minority interest, income tax expense and equity in net income of insurance and operating affiliates ... $ (67,485) $ 135,239 $ 38,185 $ 344,414 Minority interest in net income of subsidiary .................. 1,779 (652) 4,034 517 Income tax expense ............................................. 22,900 13,603 36,854 10,694 Equity in net income of insurance and operating affiliates ..... (416) (6,318) (448) (14,332) ----------- --------- ----------- ---------- Net (loss) income .................................................. $ (91,748) $ 128,606 $ (2,255) $ 347,535 ----------- --------- ----------- ---------- Change in net unrealized depreciation of investments ............... $ 68,848 $ (59,299) $ (35,466) $ (109,706) Foreign currency translation adjustments ........................... (1,649) (7,360) 55,428 (33,482) ----------- --------- ----------- ---------- Comprehensive (loss) income ........................................ $ (24,549) $ 61,947 $ 17,707 $ 204,347 =========== ========= =========== ========== Weighted average ordinary shares and ordinary share equivalents outstanding - basic .................................. 135,662 125,396 135,431 125,312 =========== ========= =========== ========== Weighted average ordinary shares and ordinary share equivalents outstanding - diluted ................................ 135,662 127,765 135,431 127,546 =========== ========= =========== ========== Earnings per ordinary share and ordinary share equivalent - basic ............................................... $ (0.68) $ 1.03 $ (0.02) $ 2.77 =========== ========= =========== ========== Earnings per ordinary share and ordinary share equivalent - diluted ............................................. $ (0.68) $ 1.01 $ (0.02) $ 2.72 =========== ========= =========== ==========
See accompanying Notes to Consolidated Financial Statements 4 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (U.S. DOLLARS IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30 ---------------------------- 2002 2001 ----------- ----------- ORDINARY SHARES: Balance-beginning of year .................. $ 1,347 $ 1,250 Issue of shares ............................ 2 -- Exercise of stock options .................. 9 8 Repurchase of shares ....................... -- (2) ----------- ----------- Balance-end of period .................. $ 1,358 $ 1,256 ----------- ----------- CONTRIBUTED SURPLUS: Balance-beginning of year .................. $ 3,378,549 $ 2,497,416 Issue of shares ............................ 18,219 15,993 Exercise of stock options .................. 43,100 28,633 Repurchase of shares ....................... -- (4,607) ----------- ----------- Balance-end of period .................. $ 3,439,868 $ 2,537,435 ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE LOSS: Balance-beginning of year .................. $ (213,013) $ (104,712) Net change in unrealized losses on investment portfolio, net of tax ......... (34,309) (110,470) Net change in unrealized gains on investment portfolio of affiliate ........ (1,157) 764 Currency translation adjustments ........... 55,428 (33,482) ----------- ----------- Balance-end of period .................. $ (193,051) $ (247,900) ----------- ----------- DEFERRED COMPENSATION: Balance-beginning of year ................. $ (27,177) $ (17,727) Issue of restricted shares ................ (17,736) (15,103) Amortization .............................. 6,875 4,775 ----------- ----------- Balance-end of period .................. $ (38,038) $ (28,055) ----------- ----------- RETAINED EARNINGS: Balance-beginning of year .................. $ 2,297,478 $ 3,197,441 Net (loss) income .......................... (2,255) 347,535 Cash dividends paid ........................ (128,255) (116,944) Repurchase of shares ....................... (1,574) (11,454) ----------- ----------- Balance-end of period .................. $ 2,165,394 $ 3,416,578 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY ................... $ 5,375,531 $ 5,679,314 =========== =========== See accompanying Notes to Consolidated Financial Statements 5 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30 -------------------------- 2002 2001 ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net (loss) income .............................. $ (2,255) $ 347,535 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized losses (gains) on investments ..... 216,022 (26,437) Net realized and unrealized losses on derivative instruments ....................... 19,913 (2,662) Amortization of discounts on fixed maturities .. (13,872) (21,517) Equity in net income of investment and insurance and operating affiliates ........... (40,564) (57,902) Amortization of deferred compensation .......... 6,875 4,775 Amortization of intangible assets ........... 625 29,171 Accretion of deposit liabilities ............ 28,395 39,639 Unpaid losses and loss expenses ................ 32,438 373,453 Unearned premiums .............................. 1,393,714 446,861 Premiums receivable ............................ (1,142,645) (367,968) Unpaid losses and loss expenses recoverable .... 390,789 (293,327) Prepaid reinsurance premiums ................... (169,155) (79,489) Reinsurance balances receivable ................ (139,317) (86,229) Deferred acquisition costs ..................... (237,219) (69,323) Reinsurance balances payable ................... 286,548 106,038 Deferred tax asset ............................. 33,111 (10,571) Other .......................................... (98,767) 102,515 ----------- ----------- Total adjustments ...................... 566,891 87,027 ----------- ----------- Net cash provided by operating activities ...... 564,636 434,562 ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Proceeds from sale of fixed maturities and short-term investments ....................... 22,304,489 13,857,761 Proceeds from redemption of fixed maturities and short-term investments ................... 1,601,993 345,521 Proceeds from sale of equity securities ........ (478,070) 515,591 Purchases of fixed maturities and short-term investments ....................... (23,478,748) (14,506,336) Purchases of equity securities ................. (281,549) (475,660) Investments in affiliates, net of dividends received ........................... (284,315) (66,974) Acquisition of subsidiaries, net of cash acquired ................................ (32,197) (20,586) Other investments .............................. 14,492 (76,145) Fixed assets and other ......................... (1,252) (14,599) ----------- ----------- Net cash used in investing activities .......... (635,157) (441,427) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from exercise of stock options ........ 43,109 28,640 Repurchase of shares ........................... (1,575) (16,063) Dividends paid ................................. (128,255) (116,944) Proceeds from notes payable and debt ........... 596,814 891,500 Repayment of notes payable and debt ............ (350,000) (50,000) Deposit liabilities ............................ 324,877 16,699 ----------- ----------- Net cash provided by financing activities ........ 484,970 753,832 Effects of exchange rate changes on foreign currency cash .................................. 444 (455) ----------- ----------- Increase in cash and cash equivalents ............ 414,893 746,512 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR .... $ 1,863,861 $ 930,469 ----------- ----------- CASH AND CASH EQUIVALENTS - END OF YEAR .......... $ 2,278,754 $ 1,676,981 =========== =========== See accompanying Notes to Consolidated Financial Statements 6 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) 1. BASIS OF PREPARATION AND CONSOLIDATION These unaudited consolidated financial statements include the accounts of XL Capital Ltd and all of its subsidiaries (collectively referred to as the "Company") and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. 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 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. To facilitate period to period comparisons, certain reclassifications have been made to prior year consolidated financial statement amounts to conform to current year presentation. There was no effect on net income from this change in presentation. 2. ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Company adopted Financial Accounting Standard ("FAS") 142, "Goodwill and Other Intangible Assets". 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. Adoption of FAS 142 has resulted in the Company ceasing to amortize goodwill. The Company has assessed the carrying value of goodwill in accordance with FAS 142 and has determined that these assets are currently unimpaired. The following is the pro forma effect on net income and earnings per share for the three month and six month periods ended June 30, 2001 had FAS 142 been effective January 1, 2001 as compared to the actual net income and earnings per share for the three month and six month periods ended June 30, 2002:
THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------ ------------------------- 2002 2001 2002 2001 ----------- --------- ----------- ---------- NET (LOSS) INCOME: Reported net (loss) income ....................................... $ (91,748) $ 128,606 $ (2,255) $ 347,535 Goodwill amortization ............................................ -- 14,495 -- 28,599 ----------- --------- ----------- ---------- Adjusted net (loss) income ....................................... $ (91,748) $ 143,101 $ (2,255) $ 376,134 ----------- --------- ----------- ---------- BASIC EARNINGS PER SHARE: Reported basic (loss) earnings per share ......................... $ (0.68) $ 1.03 $ (0.02) $ 2.77 Goodwill amortization ............................................ -- 0.11 -- 0.23 ----------- --------- ----------- ---------- Adjusted basic (loss) earnings per share ......................... $ (0.68) $ 1.14 $ (0.02) $ 3.00 ----------- --------- ----------- ---------- DILUTED EARNINGS PER SHARE: Reported diluted (loss)earnings per share ........................ $ (0.68) $ 1.01 $ (0.02) $ 2.72 Goodwill amortization ............................................ -- 0.11 -- 0.23 ----------- --------- ----------- ---------- Adjusted diluted (loss) earnings per share ....................... $ (0.68) $ 1.12 $ (0.02) $ 2.95 ----------- --------- ----------- ----------
7 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 2. ACCOUNTING PRONOUNCEMENTS (CONTINUED) The following is the pro forma effect on net income and earnings per share for the years ended December 31, 2001, 2000 and 1999 had FAS 142 been effective January 1, 1999 as compared to the reported net income and earnings per share for the years ended December 31, 2001, 2000 and 1999: YEAR ENDED DECEMBER 31 -------------------------------- 2001 2000 1999 --------- --------- --------- NET (LOSS) INCOME: Reported net (loss) income .................. $(576,135) $ 506,352 $ 470,509 Goodwill amortization ....................... 57,426 57,579 49,141 --------- --------- --------- Adjusted net (loss) income .................. $(518,709) $ 563,931 $ 519,650 --------- --------- --------- BASIC EARNINGS PER SHARE: Reported basic (loss) earnings per share .... $ (4.55) $ 4.07 $ 3.69 Goodwill amortization ....................... 0.46 0.46 0.38 --------- --------- --------- Adjusted basic (loss) earnings per share .... $ (4.09) $ 4.53 $ 4.07 --------- --------- --------- DILUTED EARNINGS PER SHARE: Reported diluted (loss)earnings per share ... $ (4.55) $ 4.03 $ 3.62 Goodwill amortization ....................... 0.46 0.46 0.37 --------- --------- --------- Adjusted diluted (loss) earnings per share .. $ (4.09) $ 4.49 $ 3.99 --------- --------- --------- Goodwill comprises approximately 98% of the total goodwill and other intangible assets at June 30, 2002. The remaining balance represents intangible assets that are being amortized over their estimated useful lives of periods between six and twenty years. 3. SEGMENT INFORMATION The Company is organized into three operating segments - insurance, reinsurance and financial products and services - in addition to a corporate segment that includes the investment and financing activities of the Company. General operations and life operations are disclosed separately within each segment. There were no significant life operations in the first six months of 2001. General operations include property and casualty lines of business and financial products and services. Effective January 1, 2002, the Company provides 100% of the capacity of its Lloyd's syndicates and these operations are included in the insurance segment and are no longer shown separately. The Company evaluates the 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 for general operations. In addition, the Company does not allocate assets by segment for its general operations. Investment assets related to the Company's life operations are held in portfolios that are separately managed. Net investment income from these assets is included in net income from life operations. Certain lines of business within general operations written by the Company have loss experience generally characterized as low frequency and high severity. This may result in volatility in both the Company's and an individual segment's results and operational cash flows. 8 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) The following is an analysis of the underwriting profit or loss by segment, together with a reconciliation of underwriting results to net income: QUARTER ENDED JUNE 30, 2002:
TOTAL FINANCIAL INSURANCE AND PRODUCTS INSURANCE REINSURANCE REINSURANCE AND SERVICES TOTAL --------- ----------- ------------- ------------ ----------- GENERAL OPERATIONS: Net premiums earned $ 549,776 $ 495,300 $ 1,045,076 $23,084 $ 1,068,160 Fee income and other 10,886 8,506 19,392 4,060 23,452 Net losses and loss expenses (1) 410,397 427,561 837,958 6,669 844,627 Acquisition costs 67,644 100,295 167,939 5,045 172,984 Operating expenses (2) 111,241 31,021 142,262 12,312 154,574 Exchange gains 22,181 1,025 23,206 -- 23,206 --------- --------- ----------- ------- ----------- Underwriting (loss) profit $ (6,439) $ (54,046) $ (60,485) $ 3,118 $ (57,367) --------- --------- ----------- ------- ----------- LIFE OPERATIONS: Life premiums earned $ -- $ 10,497 $ 10,497 $ -- $ 10,497 Fee income and other -- -- -- -- -- Claims and policy benefit reserves -- 18,816 18,816 -- 18,816 Acquisition costs and operating expenses -- 2,467 2,467 -- 2,467 Net investment income -- 16,825 16,825 -- 16,825 --------- --------- ----------- ------- ----------- Net income from life operations $ -- $ 6,039 $ 6,039 $ -- $ 6,039 --------- --------- ----------- ------- ----------- Net investment income $ 157,918 Net realized and unrealized losses on investments and derivative instruments (116,715) Equity in net income of affiliates 8,347 Interest expense 40,139 Amortization of intangible assets 11 Corporate operating expenses (2) 25,141 Minority interest 1,779 Income tax expense 22,900 ----------- NET LOSS $ (91,748) =========== GENERAL OPERATIONS: Loss and loss expense ratio (3) 74.6% 86.3% 80.2% Underwriting expense ratio (3) 32.6% 26.5% 29.7% --------- --------- ----------- Combined ratio (3) 107.2% 112.8% 109.9% ========= ========= ===========
(1) Net losses and loss expenses include an increase to loss reserves of $73.0 million and $127.0 million in the insurance and reinsurance segments, respectively, related to the September 11 event. See Note 4 for further details. (2) Operating expenses exclude corporate operating expenses, shown separately. (3) Ratios are based on net premiums earned from general insurance and reinsurance operations, excluding fee income and other. The underwriting expense ratio excludes exchange gains. 9 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) QUARTER ENDED JUNE 30, 2001:
TOTAL FINANCIAL INSURANCE AND PRODUCTS INSURANCE REINSURANCE REINSURANCE AND SERVICES TOTAL --------- ----------- ------------- ------------ ----------- GENERAL OPERATIONS: Net premiums earned $ 339,923 $ 292,407 $ 632,330 $ 8,654 $ 640,984 Fee income and other 413 714 1,127 10,366 11,493 Net losses and loss expenses 201,598 183,339 384,937 2,014 386,951 Acquisition costs 65,919 76,126 142,045 1,157 143,202 Operating expenses (1) 33,565 23,069 56,634 6,863 63,497 Exchange losses 2,783 4,825 7,608 -- 7,608 --------- --------- ----------- ------- ----------- Underwriting profit $ 36,471 $ 5,762 $ 42,233 $ 8,986 $ 51,219 --------- --------- ----------- ------- ----------- Net investment income $ 151,168 Net realized and unrealized losses on investments and derivative instruments (31,072) Equity in net income of affiliates 29,514 Interest expense 26,168 Amortization of intangible assets 14,703 Corporate operating expenses (1) 18,401 Minority interest (652) Income tax expense 13,603 ----------- NET INCOME $ 128,606 =========== GENERAL OPERATIONS: Loss and loss expense ratio (2) 59.3% 62.7% 60.9% Underwriting expense ratio (2) 29.3% 33.9% 31.4% --------- --------- ----------- Combined ratio (2) 88.6% 96.6% 92.3% ========= ========= ===========
(1) Operating expenses exclude corporate operating expenses, shown separately. (2) Ratios are based on net premiums earned from general insurance and reinsurance operations, excluding fee income and other. The underwriting expense ratio excludes exchange losses. 10 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) SIX MONTHS ENDED JUNE 30, 2002:
TOTAL FINANCIAL INSURANCE AND PRODUCTS INSURANCE REINSURANCE REINSURANCE AND SERVICES TOTAL --------- ----------- ------------- ------------ ----------- GENERAL OPERATIONS: Net premiums earned $1,142,432 $ 916,467 $ 2,058,899 $42,214 $ 2,101,113 Fee income and other 17,431 9,405 26,836 5,482 32,318 Net losses and loss expenses (1) 786,777 692,193 1,478,970 12,581 1,491,551 Acquisition costs 159,609 192,509 352,118 6,003 358,121 Operating expenses (2) 200,214 49,707 249,921 27,302 277,223 Exchange gains 24,293 7,277 31,570 -- 31,570 --------- --------- ----------- ------- ----------- Underwriting profit (loss) $ 37,556 $ (1,260) $ 36,296 $ 1,810 $ 38,106 --------- --------- ----------- ------- ----------- LIFE OPERATIONS: Life premiums earned $ -- $ 49,690 $ 49,690 $ -- $ 49,690 Fee income and other -- 2 2 -- 2 Claims and policy benefit reserves -- 66,579 66,579 -- 66,579 Acquisition costs and operating expenses -- 4,145 4,145 -- 4,145 Net investment income -- 32,343 32,343 -- 32,343 --------- --------- ----------- ------- ----------- Net income from life operations $ -- $ 11,311 $ 11,311 $ -- $ 11,311 --------- --------- ----------- ------- ----------- Net investment income $ 313,527 Net realized and unrealized losses on investments and derivative instruments (235,935) Equity in net income of affiliates 40,564 Interest expense 81,761 Amortization of intangible assets 625 Corporate operating expenses (2) 46,554 Minority interest 4,034 Income tax expense 36,854 ----------- NET LOSS $ (2,255) =========== GENERAL OPERATIONS: Loss and loss expense ratio (3) 68.9% 75.5% 71.8% Underwriting expense ratio (3) 31.5% 26.4% 29.2% --------- --------- ----------- Combined ratio (3) 100.4% 101.9% 101.1% ========= ========= ===========
(1) Net losses and loss expenses include an increase to loss reserves of $73.0 million and $127.0 million in the insurance and reinsurance segments, respectively, related to the September 11 event. (2) Operating expenses exclude corporate operating expenses, shown separately. (3) Ratios are based on net premiums earned from general insurance and reinsurance operations, excluding fee income and other. The underwriting expense ratio excludes exchange gains. 11 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) SIX MONTHS ENDED JUNE 30, 2001:
TOTAL FINANCIAL INSURANCE AND PRODUCTS INSURANCE REINSURANCE REINSURANCE AND SERVICES TOTAL --------- ----------- ------------- ------------ ----------- GENERAL OPERATIONS: Net premiums earned $ 609,396 $ 559,267 $ 1,168,663 $14,475 $ 1,183,138 Fee income and other 3,038 151 3,189 15,373 18,562 Net losses and loss expenses 361,729 351,797 713,526 3,629 717,155 Acquisition costs 121,870 145,726 267,596 1,478 269,074 Operating expenses (1) 66,352 39,775 106,127 18,220 124,347 Exchange losses 1,401 5,037 6,438 -- 6,438 --------- --------- ----------- ------- ----------- Underwriting profit $ 61,082 $ 17,083 $ 78,165 $ 6,521 $ 84,686 --------- --------- ----------- ------- ----------- Net investment income $ 294,264 Net realized and unrealized gains on investments and derivative instruments 29,099 Equity in net income of affiliates 57,902 Interest expense 47,425 Amortization of intangible assets 29,171 Corporate operating expenses (1) 30,609 Minority interest 517 Income tax expense 10,694 ----------- NET INCOME $ 347 535 =========== GENERAL OPERATIONS: Loss and loss expense ratio (2) 59.4% 62.9% 61.1% Underwriting expense ratio (2) 30.9% 33.2% 32.0% --------- --------- ----------- Combined ratio (2) 90.3% 96.1% 93.1% ========= ========= ===========
(1) Operating expenses exclude corporate operating expenses, shown separately. (2) Ratios are based on net premiums earned from general insurance and reinsurance operations, excluding fee income and other. The underwriting expense ratio excludes exchange losses. 12 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) The following tables summarize the Company's gross premiums written, net premiums written and net premiums earned by line of business: QUARTER ENDED JUNE 30, 2002: GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- GENERAL OPERATIONS Casualty insurance ....................... $ 421,091 $ 274,306 $ 204,890 Casualty reinsurance ..................... 206,110 200,456 198,982 Property catastrophe ..................... 64,740 47,018 53,574 Other property ........................... 319,005 218,158 224,614 Marine, energy, aviation and satellite ... 178,046 120,475 119,256 Lloyd's syndicates (1) ................... 136,276 116,265 84,000 Accident and health (2) .................. (38,048) (40,073) 45,041 Financial products and services .......... 84,539 82,125 23,084 Other insurance (3) ...................... 123,364 97,184 92,947 Other reinsurance (3) .................... 31,857 19,908 21,772 ---------- ---------- ---------- Total general operations ................. 1,526,980 1,135,822 1,068,160 LIFE OPERATIONS (4) ...................... 19,968 11,529 10,497 ---------- ---------- ---------- TOTAL .................................... $1,546,948 $1,147,351 $1,078,657 ========== ========== ========== QUARTER ENDED JUNE 30, 2001: GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- GENERAL OPERATIONS Casualty insurance ....................... $ 250,039 $ 170,261 $ 113,502 Casualty reinsurance ..................... 118,932 81,271 92,391 Property catastrophe ..................... 50,892 44,726 41,035 Other property ........................... 175,535 128,075 124,787 Marine, energy, aviation and satellite ... 77,088 36,959 49,606 Lloyd's syndicates (1) ................... 162,242 145,042 118,387 Financial products and services .......... 29,214 28,994 8,654 Other insurance (3) ...................... 102,823 85,100 51,723 Other reinsurance (3) .................... 39,082 28,724 40,899 ---------- ---------- ---------- TOTAL .................................... $1,005,847 $ 749,152 $ 640,984 ========== ========== ========== Footnotes appear on the following page. 13 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) SIX MONTHS ENDED JUNE 30, 2002: GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- GENERAL OPERATIONS Casualty insurance ....................... $ 916,327 $ 639,782 $ 441,758 Casualty reinsurance ..................... 656,439 576,898 358,827 Property catastrophe ..................... 262,486 224,420 113,899 Other property ........................... 898,262 597,922 454,399 Marine, energy, aviation and satellite ... 475,916 346,732 223,043 Lloyd's syndicates (1) ................... 470,001 380,079 204,362 Accident and health (2) .................. 89,858 64,904 64,699 Financial products and services .......... 156,335 151,310 42,214 Other insurance (3) ...................... 248,962 195,924 150,006 Other reinsurance (3) .................... 164,065 125,259 47,906 ---------- ---------- ---------- Total general operations ................. 4,338,651 3,303,230 2,101,113 LIFE OPERATIONS (4) ...................... 58,496 48,497 49,690 ---------- ---------- ---------- TOTAL .................................... $4,397,147 $3,351,727 $2,150,803 ========== ========== ========== SIX MONTHS ENDED JUNE 30, 2001: GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- GENERAL OPERATIONS Casualty insurance ....................... $ 439,226 $ 281,970 $ 198,510 Casualty reinsurance ..................... 290,322 204,316 163,780 Property catastrophe ..................... 153,050 142,568 77,857 Other property ........................... 353,081 254,968 219,118 Marine, energy, aviation and satellite ... 254,665 152,367 111,428 Lloyd's syndicates (1) ................... 379,238 279,582 210,546 Financial products and services .......... 41,203 40,927 14,475 Other insurance (3) ...................... 169,510 127,754 85,302 Other reinsurance (3) .................... 76,397 76,954 102,122 ---------- ---------- ---------- TOTAL .................................... $2,156,692 $1,561,406 $1,183,138 ========== ========== ========== (1) The Company's Lloyd's syndicates write a variety of coverages, primarily marine, energy, aviation and satellite. (2) Accident and health business originally included in the acquisition of Winterthur International was written and earned commencing July 1, 2001. During the three months ended June 30, 2002, the Company sold the remaining unearned premium related to this business, totaling $49.0 million, back to Winterthur Swiss Insurance Company. This was accounted for as a return premium. For more information on the acquisition of Winterthur International, see Note 5(c). Accident and health business was written by the Company's Lloyd's syndicates during the three and six month periods ended June 30, 2001. (3) Other insurance and reinsurance premiums written and earned include political risk, surety, bonding, warranty and other lines. (4) The Company did not write any significant life business during the three month and six month periods ended June 30, 2001. 14 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 4. THE SEPTEMBER 11 EVENT As part of the Company's ongoing reserve review process and as a result of loss development information during the second quarter of 2002, the Company believed it was necessary to increase its gross and net reserves for the September 11 event by $200.0 million. This increase included $127.0 million related to the reinsurance segment, primarily due to higher business interruption losses and exposure to potential claims by the Lloyd's Central Guarantee Fund under a reinsurance contract, as to which the Company has fully reserved its rights. The remaining $73.0 million primarily comprised a loss in the accident and health book of the Company's Lloyd's operations. 5. BUSINESS COMBINATIONS (A) LE MANS RE Effective January 1, 2002, the Company increased its shareholding in Le Mans Re from 49% to 67% in order to expand its international reinsurance operations. Le Mans Re underwrites a worldwide portfolio comprising most classes of property and casualty reinsurance business, together with a portfolio of life reinsurance business. The remaining 33% ownership is held by Les Mutuelles du Mans Assurances Group ("MMA"). However, MMA does not have any economic interest in the future earnings of Le Mans Re as a result of this ownership beginning January 1, 2002 due to certain contractual arrangements between the Company and MMA. Accordingly, no minority interest has been recorded. The Company has the option to buy the remaining shares from MMA for approximately $119.0 million in cash on December 13, 2003. The Company must provide notice of its intention to exercise prior to June 13, 2003. The Company currently intends to exercise its option prior to this date. In addition, MMA has the option to sell the remaining shares to the Company on December 13, 2003, or earlier if specific events occur, for approximately $119.0 million in cash. These events include, but are not limited to, a reduction of the Standard & Poor's rating of Le Mans Re and a change of control in either the Company or Le Mans Re. If the Company or MMA have not exercised their options by December 13, 2003, the parties may agree to extend the exercise period. The Company has accrued a liability for the purchase of the remaining shares at approximately $119.0 million, included in other liabilities, at June 30, 2002. The cost of the acquisition of the increase in ownership, including the liability discussed above, was approximately $171.1 million. Goodwill arising from the acquisition was approximately $50.0 million. The Company expects to complete the allocation of goodwill and intangible assets by the end of 2002. Cash paid, net of cash acquired, was $45.5 million during the six months ended June 30, 2002. Pro forma financial information is not presented for the acquisition of Le Mans Re as the results of their operations are not significant to the consolidated results of operations of the Company. (B) LYNDON LIFE INSURANCE COMPANY In the first quarter of 2002, the Company acquired Lyndon Life Insurance Company, a shell company licensed in forty nine U.S. states, for the purpose of obtaining licenses for the Company's life operations. The cost of the acquisition was $13.5 million, paid in April 2002, and intangible assets arising from the acquisition were $3.5 million. No goodwill was recorded on this acquisition. 15 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 5. BUSINESS COMBINATIONS (CONTINUED) (C) WINTERTHUR INTERNATIONAL Effective July 1, 2001, the Company acquired Winterthur International primarily to extend its predominantly North American based large corporate insurance business globally. Results of operations for Winterthur International have been included effective July 1, 2001. The following unaudited pro forma financial information for the three month and six month periods ended June 30, 2001 includes the unaudited financial information for Winterthur International for the three month and six month periods ended June 30, 2001 as if the acquisition of the Winterthur International operations occurred on January 1, 2001. Winterthur International's results of operations for the three month and six month periods ended June 30, 2001, 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 for the three month and six month periods ended June 30, 2001 is based upon information currently available and certain assumptions that the Company's management believes are reasonable. 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. 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. QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 2002 2001 2002 2001 Actual Pro forma Actual Pro forma ---------- ---------- ---------- ---------- Total revenues ............ $1,168,068 $ 984,261 $2,333,174 $1,945,629 Net (loss) income(1) ...... $ (91,748) $ 66,495 $ (2,255) $ 223,140 (Loss) earnings per ordinary share: Basic ................. $ (0.68) $ 0.53 $ (0.02) $ 1.78 Diluted ............... $ (0.68) $ 0.52 $ (0.02) $ 1.75 (1) Net (loss) income is adjusted for the effect of goodwill amortization had FAS 142 been adopted effective January 1, 2001. As discussed in Note 3, the accident and health business was sold back to Winterthur Swiss Insurance Company. As a result of the ongoing process to fair value identifiable assets and liabilities, the excess of the selling price over the carrying value of this business was accounted for by adjusting the original purchase price of Winterthur International. 6. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS In January 2002, the Company issued $600.0 million par value Guaranteed Senior Notes due January 2012. The Notes were issued at 99.469% of their face amount 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 without penalty $350.0 million of outstanding revolving credit in February 2002 that would have expired in June 2002, and for general corporate purposes. 16 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 7. DERIVATIVE INSTRUMENTS The Company enters into derivative instruments for risk management, trading and investment purposes. The Company is exposed to potential loss from various market risks, including changes in interest rates, foreign currency exchange rates and commodity values. The commodity risk relates to the Company's participation in the weather and energy risk management markets. 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. The following table summarizes these instruments and the effect on net income in the three months and six months ended June 30, 2002 and 2001:
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001 ------------- ------------- ------------- ------------- CREDIT DEFAULT SWAPS: Net premiums earned ....................................... $ 21,116 $ -- $ 28,547 $ -- Losses and loss expenses .................................. (22,530) -- (27,156) -- Net unrealized losses on derivative instruments ........... (8,710) -- (10,159) -- Fee income and other ...................................... -- 5,317 -- 8,661 ----------- --------- ----------- ---------- Total $ (10,124) $ 5,317 $ (8,768) $ 8,661 ----------- --------- ----------- ---------- WEATHER AND ENERGY RISK MANAGEMENT PRODUCTS: Fee income and other ...................................... $ 2,993 $ 4,099 $ 3,912 $ 4,786 INVESTMENT DERIVATIVES: Net realized gains (losses) on derivative instruments .... $ 6,097 $ 9,592 $ 7,404 $ (3,091) Net unrealized (losses) gains on derivative instruments ... (4,100) (4,566) (17,158) 5,753 ----------- --------- ----------- ---------- Total $ 1,997 $ 5,026 $ (9,754) $ 2,662 ----------- --------- ----------- ---------- EFFECT ON NET INCOME $ (5,134) $ 14,442 $ (14,610) $ 16,109 =========== ========= =========== ==========
The Company holds warrants in conjunction with certain of its other investments. These warrants are recorded at fair value based on quoted market prices. For the three month and six month periods ended June 30, 2002, the Company recorded an unrealized loss of $0.8 million and $14.2 million, respectively, related to the change in fair value of these warrants, included in net unrealized (losses) gains on derivative instruments. The loss for the six months ended June 30, 2002 related primarily to a decrease in the value of warrants of Mutual Risk Management in the first quarter of 2002. 17 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 8. COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT
THREE MONTHS ENDED SIX MONTHS ENDED June 30 JUNE 30 ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- BASIC (LOSS) EARNINGS PER SHARE: Net (loss) income ...................................... $ (91,748) $ 128,606 $ (2,255) $ 347,535 Weighted average ordinary shares outstanding ........... 135,662 125,396 135,431 125,312 Basic (loss) earnings per share ........................ $ (0.68) $ 1.03 $ (0.02) $ 2.77 ========= ========= ========= ========= DILUTED (LOSS) EARNINGS PER SHARE: Net (loss) income ...................................... $ (91,748) $ 128,606 $ (2,255) $ 347,535 Weighted average ordinary shares outstanding-basic ..... 135,662 125,396 135,431 125,312 Average stock options outstanding (1) .................. -- 2,369 -- 2,234 --------- --------- --------- --------- Weighted average ordinary shares outstanding-diluted ... 135,662 127,765 135,431 127,546 --------- --------- --------- --------- Diluted (loss) earnings per share ...................... $ (0.68) $ 1.01 $ (0.02) $ 2.72 ========= ========= ========= ========= DIVIDENDS PER SHARE .................................... $ 0.47 $ 0.46 $ 0.94 $ 0.92 ========= ========= ========= =========
(1) Net of shares repurchased under the treasury stock method. Basic shares outstanding are used to calculate net loss per share. Future weighted average number of shares outstanding may be affected by the convertible debt issued during 2001. Due to the contingent nature of the conversion features of the debt, there is no effect on diluted earnings per share for the three months or six months ended June 30, 2002. 9. COMMITMENTS AND CONTINGENCIES The decline in the Company's ordinary share price subsequent to June 30, 2002 could result in an additional interest cost to the Company in respect of the Liquid Yield Option Notes(TM) ("LYONs") issued by the Company. Such additional cost is contingent on the share price performance during a 30-day trading period prior to the first "put" date of September 7, 2002. Should the share price relative to the accreted conversion price of the LYONs be equal to or less than 69% for 20 days within the 30 day trading period, contingent additional principal will accrue for one year. As the LYONs is a zero coupon note, additional principal represents interest expense. It is not yet known if such additional expense, estimated at $1.9 million, will be incurred for the twelve month period from September 7, 2002 to September 6, 2003. Alternatively, the Noteholders have the right to require the Company to repurchase the Notes on September 7, 2002. The Company cannot predict whether Noteholders will exercise such right but currently plans to satisfy any such obligation in cash from general operations should this occur. The amount of such repurchase obligation would be $295.8 million. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2001 (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) GENERAL The following is a discussion of the Company's results of operations and financial condition and liquidity. 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 and an individual segment's results of operations and financial condition. The Company's results for the three months ended June 30, 2002 include the results of Winterthur International, acquired by the Company with effect from July 1, 2001. They also include the results of Le Mans Re, accounted for as a subsidiary with effect from January 1, 2002 following the Company's acquisition of majority ownership. Previously, the Company's share of Le Mans Re's net income was included in equity in net income of insurance and operating affiliates. As a result of these two transactions, period to period comparisons of the Company's results of operations and financial condition and liquidity 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 projections. Actual results may differ materially from those projected in such forward-looking statements, and therefore undue reliance should not be placed on them. See Item 3, "--Cautionary Note Regarding Forward-Looking Statements", for a list of 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 "Management's Discussion and Analysis of Results of Operations and Financial Condition", and the audited Consolidated Financial Statements and notes thereto presented under Item 7 and Item 8, respectively, of the Company's Form 10-K for the year ended December 31, 2001. CRITICAL ACCOUNTING POLICIES The Company's critical accounting policies should be read in conjunction with Item 7 of the Company's Form 10-K for the year ended December 31, 2001. RESULTS OF OPERATIONS The following table presents an after-tax analysis of the Company's net (loss) income and (loss) earnings per share for the three months ended June 30, 2002 and 2001: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------------ 2002 2001 --------- --------- Net operating income (1) .......................... $ 25,018 $ 160,062 Net realized (losses) gains on investments ........ (110,053) 36,482 Net realized and unrealized (loss) gains on derivative instruments ....................... (6,713) 5,026 --------- --------- Net (loss) income ................................. $ (91,748) $ 128,606 ========= ========= (Loss) earnings per share - basic ................. $ (0.68) $ 1.03 ========= ========= (Loss) earnings per share - diluted ............... $ (0.68) $ 1.01 ========= ========= 19 (1) Net operating income excludes after-tax net realized gains and losses on investments and net realized and unrealized losses on derivative instruments. Net operating income decreased in the second quarter of 2002 compared to the first quarter of 2001 primarily due to an increase in loss reserves of $200.0 million related to the September 11 event. Due principally to the complexity of the claims and inherent lag in reporting from insureds and cedants, management believed it was necessary to increase the estimate for ultimate losses related to this event. This increase in net loss reserves included $73.0 million in the insurance segment and $127.0 million in the reinsurance segment, discussed more fully in each of the segments below. Net income was significantly reduced by an increase in net realized investment losses in the second quarter of 2002. Net realized losses on investments included a loss of $92.5 million related to certain telecommunication fixed income securities, including WorldCom and Adelphia. Net income in 2001 included net realized gains. SEGMENTS INSURANCE OPERATIONS General 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. No life insurance business has been written in this segment. The following table summarizes the underwriting results for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 --------- --------- 2002 2001 % CHANGE --------- --------- --------- Net premiums earned ...................... $ 549,776 $ 339,923 61.73% Fee income and other ..................... 10,886 413 NM Net losses and loss expenses ............. 410,397 201,598 103.6% Acquisition costs ........................ 67,644 65,919 2.6% Operating expenses ....................... 111,241 33,565 231.4% Exchange (gains) losses .................. (22,181) 2,783 NM --------- --------- --------- Underwriting (loss) profit ............... $ (6,439) $ 36,471 NM ========= ========= ========= Net unrealized losses on credit default swaps .......................... $ (3,964) $ -- NM ========= ========= ========= * NM - Not Meaningful In the quarter ended June 30, 2002, the insurance segment included the results of Winterthur International, acquired effective July 1, 2001. As a result, each of the above line items for the quarter ended June 30, 2002 experienced growth. Further, some business previously written by the Company's insurance operations is now written by Winterthur International. Consequently, period to period comparisons may not be meaningful. Net premiums earned included $183.9 million from Winterthur International in the quarter ended June 30, 2002. Excluding Winterthur International, net premiums earned increased in the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001 by approximately $26.0 million due to growth in new business written and significant pricing increases on business written in the first six months of 2002. Pricing increases were experienced across all lines of business as a result of a market correction following five years of poor underwriting performance throughout the property and casualty industry caused by a highly competitive environment. These price increases were further compounded by the September 11 event. The increase in net premiums earned in the quarter ended June 30, 2002 was partially offset by a reduction in net premiums earned by the Company's Lloyd's syndicates following the exit of certain lines of business. 20 The increase in fee income and other for the second quarter of 2002 as compared to the second quarter of 2001 related primarily to consulting and administration services provided by Winterthur International for employee benefit plans of unrelated companies. These services will be discontinued in 2003. In addition, in the quarter ended June 30, 2001, managing agency expenses were offset against fee income earned by the managing agency from Lloyd's syndicates not owned by the Company. As the Company now owns 100% of the syndicate capacity of its Lloyd's operations effective January 1, 2002, these expenses are now included in operating expenses. Exchange gains of $22.2 million in the quarter ended June 30, 2002 related to the decline in value of the U.S. dollar against other currencies, primarily the U.K. sterling and Swiss franc where the value of certain monetary net assets denominated in these currencies increased. The exchange loss in the quarter ended June 30, 2001 was due primarily to an increase in the value of the U.S. dollar against the U.K. sterling. In 2001, the insurance operations began to write credit default swaps at primary layers in this segment. During the quarter ended June 30, 2002, an unrealized loss of $4.0 million was recognized related to the fair value adjustment for these credit default swaps. The following table presents the ratios for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 -------------------- 2002 2001 ------ ----- Loss and loss expense ratio .......... 74.6% 59.3% Underwriting expense ratio ........... 32.6% 29.3% ------ ----- Combined ratio ....................... 107.2% 88.6% ====== ===== The loss ratio increased in the quarter ended June 30, 2002 compared to the same period of 2001 primarily due to an increase in net losses incurred related to the September 11 event of $73.0 million. This was mainly attributable to additional loss reserves in the accident and health business as a result of the Company's ongoing reserve review process and additional information received during the quarter. Excluding this increase in net losses incurred, the loss ratio would have been 61.4% in the quarter ended June 30, 2002. The quarter ended June 30, 2001 included favorable development of loss reserves related to certain casualty business written in prior underwriting years, partially offset by a net incurred loss related to Tropical Storm Allison. There were no significant catastrophe events during the quarter ended June 30, 2002. It is uncertain at this time whether the ongoing political and economic crisis in Argentina may result in losses under political risk insurance and reinsurance coverages provided by the Company, and if so, to what extent. The Company believes both the possibility and magnitude of such losses are more likely to increase the longer the crisis remains unresolved, potentially increasing this segment's loss ratio in future quarters. The underwriting expense ratio in the quarter ended June 30, 2002 included acquisition and operating expenses for Winterthur International of $9.2 million and $54.4 million, respectively. These expenses were reduced by the effect of purchase accounting treatment on the deferred acquisition costs of $9.6 million. No such purchase adjustments for Winterthur International are required in future quarters. Had an historical level of deferred acquisition costs for Winterthur International been amortized, the expense ratio for this segment would have been 34.3% in the quarter ended June 30, 2002. Historically, Winterthur International has had a higher operational expense ratio than the Company's other insurance operations and is currently incurring ongoing integration costs. Excluding the effects of Winterthur International, the operating expenses increased in the quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001 due to the growth of the U.S. based insurance operations, notably the professional and environmental businesses. In addition, there was a higher amount of allocated corporate expenses in the U.S. to this segment in the quarter ended June 30, 2002. 21 REINSURANCE OPERATIONS REINSURANCE - GENERAL OPERATIONS General 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; political risk 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 requiring that its property catastrophe contracts provide for aggregate limits and varying attachment points. The following table summarizes the underwriting results for the general operations of this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 -------------------------- 2002 2001 % CHANGE --------- --------- -------- Net premiums earned ................ $ 495,300 $ 292,407 69.4% Fee income and other ............... 8,506 714 NM Net losses and loss expenses ....... 427,561 183,339 133.2% Acquisition costs .................. 100,295 76,126 31.7% Operating expenses ................. 31,021 23,069 34.5% Exchange (gains) losses ............ (1,025) 4,825 NM --------- --------- -------- Underwriting (loss) profit ......... $ (54,046) $ 5,762 NM ========= ========= ======== Net premiums earned in the second quarter of 2002 increased compared to the second quarter of 2001 primarily due to strong growth and pricing increases in business written in the first half of 2002 and the latter half of 2001. This increase was experienced across most lines of business, notably casualty reinsurance and property lines. Pricing increases primarily reflected a market correction following five years of poor underwriting performance throughout the property and casualty industry caused by a highly competitive environment. These price increases were further compounded by the September 11 event. In addition, the inclusion of Le Mans Re consolidated as a subsidiary effective January 1, 2002 contributed $70.5 million of additional net premiums earned in the second quarter of 2002. Fee income and other in the second quarter of 2002 primarily arose from the recognition of unearned income related to a contract that was commuted in the quarter. The net exchange gain in the quarter ended June 30, 2002 is primarily due to a decline in the value of the U.S. dollar against other currencies in those operations that transact in multiple currencies. The following table presents the ratios for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------- 2002 2001 ------ ----- Loss and loss expense ratio ........... 86.3% 62.7% Underwriting expense ratio ............ 26.5% 33.9% ------ ----- Combined ratio ........................ 112.8% 96.6% ====== ===== The increase in the loss and loss expense ratio for the quarter ended June 30, 2002 over the same quarter of 2001 is due primarily to $127.0 million of additional losses related to the September 11 event. These additional loss reserves included $35.0 million related to reinsurance of the Lloyd's Central Guarantee Fund, which notified its reinsurers in the second quarter of 2002. Additional loss reserves of approximately $92.0 million were also recorded in the Company's property and aviation lines due to an increase in the level of reported losses. 22 Excluding additional loss reserves related to the September 11 event, the loss ratio would have been 60.7% in the second quarter of 2002, reflecting improved terms and conditions on business being written and earned. In the quarter ended June 30, 2001, the Company had favorable loss development on certain property business written in prior underwriting years that was partially offset by net incurred losses of $20.0 million related to Tropical Storm Allison. It is uncertain at this time whether the ongoing political and economic crisis in Argentina may result in losses under political risk insurance and reinsurance coverages provided by the Company, and if so, to what extent. The Company believes both the possibility and magnitude of such losses are more likely to increase the longer the crisis remains unresolved, potentially increasing this segment's loss ratio in future quarters. The decrease in expense ratio in the second quarter of 2002 as compared to the second quarter of 2001 reflected the high growth in net premiums earned relative to a smaller increase in operating expenses, which generally do not change in direct proportion to changes in net premiums earned. In addition, a change in the mix of business included in net premium earned in the quarter ended June 30, 2002 caused a relatively smaller growth in acquisition expenses, where certain lines of business had lower commission rates. REINSURANCE - LIFE OPERATIONS Life business written by the reinsurance operations includes long duration annuity contracts and traditional mortality risk reinsurance. No such contracts were written in the second quarter of 2001. Due to the nature of some of these contracts, premium volume may vary significantly from period to period. The following summarizes net income from life operations: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ----------------- 2002 2001 ------- ---- Net premiums earned .................................. $10,497 $ -- Claims and policy benefit reserves ................... 18,816 -- Acquisition costs .................................... 1,276 -- Operating expenses ................................... 1,191 -- Net investment income ................................ 16,825 -- ------- ---- Net income from life operations $ 6,039 $ -- ======= ==== Net investment income is included in net income from life operations as it relates to income earned on portfolios of segregated life investment assets received that are matched by the assumption of policy benefit reserves on contracts written. The accretion of the policy benefit reserves is included in claims and policy benefit reserves. FINANCIAL PRODUCTS AND SERVICES OPERATIONS 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 and energy risk management products. While these transactions are usually tailored for the specific needs of the insured or user, they often involve the issuance of multi-year contracts. The Company has also started an institutionally-oriented life business and acquired a shell company licensed in forty-nine U.S. states for the purpose of obtaining life licenses. Initial products offered will include municipal guaranteed investment contracts, funding agreements and business-owned life insurance. Due to the nature and variety of the business written in this segment, gross premium volume as well as underwriting results may vary significantly from period to period. Financial guaranties are conditional commitments that guarantee the performance of certain financial obligations by an obligor to a third party. The Company's potential liability in the event of non-performance by the issuer of the insured obligation is represented by its proportionate share of the 23 aggregate outstanding principal and interest payable ("insurance in force") on such insured obligation. The Company also guarantees payment obligations of counterparties under credit default swaps. The maturity of the insured obligations ranges from one to thirty five years. The following table summarizes the underwriting results for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ----------------------- 2002 2001 % CHANGE -------- -------- -------- Net premiums earned ................... $ 23,084 $ 8,654 166.7% Fee income and other .................. 4,060 10,366 (60.8%) Net losses and loss expenses .......... 6,669 2,014 231.1% Acquisition costs ..................... 5,045 1,157 336.0% Operating expenses .................... 12,312 6,863 79.4% Underwriting profit ................... $ 3,118 $ 8,986 NM -------- -------- -------- Net unrealized (losses) on credit default swaps ....................... $ (4,746) $ -- NM ======== ======== ======== Net premiums earned increased in the second quarter of 2002 as compared to the second quarter of 2001 primarily due to significantly greater premiums written on new financial guaranty business. A component of the financial guaranty business is written in credit default swap form. The Company fair values credit default swaps by modeling its exposures and creating indices by using proxies of the spreads on similar categories of exposures. For the second quarter of 2001, all adjustments to the fair value of credit default swaps were included in fee income and other. For the second quarter of 2002, the components of the fair value changes were included in net premiums earned, net losses and loss expenses and in net realized and unrealized gains and losses on derivative instruments. See Item 1, Note 7 to the Unaudited Consolidated Financial Statements. Fee and other income in 2002 included fees earned from weather and energy risk management products provided in swap form, net of hedges purchased. All such swaps and any unhedged positions in the Company's trading book are carried at fair value. Net losses and loss expenses increased in the quarter ended June 30, 2002 relative to the growth in net premiums earned. The Company's financial guaranty operations write business with an initial expected loss ratio of approximately 25%. The increase in operating expenses is directly related to the increase in financial guaranty premiums written, as well as the continued expansion of operations in this segment including life business, which has not yet written any contracts. The financial guaranty business tracks embedded value that represents the present value of unearned premium and installment premiums not yet recorded, net of expected losses and acquisition costs. This value was approximately $400.0 million at June 30, 2002 and is expected to be earned over the life of the exposures, that can be up to thirty years, and with an average duration of approximately seven years. INVESTMENT ACTIVITIES - GENERAL OPERATIONS The following table illustrates the change in net investment income and net realized and unrealized losses on investments and derivative instruments for the quarters ended June 30, 2002 and 2001: (UNAUDITED) THREE MONTHS ENDED JUNE 30 --------- --------- 2002 2001 % CHANGE --------- --------- -------- Net investment income .................... $ 157,918 $ 151,168 4.5% Net realized losses on investments ....... (110,002) (36,098) 304.7% Net realized and unrealized gains on investment derivative instruments ...... 1,997 5,026 (60.3%) 24 Net investment income increased moderately in the second quarter of 2002 as compared to the second quarter of 2001 due primarily to a higher investment base in 2002. The growth in the investment base included the receipt of funds related to new debt and equity issued by the Company and the addition of assets from Winterthur International and Le Mans Re. This was partially offset by a decrease in interest rate levels for the three months ended June 30, 2002 compared to the three months ended June 30, 2001. Interest earned on deposit liability assets is included in investment income and the accretion of deposit liabilities is included in interest expense. In the second quarter of 2001, the accretion charge of $10.4 million was included in net investment income and has been reclassified for this change. There was no effect on net income from this change in presentation. Net realized losses on investments in the second quarter of 2002 included a loss of approximately $92.5 million related to losses on certain fixed income and equity telecommunication securities held, including WorldCom and Adelphia. In addition, the Company wrote down $20.0 million of its investment in Mutual Risk Management and approximately $12.5 million of certain of the Company's fixed income and equity investments where the Company believed that there was an other than temporary decline in the value of those investments. These investment losses were offset by realized gains from sales of approximately $15.0 million on the Company's investment portfolio during the quarter ended June 30, 2002. The Company has investment guidelines in place to minimize concentrations in any one industry sector or any one company. The Company also monitors credit exposure but such controls cannot mitigate losses due to accounting irregularities or other improprietaries of other organizations. Net realized and unrealized losses on investment derivative instruments resulted primarily from the mark to market of foreign exchange and forwards contracts used for risk management purposes. See Item 3, "Quantitative and Qualitative Disclosure About Market Risk", for a more detailed analysis. OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the three months ended June 30, 2002 and 2001: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------ 2002 2001 % CHANGE ------- ------- -------- Equity in net income of investment affiliates ... $ 7,931 $23,196 (65.8)% Equity in net income of insurance and operating affiliates .......................... 416 6,318 (93.4)% Amortization of intangible assets ............... 11 14,703 (99.9)% Corporate operating expenses .................... 25,141 18,401 36.6% Interest expense ................................ 40,139 20,642 94.4% Minority interest ............................... 1,779 (652) NM Income tax expense .............................. 22,900 13,603 68.3% Equity in net income of investment affiliates in the second quarter of 2002, although positive, showed a decreased return as compared to the second quarter of 2001 due to lower comparative performance from the fund investments as a result of the volatility in the financial markets. In addition, income from the Company's investments in management companies was lower in the second quarter of 2002 as compared to income in the second quarter of 2001 due to lower levels of performance in their funds under management. The decrease in equity in net income of insurance and operating affiliates primarily resulted from the acquisition of a majority shareholding in Le Mans Re, and its consolidation as a subsidiary of the Company effective January 1, 2002. The Company's share of Le Mans Re's net income in the quarter ended June 30, 2001 was $3.0 million. In addition, there was a decrease in the earnings of 25 the remaining insurance and operating affiliates of approximately $2.9 million as compared to last year's second quarter. The Company made no provision for its share of Annuity and Life Re's second quarter loss as its results have not yet been finalized. Amortization of intangible assets decreased in the second quarter of 2002 compared to the second quarter of 2001 due to the adoption of FAS 142, where the Company is no longer required to amortize goodwill. Had FAS 142 been effective January 1, 2001, the amortization expense would have been approximately $0.2 million in the quarter ended June 30, 2001. The Company has assessed the carrying value of goodwill at June 30, 2002 in accordance with FAS 142 and has determined that these assets are currently unimpaired. Corporate operating expenses in the second quarter ended June 30, 2002 increased compared to the three months ended June 30, 2001 due to the continued worldwide expansion of the Company's operations. The Company is in the process of developing a network of shared service organizations to support the Company's operations in certain locations on a centralized basis to improve efficiency over the longer term. The increase in interest expense primarily reflected an increase in the level of indebtedness from June 30, 2001 to June 30, 2002. In addition, interest expense included a higher accretion charge on the deposit liabilities due to growth in these reserves. For more information on the Company's financing structure, see "--Financial Condition and Liquidity." The Company reported a pre-tax net loss of $68.8 million caused by the increase to loss reserves of $200.0 million related to the September 11 event and realized investment losses of $110.0 million. Both of these items occurred primarily within the Company's Bermuda operations. The September 11 event reserve increase in the Company's Lloyd's operations had no associated tax benefit as the Company has provided a full valuation allowance of approximately $20.0 million against its deferred tax asset. The change in the income taxes of the Company reflected an improvement in the profitability of its U.S. operations, which were largely unaffected by these events. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001 (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS The following table presents an after-tax analysis of the Company's net income and earnings per share for the six months ended June 30, 2002 and 2001: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------------ 2002 2001 --------- -------- Net operating income (1) ............................. $ 235,402 $316,796 Net realized (losses) gains on investments ........... (217,744) 28,077 Net realized and unrealized (losses) gains on derivative instruments .......................... (19,913) 2,662 --------- -------- Net (loss) income .................................... $ (2,255) $347,535 ========= ======== (Loss) earnings per share - basic .................... $ (0.02) $ 2.77 ========= ======== (Loss) earnings per share - diluted .................. $ (0.02) $ 2.72 ========= ======== (1) Net operating income excludes after-tax net realized gains and losses on investments and net realized and unrealized losses on derivative instruments. Net operating income decreased in the first six months of 2002 compared to the first six months of 2001 primarily due to an increase in net losses incurred of $200.0 million related to the September 11 event during the second quarter ended June 30, 2002. Net income was significantly reduced by net realized investment losses in the first six months of 2002 of $217.7 million compared to investment gains of $28.1 million in the same prior year period. Included in net realized losses on 26 on investments for 2002 was a loss of $92.5 million related to certain fixed income and equity telecommunications securities, including WorldCom and Adelphia. In 2002, the Company also wrote down an additional $80.0 million of certain other fixed income and equity investments in circumstances where the Company believed that there was an other than temporary decline in the value of those investments. SEGMENTS INSURANCE OPERATIONS The following table summarizes the underwriting results for this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------------- 2002 2001 % CHANGE ---------- ---------- ---------- Net premiums earned .................. $1,142,432 $ 609,396 87.5% Fee income and other ................. 17,431 3,038 473.8% Net losses and loss expenses ......... 786,777 361,729 117.5% Acquisition costs .................... 159,609 121,870 31.0% Operating expenses ................... 200,214 66,352 201.7% Exchange (gains) losses .............. (24,293) 1,401 NM ---------- ---------- ---------- Underwriting profit .................. $ 37,556 $ 61,082 (38.5)% ========== ========== ========== Net unrealized (losses) on credit default swaps ............... $ (10,712) $ -- NM ========== ========== ========== * NM - Not Meaningful In the six months ended June 30, 2002, the insurance segment included the results of Winterthur International, acquired effective July 1, 2001. As a result, each of the above line items experienced growth. Consequently, period to period comparisons may not be meaningful. Net premiums earned included $345.5 million from Winterthur International in the six months ended June 30, 2002. Excluding Winterthur International, net premiums earned increased in the six months ended June 30, 2002 compared to the six months ended June 30, 2001 by approximately $187.5 million, primarily due to growth in new business written and significant pricing increases across all lines of business. Pricing increases were due to a market correction following five years of poor underwriting performance throughout the property and casualty industry caused by a highly competitive environment. These price increases were further compounded by the September 11 event. The increase in fee income and other for the first six months of 2002 over the first six months of 2001 related primarily to consulting and administration services provided by Winterthur International for employee benefit plans of unrelated companies. These services will be discontinued in 2003. Exchange gains of $24.3 million in the six months ended June 30, 2002 were primarily due to a decline in the value of the U.S. dollar against the U.K. sterling and Swiss franc in those operations that have net monetary assets denominated in these foreign currencies. In 2001, the insurance operations began to write credit default swaps at primary layers in this segment. During the six months ended June 30, 2002 an unrealized loss of $10.7 million was recorded in this segment related to the fair value adjustment for these credit default swaps. 27 The following table presents the ratios for the insurance segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------- 2002 2001 ------ ------ Loss and loss expense ratio ........... 68.9% 59.4% Underwriting expense ratio ............ 31.5% 30.9% ------ ------ Combined ratio 100.4% 90.3% ====== ====== The loss ratio increased in the six months ended June 30, 2002 compared to the same period of 2001 due to additional incurred losses of $73.0 million related to the September 11 event, discussed above in the results of insurance operations for the second quarter of 2002. Excluding these additional net losses incurred, the loss ratio would have been 62.1%. The loss ratio for the six months ended June 30, 2001 reflected favorable loss development of certain casualty business lines written in prior underwriting years, partially offset by losses from Tropical Storm Allison. There were no catastrophe losses in the six months ended June 30, 2002. The Company's exposure to the ongoing political and economic crisis in Argentina is discussed above in the results of operations for the three months ended June 30, 2002. The underwriting expense ratio in the six months ended June 30, 2002 included acquisition and operating expenses for Winterthur International of $14.2 million and $96.8 million, respectively. These expenses were reduced by the effect of purchase accounting treatment on the deferred acquisition costs of $19.3 million. No such purchase adjustments are required in future quarters. Had an historical level of deferred acquisition costs for Winterthur International been amortized, the expense ratio for this segment would have been 33.2% in the six months ended June 30, 2002 as compared to 30.9%. Historically, Winterthur International has had a higher operational expense ratio than the Company's other insurance operations, and is currently incurring ongoing integration costs. Excluding the effect of Winterthur International, the operating expenses for the six months ended June 30, 2002 were higher than the six months ended June 30, 2001 due to the growth of the U.S. based insurance operations, notably the professional and environmental businesses. In addition, there was a higher amount of allocated corporate expenses in the U.S. to this segment in the six months ended June 30, 2002. REINSURANCE OPERATIONS REINSURANCE - GENERAL OPERATIONS The following table summarizes the underwriting results for general operations of this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------------- 2002 2001 % CHANGE --------- --------- --------- Net premiums earned ................. $ 916,467 $ 559,267 63.9% Fee income and other ................ 9,405 151 NM Net losses and loss expenses ........ 692,193 351,797 96.7% Acquisition costs ................... 192,509 145,726 32.1% Operating expenses .................. 49,707 39,775 25.0% Exchange (gains) losses ............. (7,277) 5,037 NM --------- --------- --------- Underwriting (loss) profit .......... $ (1,260) $ 17,083 NM ========= ========= ========= Net premiums earned in the first six months of 2002 increased compared to the first six months of 2001 primarily due to strong growth and pricing increases in business written in 2002 and the latter half of 2001 across most lines of business, notably casualty reinsurance and property lines. In addition, the inclusion of Le Mans Re consolidated as a subsidiary effective January 1, 2002 contributed $134.1 million of additional net premiums earned for the first 28 six months of 2002. The increase in net premiums earned also reflected significant price increases across all lines of business. Pricing increases were due to a market correction following five years of poor underwriting performance throughout the property and casualty industry caused by a highly competitive environment. These price increases were further compounded by the September 11 event. Fee income and other in the six months ended June 30, 2002 was increased by the recognition of unearned income on a contract commuted during the second quarter of 2002. Exchange gains during the first six months of 2002 of $7.3 million were mainly attributable to a decline in the value of the U.S. dollar against the U.K. sterling and euro in those operations that transact in multiple currencies. The following table presents the ratios for the reinsurance segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 -------------------- 2002 2001 ------ ------ Loss and loss expense ratio .......... 75.5% 62.9% Underwriting expense ratio ........... 26.4% 33.2% ------ ------ Combined ratio ....................... 101.9 96.1% ====== ====== The increase in the loss and loss expense ratio during the first six months of 2002 is due to additional net loss reserves of $127.0 million related to the September 11 event, discussed above in the results of reinsurance operations for the quarter ended June 30, 2002. Excluding these losses, the loss ratio would have been 61.7% in the first six months of 2002. The loss ratio for the six months of June 30, 2001 reflected losses from Tropical Storm Allison, the Petrobras oil rig loss and the Seattle earthquake, which were mostly offset by favorable loss development on certain property business written in prior underwriting years. There were no significant catastrophe losses in the first half of 2002. The Company's exposure to the ongoing political and economic crisis in Argentina is discussed above in the results of operations for the three months ended June 30, 2002. The underwriting expense ratio was lower in the six months ended June 30, 2002 as compared to the six months ended June 30, 2001 due to several factors. First, the growth in net premiums earned was greater than the increase in operating expenses, which generally do not change in direct proportion to changes in net premiums earned. Price increases which cause an increase in net premiums earned would result in a lower expense ratio. Second, this ratio was reduced by the effect of the recognition of a curtailment gain of approximately $8.0 million on a pension plan in the U.S. during the first six months of 2002. Lastly, there was a change in the mix of business in net premiums earned where certain lines of business had a lower rate of commission. REINSURANCE - LIFE OPERATIONS Life business written by the Company includes long duration annuity contracts and traditional mortality risk reinsurance. No such contracts were written in the first half of 2001. Due to the nature of some of these contracts, premium volume may vary significantly from period to period. 29 The following summarizes net income from life operations: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------------ 2002 2001 ------- ------- Net premiums earned ............................... $49,690 $ -- Fee income and other .............................. 2 -- Claims and policy benefit reserves ................ 66,579 -- Acquisition costs ................................. 1,871 -- Operating expenses ................................ 2,274 -- Net investment income ............................. 32,343 -- ------- ------- Net income from life operations ................... $11,311 $ -- ======= ======= Net investment income is included in net income from life operations as it relates to income earned on portfolios of segregated life investment assets received that are matched by the assumption of policy benefit reserves on contracts written. The accretion of the policy benefit reserves is included in claims and policy benefit reserves. FINANCIAL PRODUCTS AND SERVICES OPERATIONS The following table summarizes the underwriting results for this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------ 2002 2001 % CHANGE ------- ------- -------- Net premiums earned ............................ $42,214 $14,475 191.6% Fee income and other ........................... 5,482 15,373 (64.3)% Net losses and loss expenses ................... 12,581 3,629 246.7% Acquisition costs .............................. 6,003 1,478 306.2% Operating expenses ............................. 27,302 18,220 49.8% ------- ------- ------- Underwriting profit ............................ $ 1,810 $ 6,521 (72.2)% ======= ======= ======= Net unrealized gains on credit default swaps ... $ 553 $ -- NM ======= ======= ======= Net premiums earned increased in the first half of 2002 as compared to the first half of 2001 primarily due to significantly greater premiums written on new business in the financial guaranty business. Net premiums earned in the first half of 2002 also included approximately $2.1 million of weather related risk management transactions written. Some financial guaranty business is written in credit default swap form. The Company fair values credit default swaps by modeling its exposures and creating indices by using proxies of the spreads on similar categories of exposures. For the first six months of 2001, all adjustments to the fair value of credit default swaps were included in fee income and other. For the first six months of 2002, the components of the fair value changes were included in net premiums earned, net losses and loss expenses and in net realized and unrealized gains and losses on derivative instruments. See Item 1, Note 7 to the Unaudited Consolidated Financial Statements. Net losses and loss expenses increased in the six months ended June 30, 2002 relative to the growth in net premiums earned. The Company's financial guaranty operations write business with an initial expected loss ratio of approximately 25%. The increase in operating expenses reflected the continued expansion of operations in this segment, including life business, which has not 30 yet written any transactions. These expenses, relative to the segment's revenues, have improved compared to the prior year's quarter as the growing portfolio of aggregate insurance in force is earned. INVESTMENT ACTIVITIES - GENERAL OPERATIONS The following table illustrates the change in net investment income and net realized and unrealized gains and losses on investments for the six months ended June 30, 2002 and 2001: (UNAUDITED) SIX MONTHS ENDED JUNE 30 --------------------- 2002 2001 % CHANGE --------- --------- -------- Net investment income ........................ $ 313,527 $ 294,264 6.5% Net realized (losses) gains on investments ... (216,022) 26,437 NM Net realized and unrealized (losses) gains on investment derivative instruments ....... (9,754) 2,662 NM Net investment income increased in the first six months of 2002 as compared to the first quarter of 2001 due primarily to a higher investment base in 2002. The growth in the investment base included the receipt of funds related to new debt and equity issued by the Company and the addition of assets from Winterthur International and Le Mans Re. The effect of the higher investment base was partially offset by decreases in interest rate levels for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. Interest earned on deposit liability assets is included in investment income and the accretion of deposit liabilities is included in interest expense. In the six months ended June 30, 2001, the accretion charge of $24.1 million was included in net investment income and has been reclassified for this change. There was no effect on net income from this change in presentation. The Company has investment guidelines in place to minimize concentrations in any one industry sector or any one company. The Company also monitors credit exposure but such controls cannot mitigate losses due to accounting irregularities or other improprietaries of other organizations. Net realized losses on investments in the first half of 2002 included a loss of $92.5 million of certain fixed income and equity telecommunications securities, including WorldCom and Adelphia, and a loss of $80.0 million of certain fixed income and equity investments where the Company believed that there was an other than temporary decline in the value of those investments. Net realized and unrealized losses on investment derivative instruments resulted primarily from the fair value of warrants held by the Company in conjunction with certain of its other investments, based on quoted market values. See Item 3, "Quantitative and Qualitative Disclosure About Market Risk", for a more detailed analysis. 31 OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the six months ended June 30, 2002 and 2001: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------ 2002 2001 % CHANGE ------- ------- ------- Equity in net income of investment affiliates ... $40,116 $43,570 (7.9)% Equity in net income of insurance and operating affiliates .......................... 448 14,332 NM Amortization of intangible assets ............... 625 29,171 NM Corporate operating expenses .................... 46,554 30,609 52.1% Interest expense ................................ 81,761 47,425 72.4% Minority interest ............................... 4,034 517 NM Income tax expense .............................. 36,854 10,694 244.6% Equity in net income of investment affiliates decreased in the first six months of 2002 over the first six months of 2001 due primarily to decreased returns in the quarter ended June 30, 2002 on the Company's investments in investment funds and the management companies that administer these investment funds as a result of the volatility in the financial markets. The decrease in equity in net income of insurance and operating affiliates primarily resulted from the acquisition of a majority shareholding in Le Mans Re, and its consolidation as a subsidiary of the Company effective January 1, 2002. The Company's share of Le Mans Re's net income for the six months ended June 30, 2001 was $8.0 million. In addition, there was a decrease in the earnings of the remaining insurance and operating affiliates as compared to last year's second quarter. Amortization of intangible assets decreased in the first half of 2002 compared to the first half of 2001 due to the adoption of FAS 142, where the Company is no longer required to amortize goodwill. Had FAS 142 been effective January 1, 2001, the amortization expense would have been approximately $0.6 million in the six months ended June 30, 2001. The Company has assessed the carrying value of goodwill at June 30, 2002 in accordance with FAS 142 and has determined that these assets are currently unimpaired. Corporate operating expenses in the six months ended June 30, 2002 have increased compared to the six months ended June 30, 2001 due to the continued worldwide expansion of the Company's operations. The Company is in the process of developing a network of shared service organizations to support the Company's operations in certain locations on a centralized basis to improve efficiency over the longer term. The increase in interest expense primarily reflects an increase in the level of indebtedness from June 30, 2001 to June 30, 2002. The Company's financing structure is outlined in "--Financial Condition and Liquidity." The Company reported a pre-tax net income of $34.6 which was negatively affected by the increase to loss reserves of $200.0 million related to the September 11 event and realized investment losses of $216.0 million. Both of these items occurred primarily within the Company's Bermuda operations. The September 11 event reserve increase in the Company's Lloyds operations had no associated tax benefit as the Company has provided a full valuation allowance of approximately $20.0 million against its deferred tax asset. The change in the income taxes of the Company reflected an improvement in the profitability of its U.S. operations that were largely unaffected by these events. 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 32 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 maintain existing ratings. The Company's fixed income investments including short-term investments and cash equivalents at June 30, 2002 represented approximately 90.0% of invested assets and were managed by several outside investment management firms. Approximately 93.5% of fixed income securities are investment grade, with 66.0% rated Aa or AA or better by a nationally recognized rating agency. Using the Standard & Poor's rating scale, the average quality of the fixed income portfolio was AA. At June 30, 2002, total investments available for sale and cash, net of unsettled investment trades, were $14.3 billion compared to $13.0 billion at December 31, 2001. The net payable for investments purchased increased from $1.2 billion at December 31, 2001 to $1.5 billion at June 30, 2002. This increase in investment assets related to the inclusion of Le Mans Re as a subsidiary, the receipt of premiums and an additional $319.9 million received on deposit liabilities. For the six months ended June 30, 2002, currency translation adjustments were $55.4 million. This is shown as part of accumulated other comprehensive loss and primarily related to unrealized gains on foreign currency exchange rate movement at Winterthur International and Le Mans Re, where most operations have a functional currency that is not the U.S. dollar. 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. No assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. Inflation can, among other things, lead to increased 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 pressures. 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 the first six months of 2002 increased from the same period of 2001 primarily due to the receipt of increased premiums written. In the six months ended June 30, 2002 and 2001, the net amount of losses paid by the Company was $1.2 billion and $614.5 million, respectively. The increase in 2002 is due to growth in operations and the inclusion of Winterthur International and Le Mans Re. The Company's cash flow has not yet been adversely affected by the September 11 event, as approximately 90% of these losses remain unpaid at June 30, 2002. The Company has reviewed the anticipated cash flow from the September 11 event and believes it has sufficient liquidity to meet its obligations. In the six months ended June 30, 2002, the Company made the following significant investments: 33 (1) 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. Cash paid, net of cash acquired, was $45.5 million. (2) The Company invested a further $286.4 million in affiliates, the majority of which related to investments in alternative investment managers and related investment funds. This included a $75.0 million investment in Primus Guaranty, Ltd., that specializes in providing credit risk protection through credit default swaps. The mark to market effect on their derivative instruments may potentially introduce some volatility to the equity earnings in affiliates in future periods. As at June 30, 2002, the Company had bank, letter of credit and loan facilities available from a variety of sources including commercial banks totaling $5.4 billion, of which $1.9 billion in debt was outstanding. In addition, $2.0 billion of letters of credit were outstanding, 6% of which were collateralized by the Company's investment portfolio, supporting U.S. non-admitted business and the Company's Lloyd's capital requirements. The following tables present the Company's indebtedness under outstanding securities and lenders' commitments as at June 30, 2002:
------------------------------------------------- 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 $ -- $ -- $ -- $ -- 7.15% Senior Notes ....................... 100,000 99,976 2005 -- 100,000 -- -- 6.58% GUARANTEED SENIOR NOTES ............ 255,000 255,000 2011 -- -- -- 255,000 6.50% Guaranteed Senior Notes ............ 600,000 596,963 2012 -- -- 600,000 Zero Coupon Convertible Debentures (1) ... 617,602 617,602 2021 -- -- -- 1,010,833 Liquid Yield Option Notes(TM) (1) ........ 294,275 294,275 2021 -- -- -- 508,842 ------------------------ ------------------------------------------------ Total .................................... $2,366,877 $1,863,816 $ -- $100,000 $ -- $2,374,675 ======================== ================================================
(1) "Commitment" and "In Use" data represent June 30, 2002 accreted values. "After 6 years" data represent ultimate redemption values. The convertibles may be "put" or converted by the bondholders at various times prior to the 2021 redemption date. The next "put" date is September 7, 2002 for the Liquid Yield Option Notes(TM), as described below, and May 23, 2004 for the Zero Coupon Convertible Debentures. The Company may also choose to "call" the debt from May and September 2004 onwards for the Zero Coupon Convertible Debentures and Liquid Yield Option Notes(TM), respectively. In January 2002, the Company issued $600.0 million par value 6.50% Guaranteed Senior Notes due January 2012. The notes were issued at $99.469 and gross proceeds were $596.8 million. Related expenses of the offering amounted to $7.9 million. Proceeds of the Notes were used to pay down two 5-year revolving credit facilities of $350.0 million and for general corporate purposes. These credit facilities were subsequently canceled. The decline in the Company's ordinary share price subsequent to June 30, 2002 could result in an additional interest cost to the Company in respect of the Liquid Yield Option Notes(TM) ("LYONs") issued by the Company. Such additional cost is contingent on the share price performance during a 30-day trading period prior to the first "put" date of September 7, 2002. Should the share price relative to the accreted conversion price of the LYONs be equal to or less than 69% for 20 days within the 30 day trading period, contingent additional principal will accrue for one year. As the LYONs is a zero coupon note, additional principal represents interest expense. It is not yet known if such additional expense, estimated at $1.9 million, will be incurred for the twelve month period from September 7, 2002 to September 6, 2003. Alternatively, the Noteholders have the right to require the Company to repurchase the Notes on September 7, 2002. The Company cannot predict whether Noteholders will exercise such right but currently plans to satisfy any such obligation in cash from general operations should this occur. The amount of such repurchase obligation would be $295.8 million. The total pre-tax interest expense on the borrowings described above was $81.8 million and $47.4 million for the six months ended June 30, 2002 and 2001, respectively. 34
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ------------------------------------------------- PAYMENTS DUE BY PERIOD ------------------------------------------------- YEAR OF LESS THAN 1 TO 3 4 TO 5 AFTER 6 OTHER COMMERCIAL COMMITMENTS COMMITMENT IN USE EXPIRY 1 YEAR YEARS YEARS YEARS ------------------------------------------------------------------------------------ Letter of Credit Facilities ........ $1,490,000 $1,251,000 2002 $1,490,000 -- -- -- Letter of Credit Facilities ........ $1,500,000 $779,000 2003 $1,500,000
The Company renewed its 364-day revolving credit and letter of credit facility that expired in June 2002. The combined facility amounts to $2.0 billion, previously $1.5 billion, of which up to $500.0 million is available as revolving credit and is disclosed in "Notes payable and debt" above. The remaining $1.5 billion is disclosed in "Other Commercial Commitments" above, however the Company may choose to use the total $2.0 billion facility in letter of credit form. The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks. 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 commercial facilities are scheduled for renewal during 2002 and 2003. 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 cedants. 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 addition, from July 1, 2001 until July 24, 2002, the Company had additional letters of credit provided by the previous owner of the Winterthur International operations. The Company replaced this facility with letters of credit issued from its 364-day facility on July 24, 2002. The letter of credit facilities also included a $150.0 million secured letter of credit facility established in January 2002. This facility is unutilized and will expire at the end of 2002. In addition, Le Mans Re has a secured letter of credit facility, included in the table above, under which letters of credit amounting to $42.0 million were issued. For information regarding cross-default and certain other provisions in the Company's debt documents, see Item 7 of the Company's Form 10-K for the year ended December 31, 2001. 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. 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. During the six months ended June 30, 2002, no shares were repurchased in the open market but the Company has repurchased shares from employees and directors in relation to share swaps on option exercises and withholding tax on restricted stock. CURRENT OUTLOOK The Company continued to recognize strong levels of net premiums earned, primarily due to increases in pricing across virtually all property and casualty lines of insurance and reinsurance business, significant new business growth, the acquisition of Winterthur International effective July 1, 2001 and the acquisition of a majority ownership stake in Le Mans Re, effective January 1, 2002. Rate increases and favorable terms and conditions remained at least as strong as earlier in the year, and the Company believes these market conditions will prevail through 2002 for most lines of property and casualty business the Company writes. These improvements are, however, tempered by, among other things, a challenging investment income environment and potential unusual loss events. 35 ITEM 3. 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 and energy 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." WEATHER AND ENERGY RISK The Company offers weather and energy 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 and energy derivatives trading portfolio, with the majority of contracts outstanding for less than twelve months. 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. The Company's high, low and average aggregate seasonal VaR amounts during the period ended June 30, 2002 were $101.6 million, $25.8 million and $55.4 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. The following table summarizes the movement in the fair value of weather and energy contracts outstanding during the six months ended June 30, 2002: SIX MONTHS ENDED JUNE 30, 2002 ---------------- Fair value of contracts outstanding, beginning of the year ..... $ (1,104) Contracts realized or otherwise settled ........................ (8,094) Fair value of new contracts .................................... 15,360 Other changes in fair value .................................... 3,410 -------- Fair value of contracts outstanding, end of period ............. $ 9,572 ======== The following table summarizes the maturity of contracts outstanding as at June 30, 2002:
GREATER LESS THAN THAN 5 TOTAL FAIR SOURCE OF FAIR VALUE 1 YEAR 1-3 YEARS 4-5 YEARS YEARS VALUE -------------------- ------ --------- --------- ----- ----- Prices actively quoted ............................... $ 800 $ -- $ -- $ -- $ 800 Prices based on models and other valuation methods ... 4,732 1,657 2,383 -- 8,772 ------ ------ ------ ------ ------ Total fair value of contracts outstanding ............ $5,532 $1,657 $2,383 $ -- $9,572 ====== ====== ====== ====== ======
36 In managing its weather and energy risk management business, 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. 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, credit quality, 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. VaR is one of the tools used by management to measure potential losses in fair values using historical rates, market movements and credit spreads 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, including all investment related derivatives, at June 30, 2002 was approximately $222.4 million. 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 June 30, 2002, bond and stock index futures outstanding were $226.0 million with underlying investments having a market value of $2.2 billion. Gains of $7.3 million were realized on these contracts for the three months ended June 30, 2002. The Company reduces its exposure to these futures through offsetting transactions, including options and forwards. The VaR of all investment related derivatives at June 30, 2002 was approximately $6.0 million. The Company holds warrants in conjunction with certain of its other investments. These warrants are recorded at fair value based on quoted market prices. For the six months ended June 30, 2002, the Company recorded an unrealized loss of $14.2 million for the change in fair value of these warrants, relating primarily to the Company's investment in Mutual Risk Management. 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 statement, any 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 that are not historical facts, including statements about the Company's beliefs and expectations, are forwarded-looking statements. These Statements are based on current plans, estimates and projections. 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. 37 All forward-looking statements address matters that involve inherent risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such forward-looking 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 sustainable 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, or due to adverse development over time, including 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 government-sponsored solutions to make available insurance coverage for acts of terrorism; (xi) developments in the bankruptcy proceedings of Adelphia Communications, Enron Corp. and WorldCom Inc. (or other companies that are subject to bankruptcy or other similar proceedings) or other developments related to such companies, in so far as they affect property and casualty insurance and reinsurance coverages; (xii) availability and terms 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 that could adversely affect the Company's financial, statutory and other statements and reports and the Company's ability to engage in particular lines of business; (xx) changes in accounting policies or practices that could adversely affect the Company's financial statutory and other statements and reports; (xxi) legislative, tax or regulatory developments that could adversely affect the Company or the ability of customers or brokers to do business with the Company; (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; (xxiv) developments relating to Argentina, including the impact of any potential International Monetary Fund assistance or structural reforms within Argentina; and (xxv) the other factors set forth in the Company's most recent report on Form 10-K and 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. 38 XL CAPITAL LTD PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to various legal proceedings, including arbitrations, arising in the ordinary course of business. Such legal proceedings generally relate to claims asserted by or against the Company's subsidiaries in the ordinary course of their respective insurance, reinsurance and financial products and services operations. The Company does not believe that the eventual resolution of any of the legal proceedings to which it is a party will result in a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS At the Annual General Meeting of Class A Shareholders held on May 10, 2002 at the Executive Offices of the Company, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda, the shareholders approved the following: 1. The election of six Class I Directors to hold office until 2005: Votes in Favor Votes Withheld -------------- -------------- R. Bornhuetter 119,763,533 615,322 M.P. Esposito, Jr. 119,773,879 604,976 R.R. Glauber 119,277,648 1,101,207 P. Jeanbart 119,768,894 609,961 C. Rance 119,748,102 630,753 E.E. Thrower 119,767,251 611,604 2. The appointment of Pricewaterhouse Coopers LLP, New York, New York, to act as the independent auditors of the Company for the fiscal year ending December 31, 2002: VOTES IN FAVOR VOTES WITHHELD ABSTENTIONS -------------- -------------- ----------- 117,984,399 2,006,289 388,167 3. The approval of the amendment and restatement of the Company's 1991 Performance Incentive Program and: VOTES IN FAVOR VOTES WITHHELD ABSTENTIONS BROKER NON-VOTES -------------- -------------- ----------- ---------------- 57,510,480 55,477,129 583,566 6,807,680 4. The approval of the Company's Employee Share Purchase Plan: VOTES IN FAVOR VOTES WITHHELD ABSTENTIONS BROKER NON-VOTES -------------- -------------- ----------- ---------------- 112,835,580 310,007 425,588 6,807,680 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.63 364-Day Credit Agreement, dated June 27, 2002, between XL Capital Ltd, X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL Europe Ltd and XL Re Ltd, as account parties and guarantors, the lenders party thereto, and JP Morgan Chase Bank, as administrative agent. 99.9 XL Capital Assurance Inc. unaudited condensed financial statements for the three month and six month periods ended June 30, 2002 and 2001. 99.10 XL Financial Assurance Ltd. unaudited condensed financial statements for the three month and six month periods ended June 30, 2002 and 2001. 39 (B) REPORTS ON FORM 8-K None 40 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. XL CAPITAL LTD ---------------------------------------------------- (REGISTRANT) Dated: AUGUST 5, 2002 /s/ BRIAN M. O'HARA - --------------------- ---------------------------------------------------- BRIAN M. O'HARA PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ JERRY DE ST. PAER ---------------------------------------------------- JERRY DE ST. PAER EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 41 CERTIFICATION ACCOMPANYING FORM 10-Q REPORT OF XL CAPITAL LTD PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (CHAPTER 63, TITLE 18 U.S.C.SS.1350(A) AND (B)) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.1350(a) and (b)), each of the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the period ended June 30, 2002 of XL Capital Ltd ("Company") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 5, 2002 /s/ Brian M. O'Hara ------------------------------------- Brian M. O'Hara President and Chief Executive Officer XL Capital Ltd Dated: August 5, 2002 /s/ Jerry de St. Paer ------------------------------------- Jerry de St. Paer Executive Vice President and Chief Financial Officer XL Capital Ltd EX-10.63 3 c25171_ex10-63.txt CREDIT AGREEMENT EX-10.63 EXECUTION COPY ================================================================================ 364-DAY CREDIT AGREEMENT dated as of June 27, 2002 between XL CAPITAL LTD, X.L. AMERICA, INC., XL INSURANCE (BERMUDA) LTD, XL EUROPE LTD and XL RE LTD, as Account Parties and Guarantors, The LENDERS Party Hereto and JPMORGAN CHASE BANK, as Administrative Agent ------------- $2,000,000,000 ------------- J.P. MORGAN SECURITIES INC., as Sole Advisor, Sole Lead Arranger and Sole Bookrunner and CITIBANK, N.A., DEUTSCHE BANK AG NEW YORK BRANCH and MELLON BANK, N.A., as Co-Syndication Agents ================================================================================ TABLE OF CONTENTS
Page ARTICLE I.................................................................................1 DEFINITIONS............................................................................1 SECTION 1.01. Defined Terms.......................................................1 SECTION 1.02. Terms Generally....................................................13 SECTION 1.03. Accounting Terms; GAAP and SAP.....................................14 ARTICLE II...............................................................................14 THE CREDITS...........................................................................14 SECTION 2.01. Syndicated Letters of Credit.......................................14 SECTION 2.02. Issuance and Administration........................................16 SECTION 2.03. Reimbursement of LC Disbursements, Etc.............................16 SECTION 2.04. Non-Syndicated Letters of Credit...................................19 SECTION 2.05. Participated Letters of Credit.....................................24 SECTION 2.06. Alternative Currency Letters of Credit.............................28 SECTION 2.07. The Revolving Credit Commitments...................................29 SECTION 2.08. Loans and Borrowings...............................................29 SECTION 2.09. Requests for Borrowings............................................30 SECTION 2.10. Funding of Borrowings..............................................31 SECTION 2.11. Interest Elections.................................................31 SECTION 2.12. Termination and Reduction of the Commitments.......................32 SECTION 2.13. Repayment of Loans; Term-Out Option; Evidence of Debt..............33 SECTION 2.14. Prepayment of Loans................................................34 SECTION 2.15. Fees. 35 SECTION 2.16. Interest...........................................................37 SECTION 2.17. Alternate Rate of Interest.........................................38 SECTION 2.18. Increased Costs....................................................38 SECTION 2.19. Break Funding Payments.............................................39 SECTION 2.20. Taxes..............................................................40 SECTION 2.21. Payments Generally; Pro Rata Treatment; Sharing of Set-offs........41 SECTION 2.22. Mitigation Obligations; Replacement of Lenders.....................43 ARTICLE III..............................................................................44 GUARANTEE.............................................................................44 SECTION 3.01. The Guarantee......................................................44 SECTION 3.02. Obligations Unconditional..........................................45 SECTION 3.03. Reinstatement......................................................45 SECTION 3.04. Subrogation........................................................46 SECTION 3.05. Remedies...........................................................46 SECTION 3.06. Continuing Guarantee...............................................46 SECTION 3.07. Rights of Contribution.............................................46 SECTION 3.08. General Limitation on Guarantee Obligations........................47
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ARTICLE IV...............................................................................47 REPRESENTATIONS AND WARRANTIES........................................................47 SECTION 4.01. Organization; Powers...............................................47 SECTION 4.02. Authorization; Enforceability......................................47 SECTION 4.03. Governmental Approvals; No Conflicts...............................47 SECTION 4.04. Financial Condition; No Material Adverse Change....................48 SECTION 4.05. Properties.........................................................48 SECTION 4.06. Litigation and Environmental Matters...............................49 SECTION 4.07. Compliance with Laws and Agreements................................49 SECTION 4.08. Investment and Holding Company Status..............................49 SECTION 4.09. Taxes .............................................................49 SECTION 4.10. ERISA .............................................................49 SECTION 4.11. Disclosure.........................................................50 SECTION 4.12. Use of Credit......................................................50 SECTION 4.13. Subsidiaries.......................................................50 SECTION 4.14. Withholding Taxes..................................................50 SECTION 4.15. Stamp Taxes........................................................51 SECTION 4.16. Legal Form.........................................................51 ARTICLE V................................................................................51 CONDITIONS............................................................................51 SECTION 5.01. Effective Date.....................................................51 SECTION 5.02. Each Credit Event..................................................52 ARTICLE VI...............................................................................53 AFFIRMATIVE COVENANTS.................................................................53 SECTION 6.01. Financial Statements and Other Information.........................53 SECTION 6.02. Notices of Material Events.........................................55 SECTION 6.03. Preservation of Existence and Franchises...........................55 SECTION 6.04. Insurance..........................................................56 SECTION 6.05. Maintenance of Properties..........................................56 SECTION 6.06. Payment of Taxes and Other Potential Charges and Priority Claims; Payment of Other Current Liabilities..........................56 SECTION 6.07. Financial Accounting Practices.....................................56 SECTION 6.08. Compliance with Applicable Laws....................................57 SECTION 6.09. Use of Letters of Credit and Proceeds..............................57 SECTION 6.10. Continuation of and Change in Businesses...........................57 SECTION 6.11. Visitation.........................................................57 ARTICLE VII..............................................................................57 NEGATIVE COVENANTS....................................................................57 SECTION 7.01. Mergers............................................................57 SECTION 7.02. Dispositions.......................................................58 SECTION 7.03. Liens .............................................................58 SECTION 7.04. Transactions with Affiliates.......................................59 SECTION 7.05. Ratio of Total Funded Debt to Total Capitalization.................60
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SECTION 7.06. Consolidated Net Worth.............................................60 SECTION 7.07. Indebtedness.......................................................60 SECTION 7.08. Claims Paying Ratings..............................................60 SECTION 7.09. Private Act........................................................60 ARTICLE VIII.............................................................................61 EVENTS OF DEFAULT.....................................................................61 ARTICLE IX...............................................................................64 THE ADMINISTRATIVE AGENT..............................................................64 ARTICLE X................................................................................66 MISCELLANEOUS.........................................................................66 SECTION 10.01. Notices...........................................................66 SECTION 10.02. Waivers; Amendments...............................................66 SECTION 10.03. Expenses; Indemnity; Damage Waiver................................68 SECTION 10.04. Successors and Assigns............................................69 SECTION 10.05. Survival..........................................................72 SECTION 10.06. Counterparts; Integration; Effectiveness..........................73 SECTION 10.07. Severability......................................................73 SECTION 10.08. Right of Setoff...................................................73 SECTION 10.09. Governing Law; Jurisdiction; Etc..................................74 SECTION 10.10. WAIVER OF JURY TRIAL..............................................74 SECTION 10.11. Headings..........................................................75 SECTION 10.12. Treatment of Certain Information; Confidentiality.................75 SECTION 10.13. Judgment Currency.................................................76
SCHEDULE I - Commitments SCHEDULE II - Indebtedness and Liens SCHEDULE III - Litigation SCHEDULE IV - Environmental Matters SCHEDULE V - Subsidiaries SCHEDULE VI - Existing Letters of Credit EXHIBIT A - Form of Assignment and Acceptance EXHIBIT B-1 - Form of Opinion of Paul S. Giordano, Esq., Counsel to XL Capital EXHIBIT B-2 - Form of Opinion of Charles R. Barr, Esq., Counsel to XL America EXHIBIT B-3 - Form of Opinion of Special U.S. Counsel to the Obligors EXHIBIT B-4 - Form of Opinion of Special Bermuda Counsel to XL Insurance and XL Re EXHIBIT B-5 - Form of Opinion of Special Cayman Islands Counsel to XL Capital EXHIBIT B-6 - Form of Opinion of Special Irish Counsel to XL Europe EXHIBIT C - Form of Opinion of Special New York Counsel to JPMCB iii 364-Day Credit Agreement dated as of June 27, 2002, between XL CAPITAL LTD, a company incorporated 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" and, together with XL Capital, XL America, XL Insurance and XL Europe, each an "ACCOUNT PARTY" and each a "GUARANTOR" and collectively, the "ACCOUNT PARTIES" and the "GUARANTORS"; the Account Parties and the Guarantors being collectively referred to as the "OBLIGORS"), the LENDERS party hereto, and JPMORGAN CHASE BANK, as Administrative Agent. The Account Parties have requested that the Lenders issue letters of credit for their account and make loans to them in an aggregate face or principal amount not exceeding $2,000,000,000 at any one time outstanding, and the Lenders are prepared to issue such letters of credit and make such loans upon the terms and conditions hereof. Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "ACCOUNT PARTIES" means each of XL Capital, XL America, XL Insurance, XL Europe and XL Re. "ACCOUNT PARTY JURISDICTION" means (a) Bermuda, (b) the Cayman Islands, (c) the Republic of Ireland and (d) any other country (i) where any Account Party is licensed or qualified to do business or (ii) from or through which payments hereunder are made by any Account Party. "ADJUSTED LIBO RATE" means, for the Interest Period for any Eurodollar Borrowing, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period MULTIPLIED BY (b) the Statutory Reserve Rate for such Interest Period. "ADMINISTRATIVE AGENT" means JPMCB, in its capacity as administrative agent for the Lenders hereunder. 364-DAY CREDIT AGREEMENT - 2 - "ADMINISTRATIVE QUESTIONNAIRE" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "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. "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day, and (b) the Federal Funds Effective Rate for such day PLUS 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be. "ALTERNATIVE CURRENCY" means any currency other than Dollars (a) that is freely transferable and convertible into Dollars in the London foreign exchange market and (b) for which 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 Lender for issuing, renewing, extending or amending letter of credits or funding or making drawings thereunder and/or to permit any Account Party to pay the reimbursement obligations and interest thereon, each as contemplated hereunder, unless such authorization has been obtained and is in full force and effect. "ALTERNATIVE CURRENCY LC EXPOSURE" means, at any time, the sum of (a) the Dollar Equivalent of the aggregate undrawn amount of all outstanding Alternative Currency Letters of Credit at such time PLUS (b) the Dollar Equivalent of the aggregate amount of all LC Disbursements under Alternative Currency Letters of Credit that have not been reimbursed by or on behalf of the Account Parties at such time. The Alternative Currency LC Exposure of any Lender shall at any time be such Lender's share of the total Alternative Currency LC Exposure at such time. "ALTERNATIVE CURRENCY LETTER OF CREDIT" means a letter of credit issued by a Lender in an Alternative Currency pursuant to Section 2.06. "ALTERNATIVE CURRENCY LETTER OF CREDIT REPORT" has the meaning set forth in Section 2.06(b). "APPLICABLE MARGIN" means (a) for the period from and including the date hereof to but not including the Commitment Termination Date, 0.315% per annum and (b) in the event that the Term-Out Option has been exercised and is in effect, for the period from and including the Commitment Termination Date to but not including the date of payment in full of the Loans, 0.565% per annum. "APPLICABLE PERCENTAGE" means, with respect to any Lender, the percentage of the Commitments of all the Lenders represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "APPROVED FUND" means (a) a CLO and (b) with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in 364-DAY CREDIT AGREEMENT - 3 - bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 10.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "AVAILABILITY PERIOD" means the period from and including the Effective Date to and including the Commitment Termination Date. "BACKSTOPPED LETTER OF CREDIT" means a letter of credit identified in Schedule VI (a) issued for account of an Account Party, (b) as to which the issuer thereof has become the beneficiary of a Letter of Credit issued hereunder under which such beneficiary is entitled to draw in an amount equal to any drawing under such identified letter of credit and (c) as to which, if the reimbursement obligations thereunder were originally secured, such beneficiary terminates any Lien securing such reimbursement obligations upon its receipt of such Letter of Credit. "BOARD" means the Board of Governors of the Federal Reserve System of the United States of America. "BORROWING" means (a) all ABR Loans made, converted or continued on the same date or (b) all Eurodollar Loans that have the same Interest Period. "BORROWING REQUEST" means a request by an Account Party for a Borrowing in accordance with Section 2.09. "BUSINESS DAY" means any day (a) that is not a Saturday, Sunday or other day on which commercial banks in New York City, London, the Cayman Islands, British West Indies, Bermuda or Ireland are authorized or required by law to remain closed and (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 Eurodollar Loan, or to a notice by an Account Party with respect to any such borrowing, payment, prepayment, continuation, conversion, or Interest Period, that is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "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. "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, 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 364-DAY CREDIT AGREEMENT - 4 - 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. "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 Section 2.18(b), 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. "CLO" means 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. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITMENT" means, with respect to each Lender, the commitment (if any) of such Lender (a) to issue Syndicated Letters of Credit and Non-Syndicated Letters of Credit and acquire participations in Participated Letters of Credit and/or (b) to make Loans hereunder (a "REVOLVING CREDIT COMMITMENT"), in each case expressed as an amount representing the maximum aggregate amount of such Lender's Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.12 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 10.04. The initial amount of each Lender's Commitment (including any Revolving Credit Commitment) is set forth on Schedule I, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is $2,000,000,000, including the initial aggregate Revolving Credit Commitments of $500,000,000. "COMMITMENT TERMINATION DATE" means June 26, 2003. "CONFIRMING LENDER" means, with respect to any Lender, any other bank that has agreed, by delivery of an agreement in form and substance satisfactory to the Administrative Agent that such other bank will itself honor the obligations of such Lender in respect of a draft complying with the terms of a Syndicated Letter of Credit or a Non-Syndicated Letter of Credit, as the case may be, as if, and to the extent, such other bank were the "Issuing Lender" named in such Syndicated Letter of Credit or Non-Syndicated Letter of Credit, as the case may be. "CONSOLIDATED NET WORTH" means, at any time, the consolidated stockholders' equity of XL Capital 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 364-DAY CREDIT AGREEMENT - 5 - exercise voting power, by contract or otherwise. "CONTROLLING" and "CONTROLLED" have meanings correlative thereto. "CREDIT DOCUMENTS" means, collectively, this Agreement and the Letter of Credit Documents. "CREDIT EXPOSURE" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Loans and its LC Exposure at such time. "DEFAULT" means 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" means, as used in each Alternative Currency Letter of Credit Report and in respect of any Alternative Currency Letter of Credit, the amount of Dollars obtained by converting the Alternative Currency LC Exposure with respect to such Alternative Currency Letter of Credit, as specified in such Alternative Currency Letter of Credit Report, into Dollars at the spot rate for the purchase of Dollars with such currency as quoted by the Administrative Agent at approximately 11:00 a.m. (London time) on the second Business Day before the date of such Alternative Currency Letter of Credit Report (unless another rate or time is agreed to by XL Capital and the Administrative Agent). "DOLLARS" or "$" refers to lawful money of the United States of America. "EFFECTIVE DATE" means the date on which the conditions specified in Section 5.01 are satisfied (or waived in accordance with Section 10.02). "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 364-DAY CREDIT AGREEMENT - 6 - 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 Account 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 Account Party or any of such Account 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 Account 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 Account Party 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 Account Party or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from any Account 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. "EURODOLLAR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "EVENT OF DEFAULT" has the meaning assigned to such term in Article VIII. "EXCLUDED TAXES" means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of any Account Party hereunder, (a) Taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits Taxes imposed by the United States of America or any similar Tax imposed by any other jurisdiction in which any Account Party is located or (c) with respect to any Lender (other than an assignee pursuant to a request by XL Capital pursuant to Section 2.22(b)) any Indemnified Tax that (i) is in effect and would apply to amounts payable to such Lender at the time such Lender becomes a party to this Agreement (or designates a new lending office), other than any Indemnified Tax imposed on any payment to any Lender to the extent such Lender (or its assignee, as the case may be) was entitled, at the time of designation of 364-DAY CREDIT AGREEMENT - 7 - a new lending office (or assignment, as the case may be) to receive additional amounts from such Account Party with respect to such Indemnified Tax pursuant to Section 2.20(a) or (ii) is attributable to such Lender's failure or inability to comply with Section 2.20(e). "EXISTING CREDIT AGREEMENT" means the 364-Day Credit Agreement dated as of June 29, 2001 between the Obligors, the lenders party thereto, and JPMCB (formerly known as The Chase Manhattan Bank), as administrative agent for such lenders. "EXISTING LETTER OF CREDIT AGREEMENT" means the Letter of Credit and Reimbursement Agreement dated as of June 29, 2001 between the Obligors, the lenders party thereto, and JPMCB (formerly known as The Chase Manhattan Bank), as administrative agent for such lenders. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FINANCIAL OFFICER" means, with respect to any Obligor, a principal financial officer of such Obligor. "GAAP" means generally accepted accounting principles in the United States of America. "GIC" means a guaranteed investment contract or funding agreement or other similar agreement issued by an Account Party or any of its Subsidiaries that guarantees to a counterparty a rate of return on the invested capital over the life of such contract or agreement. "GOVERNMENTAL AUTHORITY" means the government of the United States of America, or of any other nation (including the European Union), 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 364-DAY CREDIT AGREEMENT - 8 - 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 XL Capital, 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 GICs) or corporate member of The Council of Lloyd's or as a provider of financial or investment services or contracts (including GICs) (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. "INDEMNIFIED TAXES" means Taxes (including Other Taxes) imposed on the Administrative Agent or any Lender on or with respect to any payment hereunder or the execution, delivery or enforcement of, or otherwise with respect to this Agreement other than Excluded Taxes. "INSURANCE SUBSIDIARY" means any Subsidiary which is subject to the regulation of, and is required to file statutory financial statements with, any governmental body, agency or 364-DAY CREDIT AGREEMENT - 9 - official in any State or territory of the United States or the District of Columbia which regulates insurance companies or the doing of an insurance business therein. "INTEREST ELECTION REQUEST" means a request by an Account Party to convert or continue a Borrowing in accordance with Section 2.11. "INTEREST PAYMENT DATE" means (a) with respect to any ABR Loan, each Quarterly Date and (b) with respect to any Eurodollar Loan, the last day of each Interest Period therefor and, in the case of any Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at three-month intervals after the first day of such Interest Period. "INTEREST PERIOD" means, for any Eurodollar Loan or Borrowing, the period commencing on the date of such Loan or Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as specified in the applicable Borrowing Request or Interest Election Request; PROVIDED that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (ii) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Loan initially shall be the date on which such Loan is made and thereafter shall be the effective date of the most recent conversion or continuation of such Loan, and the date of a Borrowing comprising Loans that have been converted or continued shall be the effective date of the most recent conversion or continuation of such Loans. "ISSUING LENDER" means (a) with respect to any Participated Letter of Credit, JPMCB, in its capacity as the issuer of such Participated Letter of Credit hereunder, and its successors in such capacity as provided in Section 2.05(j), (b) with respect to any Syndicated Letter of Credit, each Lender, in its capacity as the issuer of such Syndicated Letter of Credit and (c) with respect to any Non-Syndicated Letter of Credit, the Lender named therein as the issuer thereof. "JPMCB" means JPMorgan Chase Bank. "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 or Non-Syndicated Letter of Credit, a payment made by the Issuing Lender pursuant thereto and (b) with respect to any Syndicated Letter of Credit or Alternative Currency Letter of Credit, a payment made by a Lender pursuant thereto. "LC EXPOSURE" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time PLUS (b) the aggregate amount of all LC 364-DAY CREDIT AGREEMENT - 10 - Disbursements under Letters of Credit that have not yet been reimbursed by or on behalf of the Account Parties at such time. The LC Exposure of any Lender at any time shall be the sum of (i) its Applicable Percentage of the total LC Exposure (excluding any Alternative Currency LC Exposure) PLUS (ii) the Alternative Currency LC Exposure (if any) of such Lender at such time. "LENDERS" means the Persons listed on Schedule I and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. "LETTER OF CREDIT DOCUMENTS" means, with respect to any Letter of Credit, collectively, any application therefor and any other agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for the rights and obligations of the parties concerned or at risk with respect to such Letter of Credit. "LETTERS OF CREDIT" means each of the Syndicated Letters of Credit, the Non-Syndicated Letters of Credit, the Participated Letters of Credit and the Alternative Currency Letters of Credit. "LIBO RATE" means, for the Interest Period for any Eurodollar Borrowing, the rate appearing on Page 3750 of the Telerate Service (or on any 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 Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for the offering of Dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the LIBO Rate for such Interest Period shall be the rate at which Dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "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. "LOANS" means the loans made by the Lenders to the Account Parties pursuant to Section 2.07. "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 Account Party and its Subsidiaries taken as a whole; or (b) the ability of an Account Party to perform any of its payment or other material obligations under this Agreement. 364-DAY CREDIT AGREEMENT - 11 - "MATURITY DATE" means the Commitment Termination Date, as such date may be extended pursuant to the Term-Out Option. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NAIC" means the National Association of Insurance Commissioners. "NAIC APPROVED LENDER" means (a) any Lender that is a bank listed on the most current Bank List of banks approved by the NAIC (the "NAIC LENDER LIST") or (b) any Lender as to which its Confirming Lender is a bank listed on the NAIC Lender List. "NON-SYNDICATED LETTERS OF CREDIT" means letters of credit issued under Section 2.04. "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 Account Party or any of their Subsidiaries, with respect to which such Account Party or such Subsidiary has an obligation to contribute, for the benefit of employees of such Account 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. "OBLIGORS" means each of the Account Parties and each of the Guarantors. "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. "PARTICIPATED LETTERS OF CREDIT" means letters of credit issued under Section 2.05. "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 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. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by JPMCB as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. 364-DAY CREDIT AGREEMENT - 12 - "PRIVATE ACT" means separate legislation enacted in Bermuda with the intention that such legislation apply specifically to an Account Party, 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. "REGISTER" has the meaning assigned to such term in Section 10.04. "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. "REPLACED LETTER OF CREDIT" means a letter of credit identified in Schedule VI (a) issued for account of an Account Party and (b) as to which the beneficiary thereof has become the beneficiary of a Letter of Credit issued hereunder that contains a provision to the effect that such Letter of Credit shall be of no force or effect, and no drawing under such Letter of Credit may be made, unless and until the issuer of such identified letter of credit receives such identified letter of credit within 30 days after the date of issuance of such Letter of Credit together with instructions from such beneficiary to cancel such identified letter of credit. "REQUIRED LENDERS" means, at any time, Lenders having Commitments representing more than 50% of the sum of the aggregate Commitments of all the Lenders at such time; PROVIDED that, if the Commitments have expired or been terminated, "Required Lenders" means Lenders having more than 50% of the aggregate Credit Exposure of the Lenders. "REVOLVING CREDIT COMMITMENT" has the meaning assigned to such term in the definition of "Commitment" contained in this Section 1.01. "SAP" means, as to each Account Party and each Subsidiary that offers insurance products, the statutory accounting practices prescribed or permitted by the relevant Governmental Authority for such Account Party'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 Account Party 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 1.03. "SEC" means the Securities and Exchange Commission or any successor entity. "STATUTORY RESERVE RATE" means, for any day (or for the Interest Period for any Eurodollar Borrowing), 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 Board to which the Administrative Agent is subject on such day (or, with respect to an Interest Period, the denominator of which is the number one MINUS the arithmetic mean of such aggregates for the days in such Interest Period) with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit 364-DAY CREDIT AGREEMENT - 13 - for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "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 LETTERS OF CREDIT" means letters of credit issued under Section 2.01. "TAXES" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "TERM-OUT OPTION" has the meaning assigned to such term in Section 2.13(b). "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. "TRANSACTIONS" means the execution, delivery and performance by the Obligors of this Agreement and the other Credit Documents to which any Account Party is intended to be a party, the issuance of Letters of Credit, the borrowing of Loans and the use of the proceeds thereof. "TYPE", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans constituting such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "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. SECTION 1.02. TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not 364-DAY CREDIT AGREEMENT - 14 - to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "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. SECTION 1.03. 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 Account Parties 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 Account Parties that the Required 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. ARTICLE II THE CREDITS SECTION 2.01. SYNDICATED LETTERS OF CREDIT. (a) GENERAL. Subject to the terms and conditions set forth herein, at the request of any Account Party the Lenders agree at any time and from time to time during the Availability Period to issue Syndicated Letters of Credit for the account of such Account Party in an aggregate amount that will not result in the Credit Exposure exceeding the Commitments (it being understood that Syndicated Letters of Credit may be issued, or be outstanding, for the account of more than one of the Account Parties at any time). Each Syndicated Letter of Credit shall be in such form as is consistent with the requirements of the applicable regulatory authorities in Illinois, California, Wisconsin or New York as reasonably determined by the Administrative Agent or as otherwise agreed to by the Administrative Agent and XL Capital; PROVIDED that, without the prior consent of each Lender, no Syndicated Letter of Credit may be issued that would vary the several and not joint nature of the obligations of the Lenders thereunder as provided in the next succeeding sentence. Each Syndicated Letter of Credit shall be issued by all of the Lenders thereunder, acting through the Administrative Agent, at the time of issuance as a single multi-bank letter of credit, but the obligation of each Lender thereunder shall be several and not joint, based upon its Applicable Percentage of the aggregate undrawn amount of such Syndicated Letter of Credit. (b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL OR EXTENSION. To request the issuance of a Syndicated Letter of Credit (or the amendment, renewal or extension of an outstanding Syndicated Letter of Credit), an Account Party shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the 364-DAY CREDIT AGREEMENT - 15 - Administrative Agent) to the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Syndicated Letter of Credit, or identifying the Syndicated Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension, as the case may be (which shall be a Business Day), the date on which such Syndicated Letter of Credit is to expire (which shall comply with paragraph (d) of this Section), the amount of such Syndicated Letter of Credit, the name and address of the beneficiary thereof and the terms and conditions of (and such other information as shall be necessary to prepare, amend, renew or extend, as the case may be) such Syndicated Letter of Credit. If any Syndicated Letter of Credit shall provide for the automatic extension of the expiry date thereof unless the Administrative Agent gives notice that such expiry date shall not be extended, then the Administrative Agent will give such notice if requested to do so by the Required Lenders in a notice given to the Administrative Agent not more than 60 days, but not less than 45 days, prior to the current expiry date of such Syndicated Letter of Credit. If requested by the Administrative Agent, such Account Party also shall submit a letter of credit application on JPMCB's standard form in connection with any request for a Syndicated Letter of Credit. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by any Account Party to, or entered into by any Account Party with, the Administrative Agent relating to any Syndicated Letter of Credit, the terms and conditions of this Agreement shall control. (c) LIMITATIONS ON AMOUNTS. A Syndicated Letter of Credit shall be issued, amended, renewed or extended only if (and upon such issuance, amendment, renewal or extension of each Syndicated Letter of Credit the Account Parties shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension, (A) the aggregate Credit Exposure of the Lenders shall not exceed the excess, if any, of (i) the aggregate amount of the Commitments OVER (ii) the aggregate stated amount of all letters of credit identified in Schedule VI (other than Backstopped Letters of Credit and Replaced Letters of Credit) at the time outstanding and (B) the sum of (i) the Credit Exposure (excluding any Alternative Currency LC Exposure) of each Lender PLUS (ii) the aggregate stated amount of all letters of credit identified in Schedule VI issued by such Lender (other than Backstopped Letters of Credit and Replaced Letters of Credit) at the time outstanding shall not exceed the Commitment of such Lender. (d) EXPIRY DATE. Each Syndicated Letter of Credit shall expire at or prior to the close of business on the date one year after the date of the issuance of such Syndicated Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension). (e) OBLIGATION OF LENDERS. The obligation of any Lender under any Syndicated Letter of Credit shall be several and not joint and shall at any time be in an amount equal to such Lender's Applicable Percentage of the aggregate undrawn amount of such Syndicated Letter of Credit, and each Syndicated Letter of Credit shall expressly so provide. (f) CONTINUATION OF EXISTING LETTERS OF CREDIT. Subject to the terms and conditions hereof, each Letter of Credit under (and as defined in) the Existing Letter of Credit Agreement which is outstanding on the Effective Date and designated by the Account Parties in 364-DAY CREDIT AGREEMENT - 16 - a notice to the Administrative Agent shall be continued hereunder on the Effective Date by all of the Lenders, and the obligation of each such Lender shall be several and not joint, based upon its Applicable Percentage and the aggregate undrawn amount of such Letter of Credit (as so defined), which shall be deemed a Syndicated Letter of Credit under this Agreement as of such date. The Administrative Agent shall, on the Effective Date or promptly thereafter, notify each beneficiary of such Letter of Credit that is continued hereunder of the Lenders party thereto, and their respective Applicable Percentages, as of the Effective Date. SECTION 2.02. ISSUANCE AND ADMINISTRATION. Each Syndicated Letter of Credit shall be executed and delivered by the Administrative Agent in the name and on behalf of, and as attorney-in-fact for, each Lender party to such Syndicated Letter of Credit, and the Administrative Agent shall act under each Syndicated Letter of Credit, and each Syndicated Letter of Credit shall expressly provide that the Administrative Agent shall act, as the agent of each Lender 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 Lender 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 Administrative 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 Lender hereby irrevocably appoints and designates the Administrative Agent as its attorney-in-fact, acting through any duly authorized officer of JPMCB, to execute and deliver in the name and on behalf of such Lender each Syndicated Letter of Credit to be issued by such Lender hereunder. Promptly upon the request of the Administrative Agent, each Lender will furnish to the Administrative 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 Administrative Agent has the power to act as attorney-in-fact for such Lender to execute and deliver such Syndicated Letter of Credit. Notwithstanding anything in this Agreement to the contrary, the Administrative Agent has no responsibility hereunder with respect to the issuance, renewal, extension, amendment or other administration of any Alternative Currency Letter of Credit, except as expressly set forth in Section 2.06. SECTION 2.03. REIMBURSEMENT OF LC DISBURSEMENTS, ETC. (a) REIMBURSEMENT. If any Lender shall make any LC Disbursement in respect of any Syndicated Letter of Credit or Alternative Currency Letter of Credit, regardless of the identity of the Account Party of such Syndicated Letter of Credit or Alternative Currency Letter of Credit, as the case may be, the Account Parties jointly and severally agree that they shall reimburse such Lender in respect of such LC Disbursement under (x) a Syndicated Letter of Credit by paying to the Administrative Agent an amount equal to such LC Disbursement not later than noon, New York City time, on (i) the Business Day that the Account Parties receive notice of such LC Disbursement, if such notice is received prior to 10:00 a.m., New York City time, or (ii) the Business Day immediately following the day that the Account Parties receive such notice, if such notice is not received prior to such time and (y) an Alternative Currency Letter of Credit, by paying such Lender on the date, in the currency and amount thereof, together with interest thereon (if any), and in the manner (including the place of payment) as such Lender and such Account Party shall have separately agreed pursuant to Section 2.06. 364-DAY CREDIT AGREEMENT - 17 - (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 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 (PROVIDED that the Account Parties shall not be obligated to reimburse such LC Disbursements unless payment is made against presentation of a draft or other document that at least substantially complies 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 Default, (vii) the existence of any proceedings of the type described in clause (g) or (h) of Article VIII 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 Administrative 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 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 Administrative Agent or a Lender 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 wilful misconduct of the Administrative Agent or a Lender. The parties hereto expressly agree that: (i) the Administrative 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; 364-DAY CREDIT AGREEMENT - 18 - (ii) the Administrative 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 Administrative 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 Administrative 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 Administrative Agent shall promptly after such examination (i) notify each of the Lenders and the Account Parties by telephone (confirmed by telecopy) of such demand for payment and (ii) deliver to each Lender 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 Lender 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 Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative 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 Lender in respect of any Syndicated Letter of Credit, the Administrative 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 Lenders 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 (i) 1% PLUS the Alternate Base Rate to but excluding the date three Business Days after such LC Disbursement is made and (ii) from and including the date three Business Days after such LC Disbursement is made, 3% PLUS the Alternate Base Rate. (e) RIGHT OF CONTRIBUTION. The Account Parties hereby agree, as between themselves, that if any Account Party shall pay any reimbursement obligation in respect of any LC Disbursement with respect to a Syndicated Letter of Credit issued to support the obligations of another Account Party (the "SPECIFIED ACCOUNT PARTY"), the Specified Account Party shall, on demand (but subject to the next sentence), pay to such first Account Party an amount equal to the amount of such reimbursement. The payment obligation of a Specified Account Party to another Account Party under this paragraph (e) shall be subordinate and subject in right of payment to 364-DAY CREDIT AGREEMENT - 19 - the prior payment in full of the obligations of the Specified Account Party under this Agreement and each other Credit Document, and such other Account Party shall not exercise any right or remedy with respect to such reimbursement until payment and satisfaction in full of all of such obligations of the Specified Account Party. SECTION 2.04. NON-SYNDICATED LETTERS OF CREDIT. (a) GENERAL. Subject to the terms and conditions set forth herein, at the request of any Account Party the Lenders agree at any time and from time to time during the Availability Period to issue Non-Syndicated Letters of Credit for the account of such Account Party in an aggregate amount that will not result in the Credit Exposure exceeding the Commitments (it being understood that Non-Syndicated Letters of Credit may be issued, or be outstanding, for the account of more than one of the Account Parties at any time). Each Non-Syndicated Letter of Credit shall be in such form as is consistent with the requirements of the applicable regulatory authorities in the jurisdiction of issue as reasonably determined by the Administrative Agent or as otherwise agreed to by the Administrative Agent and XL Capital. Each Lender shall issue a Non-Syndicated Letter of Credit through the Administrative Agent, in the amount of such Lender's Applicable Percentage of the aggregate amount of Non-Syndicated Letters of Credit being requested by such Account Party at such time, and each Non-Syndicated Letter of Credit shall be the sole responsibility of such Issuing Lender. Notwithstanding anything to the contrary in this Agreement, no Non-Syndicated Letter of Credit may be requested hereunder for any jurisdiction unless XL Capital provides evidence reasonably satisfactory to the Administrative Agent that Syndicated Letters of Credit do not comply with the insurance laws of such jurisdiction. (b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL OR EXTENSION. To request the issuance of Non-Syndicated Letters of Credit (or the amendment, renewal or extension of outstanding Non-Syndicated Letters of Credit), an Account Party shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Administrative Agent) to the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of Non-Syndicated Letters of Credit, or identifying the Non-Syndicated Letters of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension, as the case may be (which shall be a Business Day), the date on which such Non-Syndicated Letters of Credit are to expire (which shall comply with paragraph (e) of this Section), the aggregate amount of all Non-Syndicated Letters of Credit to be issued in connection with such request, the name and address of the beneficiary thereof and the terms and conditions of (and such other information as shall be necessary to prepare, amend, renew or extend, as the case may be) such Non-Syndicated Letters of Credit. If Non-Syndicated Letters of Credit issued in connection with the same request shall provide for the automatic extension of the expiry date thereof unless the Issuing Lender thereof or the Administrative Agent gives notice that such expiry date shall not be extended, then the Administrative Agent (acting on behalf of the relevant Issuing Lenders) will give such notice for all such Non-Syndicated Letters of Credit if requested to do so by the Required Lenders in a notice given to the Administrative Agent not more than 60 days, but not less than 45 days, prior to the current expiry date of such Non-Syndicated 364-DAY CREDIT AGREEMENT - 20 - Letter of Credit. If requested by the Administrative Agent, such Account Party also shall submit a letter of credit application on JPMCB's standard form in connection with any request for a Non-Syndicated Letter of Credit. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by any Account Party to, or entered into by any Account Party with, the Administrative Agent relating to any Non-Syndicated Letter of Credit, the terms and conditions of this Agreement shall control. (c) ISSUANCE AND ADMINISTRATION. Each Non-Syndicated Letter of Credit shall be executed and delivered by the Administrative Agent in the name and on behalf of, and as attorney-in-fact for, the Issuing Lender party to such Non-Syndicated Letter of Credit, and the Administrative Agent shall act under each Non-Syndicated Letter of Credit, and each Non-Syndicated Letter of Credit shall expressly provide that the Administrative Agent shall act, as the agent of the respective Issuing Lender to (i) receive drafts, other demands for payment and other documents presented by the beneficiary under such Non-Syndicated Letter of Credit, (ii) determine whether such drafts, demands and documents are in compliance with the terms and conditions of such Non-Syndicated Letter of Credit and (iii) notify such Lender 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 Administrative Agent shall have no obligation or liability for any LC Disbursement under such Non-Syndicated Letter of Credit, and each Non-Syndicated Letter of Credit shall expressly so provide. Each Lender hereby irrevocably appoints and designates the Administrative Agent as its attorney-in-fact, acting through any duly authorized officer of JPMCB, to execute and deliver in the name and on behalf of such Lender each Non-Syndicated Letter of Credit to be issued by such Lender hereunder. Promptly upon the request of the Administrative Agent, each Lender will furnish to the Administrative Agent such powers of attorney or other evidence as any beneficiary of any Non-Syndicated Letter of Credit may reasonably request in order to demonstrate that the Administrative Agent has the power to act as attorney-in-fact for such Lender to execute and deliver such Non-Syndicated Letter of Credit. (d) LIMITATIONS ON AMOUNTS. Non-Syndicated Letters of Credit shall be issued, amended, renewed or extended only if (and upon such issuance, amendment, renewal or extension of each Non-Syndicated Letter of Credit the Account Parties shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension, (i) the aggregate Credit Exposure of the Lenders shall not exceed the excess, if any, of (A) the aggregate amount of the Commitments OVER (B) the aggregate stated amount of all letters of credit identified in Schedule VI (other than Backstopped Letters of Credit and Replaced Letters of Credit) at the time outstanding and (ii) the sum of (A) the Credit Exposure (excluding any Alternative Currency LC Exposure) of each Lender PLUS (B) the aggregate stated amount of all letters of credit identified in Schedule VI issued by such Lender (other than Backstopped Letters of Credit and Replaced Letters of Credit) at the time outstanding shall not exceed the Commitment of such Lender. (e) EXPIRY DATE. Each Non-Syndicated Letter of Credit shall expire at or prior to the close of business on the date one year after the date of the issuance of such Non-Syndicated Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension). (f) PARTICIPATIONS. By the issuance of a Non-Syndicated Letter of Credit (or an amendment to a Non-Syndicated Letter of Credit increasing the amount thereof) by the 364-DAY CREDIT AGREEMENT - 21 - respective Issuing Lender, and without any further action on the part of such Issuing Lender or the Lenders, such Issuing Lender hereby grants to each Lender (other than the Issuing Lender itself), and each such Lender hereby acquires from such Issuing Lender, a participation in such Non-Syndicated Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Non-Syndicated Letter of Credit. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Non-Syndicated Letter of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Non-Syndicated Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for account of the respective Issuing Lender, such Lender's Applicable Percentage of each LC Disbursement made by an Issuing Lender in respect of any Non-Syndicated Letter of Credit promptly upon the request of the Administrative Agent at any time from the time such LC Disbursement is made until such LC Disbursement is reimbursed by the Account Parties or at any time after any reimbursement payment is required to be refunded to the Account Parties for any reason. Such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Promptly following receipt by the Administrative Agent of any payment from the Account Parties pursuant to the next following paragraph, the Administrative Agent shall distribute such payment to the respective Issuing Lender or, to the extent that the Lenders have made payments pursuant to this paragraph to reimburse such Issuing Lender, then to such Lenders and such Issuing Lender as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse an Issuing Lender for any LC Disbursement shall not relieve the Account Parties of their obligation to reimburse such LC Disbursement. (g) REIMBURSEMENT. If any Issuing Lender shall make any LC Disbursement in respect of any Non-Syndicated Letter of Credit, regardless of the identity of the Account Party of such Non-Syndicated Letter of Credit, the Account Parties jointly and severally agree that they shall reimburse such Issuing Lender in respect of such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than noon, New York City time, on (i) the Business Day that the Account Parties receive notice of such LC Disbursement, if such notice is received prior to 10:00 a.m., New York City time, or (ii) the Business Day immediately following the day that the Account Parties receive such notice, if such notice is not received prior to such time. If the Account Parties fail to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Account Parties in respect thereof and such Lender's Applicable Percentage thereof. (h) OBLIGATIONS ABSOLUTE. The Account Parties' joint and several obligations to reimburse LC Disbursements in respect of any Non-Syndicated Letter of Credit as provided in paragraph (g) 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 Non-Syndicated Letter of Credit, or any term or provision therein, (ii) any draft or other document presented under a Non-Syndicated Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, 364-DAY CREDIT AGREEMENT - 22 - (iii) payment by the Issuing Lender under a Non-Syndicated Letter of Credit against presentation of a draft or other document that does not comply strictly with the terms of such Non-Syndicated Letter of Credit (PROVIDED that the Account Parties shall not be obligated to reimburse such LC Disbursements unless payment is made against presentation of a draft or other document that at least substantially complies with the terms of such Non-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 Default, (vii) the existence of any proceedings of the type described in clause (g) or (h) of Article VIII 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 Administrative Agent, the Lenders nor any Issuing Lender, 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 Non-Syndicated Letter of Credit (irrespective of any of the circumstances referred to in the preceding sentence) as a result of determining whether drafts or other documents presented under a Non-Syndicated 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 Non-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 the control of an Issuing Lender; PROVIDED that the foregoing shall not be construed to excuse the Administrative Agent or a Lender from 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 gross negligence or willful misconduct of the Administrative Agent or a Lender when determining whether drafts and other documents presented under a Non-Syndicated Letter of Credit comply with the terms thereof. The parties hereto expressly agree that: (i) the Administrative Agent may accept documents that appear on their face to be in substantial compliance with the terms of a Non-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 Non-Syndicated Letter of Credit; (ii) the Administrative 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 Non-Syndicated Letter of Credit; and 364-DAY CREDIT AGREEMENT - 23 - (iii) this sentence shall establish the standard of care to be exercised by the Administrative Agent when determining whether drafts and other documents presented under a Non-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). (i) DISBURSEMENT PROCEDURES. The Administrative Agent shall, within a reasonable time following its receipt thereof, examine all documents purporting to represent a demand for payment under any Non-Syndicated Letter of Credit. The Administrative Agent shall promptly after such examination (i) notify each of the Lenders and the Account Parties by telephone (confirmed by telecopy) of such demand for payment and (ii) deliver to each Lender (including the Issuing Lender) a copy of each document purporting to represent a demand for payment under such Non-Syndicated Letter of Credit. With respect to any drawing properly made under a Non-Syndicated Letter of Credit, the Issuing Lender thereof will make an LC Disbursement in respect of such Non-Syndicated Letter of Credit in accordance with its liability under such Non-Syndicated Letter of Credit and this Agreement, such LC Disbursement to be made to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make any such LC Disbursement available to the beneficiary of such Non-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 Issuing Lender in respect of any Non-Syndicated Letter of Credit, the Administrative 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 such Issuing Lender with respect to any such LC Disbursement. (j) INTERIM INTEREST. If any LC Disbursement with respect to a Non-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 (i) 1% PLUS the Alternate Base Rate to but excluding the date three Business Days after such LC Disbursement is made and (ii) from and including the date three Business Days after such LC Disbursement is made, 3% PLUS the Alternate Base Rate. (k) RIGHT OF CONTRIBUTION. The Account Parties hereby agree, as between themselves, that if any Account Party shall pay any reimbursement obligation in respect of any LC Disbursement with respect to a Non-Syndicated Letter of Credit issued to support the obligations of another Account Party (the "SPECIFIED ACCOUNT PARTY"), the Specified Account Party shall, on demand (but subject to the next sentence), pay to such first Account Party an amount equal to the amount of such reimbursement. The payment obligation of a Specified Account Party to another Account Party under this paragraph (k) shall be subordinate and subject in right of payment to the prior payment in full of the obligations of the Specified Account Party under this Agreement and each other Credit Document, and such other Account Party shall not exercise any right or remedy with respect to such reimbursement until payment and satisfaction in full of all of such obligations of the Specified Account Party. 364-DAY CREDIT AGREEMENT - 24 - SECTION 2.05. 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 Lender to issue, at any time and from time to time during the Availability Period, Participated Letters of Credit for its own account. Each Participated Letter of Credit shall be in such form as is consistent with the requirements of the applicable regulatory authorities in Illinois, California, Wisconsin or New York as reasonably determined by the Administrative Agent or as otherwise agreed to by the Administrative Agent and XL Capital. Participated Letters of Credit issued hereunder shall constitute utilization of the Commitments. (b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL OR EXTENSION. To request the issuance of a Participated Letter of Credit (or the amendment, renewal or extension of an outstanding Participated Letter of Credit), an Account Party shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Lender) to the Issuing Lender and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Participated Letter of Credit, or identifying the Participated Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Participated Letter of Credit is to expire (which shall comply with paragraph (d) of this Section), the amount of such Participated Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Participated Letter of Credit. If requested by the Issuing Lender, such Account Party also shall submit a letter of credit application on the Issuing Lender's standard form in connection with any request for a Participated Letter of Credit. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by such Account Party to, or entered into by any Account Party with, the Issuing Lender relating to any Participated Letter of Credit, the terms and conditions of this Agreement shall control. (c) LIMITATIONS ON AMOUNTS. A Participated Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Participated Letter of Credit each Account Party shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure of the Issuing Lender with respect to Participated Letters of Credit (determined for these purposes without giving effect to the participations therein of the Lenders pursuant to paragraph (e) of this Section) shall not exceed $50,000,000 and (ii) the Credit Exposure of the Lenders shall not exceed the total Commitments. (d) EXPIRY DATE. Each Participated Letter of Credit shall expire at or prior to the close of business on the date one year after the date of the issuance of such Participated Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension). (e) PARTICIPATIONS. By the issuance of a Participated Letter of Credit (or an amendment to a Participated Letter of Credit increasing the amount thereof) by the Issuing 364-DAY CREDIT AGREEMENT - 25 - Lender, and without any further action on the part of the Issuing Lender or the Lenders, the Issuing Lender hereby grants to each Lender, and each Lender hereby acquires from the Issuing Lender, a participation in such Participated Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Participated Letter of Credit. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Participated Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Participated Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for account of the Issuing Lender, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Lender in respect of any Participated Letter of Credit promptly upon the request of the Issuing Lender at any time from the time such LC Disbursement is made until such LC Disbursement is reimbursed by the Account Parties or at any time after any reimbursement payment is required to be refunded to the Account Parties for any reason. Such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Promptly following receipt by the Administrative Agent of any payment from the Account Parties pursuant to the next following paragraph, the Administrative Agent shall distribute such payment to the Issuing Lender or, to the extent that the Lenders have made payments pursuant to this paragraph to reimburse the Issuing Lender, then to such Lenders and the Issuing Lender as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Issuing Lender for any LC Disbursement shall not relieve the Account Parties of their obligation to reimburse such LC Disbursement. (f) REIMBURSEMENT. If any Lender shall make any LC Disbursement in respect of any Participated Letter of Credit, regardless of the identity of the Account Party of such Participated Letter of Credit, the Account Parties jointly and severally agree that they shall reimburse such Lender in respect of such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than noon, New York City time, on (i) the Business Day that the Account Parties receive notice of such LC Disbursement, if such notice is received prior to 10:00 a.m., New York City time, or (ii) the Business Day immediately following the day that the Account Parties receive such notice, if such notice is not received prior to such time. If the Account Parties fail to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Account Parties in respect thereof and such Lender's Applicable Percentage thereof. (g) OBLIGATIONS ABSOLUTE. The Account Parties' joint and several obligations to reimburse LC Disbursements in respect of any Participated Letter of Credit as provided in paragraph (f) 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 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 Lender under a Participated Letter of Credit against presentation of a draft or other 364-DAY CREDIT AGREEMENT - 26 - document that does not comply strictly with the terms of such Participated Letter of Credit (PROVIDED that the Account Parties shall not be obligated to reimburse such LC Disbursements unless payment is made against presentation of a draft or other document that at least substantially complies 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 Article VIII 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 Administrative Agent, the Lenders nor the Issuing Lender, 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 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 Lender; PROVIDED that the foregoing shall not be construed to excuse the Issuing Lender from 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 Lender'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 Lender 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 Lender 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 Lender when determining whether drafts and other documents presented under a 364-DAY CREDIT AGREEMENT - 27 - 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). (h) DISBURSEMENT PROCEDURES. The Issuing Lender shall, within a reasonable time following its receipt thereof, examine all documents purporting to represent a demand for payment under a Participated Letter of Credit. The Issuing Lender shall promptly after such examination notify the Administrative Agent and XL Capital by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Lender has made or will make a LC Disbursement thereunder; PROVIDED that any failure to give or delay in giving such notice shall not relieve the Account Parties of their obligation to reimburse the Issuing Lender and the Lenders with respect to any such LC Disbursement. (i) INTERIM INTEREST. If any LC Disbursement is made with respect to a Participated Letter of Credit, 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 (i) 1% PLUS the Alternate Base Rate to but excluding the date three Business Days after such LC Disbursement is made and (ii) from and including the date three Business Days after such LC Disbursement is made, 3% PLUS the Alternate Base Rate. Interest accrued pursuant to this paragraph shall be for account of the Issuing Lender, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (f) of this Section to reimburse the Issuing Lender shall be for account of such Lender to the extent of such payment. (j) REPLACEMENT OF THE ISSUING LENDER. The Issuing Lender may be replaced at any time by written agreement between XL Capital, the Administrative Agent, the replaced Issuing Lender and the successor Issuing Lender. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Lender. At the time any such replacement shall become effective, the Account Parties shall pay all unpaid fees accrued for account of the replaced Issuing Lender pursuant to Section 2.15(e). From and after the effective date of any such replacement, (i) the successor Issuing Lender shall have all the rights and obligations of the replaced Issuing Lender under this Agreement with respect to Participated Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Lender" shall be deemed to refer to such successor or to any previous Issuing Lender, or to such successor and all previous Issuing Lenders, as the context shall require. After the replacement of an Issuing Lender hereunder, the replaced Issuing Lender shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Lender under this Agreement with respect to Participated Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Participated Letters of Credit. (k) RIGHT OF CONTRIBUTION. The Account Parties hereby agree, as between themselves, that if any Account Party shall pay any reimbursement obligation in respect of any LC Disbursement with respect to a Participated Letter of Credit issued to support the obligations of another Account Party (the "SPECIFIED ACCOUNT PARTY"), the Specified Account Party shall, on demand (but subject to the next sentence), pay to such first Account Party an amount equal to the amount of such reimbursement. The payment obligation of a Specified Account Party to another 364-DAY CREDIT AGREEMENT - 28 - Account Party under this paragraph (k) shall be subordinate and subject in right of payment to the prior payment in full of the obligations of the Specified Account Party under this Agreement and each other Credit Document, and such other Account Party shall not exercise any right or remedy with respect to such reimbursement until payment and satisfaction in full of all of such obligations of the Specified Account Party. SECTION 2.06. ALTERNATIVE CURRENCY LETTERS OF CREDIT. (a) REQUESTS FOR OFFERS. From time to time during the Availability Period, an Account Party may request any or all of the Lenders to make offers to issue an Alternative Currency Letter of Credit for account of such Account Party. Each Lender may, but shall have no obligation to, make such offers on terms and conditions that are satisfactory to such Lender, and such Account Party may, but shall have no obligation to, accept any such offers. An Alternative Currency Letter of Credit shall be issued, amended, renewed or extended only if (and upon such issuance, amendment, renewal or extension of each Alternative Currency Letter of Credit the Account Parties shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension, the aggregate Credit Exposure of the Lenders shall not exceed the excess, if any, of (i) the aggregate amount of the Commitments OVER (ii) the aggregate stated amount of all letters of credit identified in Schedule VI (other than Backstopped Letters of Credit and Replaced Letters of Credit) at the time outstanding. Each such Alternative Currency Letter of Credit shall be issued, and subsequently, renewed, extended, amended and confirmed, on such terms as XL Capital, the applicable Account Party and such Lender shall agree, including, without limitation, expiry, drawing conditions, reimbursement, interest, fees and provision of cover; PROVIDED that the expiry of any Alternative Currency Letter of Credit shall not be later than the one-year anniversary from the date of issuance thereof (or, in the case of any renewal or extension thereof, one-year after such renewal or extension). (b) REPORTS TO ADMINISTRATIVE AGENT. The Account Parties shall deliver to the Administrative Agent and each of the Lenders a report in respect of each Alternative Currency Letter of Credit (an "ALTERNATIVE CURRENCY LETTER OF CREDIT REPORT") on and as of the date (i) on which such Alternative Currency Letter of Credit is issued, (ii) of the issuance, renewal, extension or amendment of a Syndicated Letter of Credit or a Non-Syndicated Letter of Credit, if any Alternative Currency Letter of Credit is then outstanding and (iii) on which the Commitments are to be reduced pursuant to Section 2.12, specifying for each such Alternative Currency Letter of Credit (after giving effect to issuance thereof, as applicable): (A) the date on which such Alternative Currency Letter of Credit was or is being issued; (B) the Alternative Currency of such Alternative Currency Letter of Credit; (C) the aggregate undrawn amount of such Alternative Currency Letter of Credit (in such Alternative Currency); (D) the aggregate unpaid amount of LC Disbursements under such Alternative Currency Letter of Credit (in such Alternative Currency); 364-DAY CREDIT AGREEMENT - 29 - (E) the Alternative Currency LC Exposure (in Dollars) in respect of such Alternative Currency Letter of Credit; and (F) the aggregate amount of Alternative Currency LC Exposures (in Dollars). Each Alternative Currency Letter of Credit Report shall be delivered to the Administrative Agent and each of the Lenders by 10:00 a.m. (New York City time) on the date on which it is required to be delivered. SECTION 2.07. THE REVOLVING CREDIT COMMITMENTS. Subject to the terms and conditions set forth herein, each Lender agrees to make Loans to an Account Party from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's outstanding Loans exceeding such Lender's Revolving Credit Commitment, (b) such Lender's Credit Exposures (excluding any Alternative Currency LC Exposure) exceeding such Lender's Commitment, (c) the total outstanding Loans exceeding the total Revolving Credit Commitments or (d) the aggregate Credit Exposures of all Lenders exceeding the aggregate Commitments of all Lenders (it being understood that Loans may be made, or be outstanding, to more than one of the Account Parties at any time). Within the foregoing limits and subject to the terms and conditions set forth herein, the Account Parties may borrow, prepay and reborrow Loans. SECTION 2.08. LOANS AND BORROWINGS. (a) OBLIGATIONS OF LENDERS. Each Loan shall be made as part of a Borrowing consisting of Loans of the same Type made by the Lenders ratably in accordance with their respective Revolving Credit Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; PROVIDED that the Revolving Credit Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. Loans made hereunder shall constitute utilization of both the Revolving Credit Commitments and the Commitments. (b) TYPE OF LOANS. Subject to Section 2.16, each Borrowing shall be constituted entirely of ABR Loans or of Eurodollar Loans as any Account Party may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; PROVIDED that any exercise of such option shall not affect the obligation of the Account Parties to repay such Loan in accordance with the terms of this Agreement. (c) MINIMUM AMOUNTS; LIMITATION ON NUMBER OF BORROWINGS. Each Eurodollar Borrowing shall be in an aggregate amount of $10,000,000 or a larger multiple of $1,000,000. Each ABR Borrowing shall be in an aggregate amount equal to $10,000,000 or a larger multiple of $1,000,000; PROVIDED that an ABR Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Revolving Credit Commitments or that is requested to finance the reimbursement of an LC Disbursement as contemplated by Section 2.03(a). Borrowings of more than one Type may be outstanding at the same time; PROVIDED that there shall not at any time be more than a total of ten Eurodollar Borrowings outstanding. 364-DAY CREDIT AGREEMENT - 30 - (d) LIMITATIONS ON INTEREST PERIODS. Notwithstanding any other provision of this Agreement, no Account Party shall be entitled to request (or to elect to convert to or continue as a Eurodollar Borrowing) any Borrowing if the Interest Period requested therefor would end after the Maturity Date. SECTION 2.09. REQUESTS FOR BORROWINGS. (a) NOTICE BY THE ACCOUNT PARTIES. To request a Borrowing, XL Capital shall notify the Administrative Agent of such request by telephone (i) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (ii) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing; provided that any such notice of an ABR Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.03(a) may be given not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by XL Capital. (b) CONTENT OF BORROWING REQUESTS. Each telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.08: (i) the relevant Account Party; (ii) the aggregate amount of the requested Borrowing; (iii) the date of such Borrowing, which shall be a Business Day; (iv) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (v) in the case of a Eurodollar Borrowing, the Interest Period therefor, which shall be a period contemplated by the definition of the term "Interest Period" and permitted under Section 2.08(d); and (vi) the location and number of such Account Party's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.10. (c) NOTICE BY THE ADMINISTRATIVE AGENT TO THE LENDERS. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. (d) FAILURE TO ELECT. If no election as to the Type of a Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the requested Borrowing shall be made instead as an ABR Borrowing. 364-DAY CREDIT AGREEMENT - 31 - SECTION 2.10. FUNDING OF BORROWINGS. (a) FUNDING BY LENDERS. Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time (or 1:00 p.m., New York City time with respect to ABR Loans requested by XL Capital no later than 11:00 a.m. on the same day), to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the relevant Account Party by promptly crediting the amounts so received, in like funds, to an account of such Account Party maintained with the Administrative Agent in New York City and designated by such Account Party in the applicable Borrowing Request. (b) PRESUMPTION BY THE ADMINISTRATIVE AGENT. Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the relevant Account Party a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the relevant Account Party severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to such Account Party to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of such Account Party, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.11. INTEREST ELECTIONS. (a) ELECTIONS BY THE ACCOUNT PARTIES. The Loans constituting each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have the Interest Period specified in such Borrowing Request. Thereafter, the relevant Account Party may elect to convert such Borrowing to a Borrowing of a different Type or to continue such Borrowing as a Borrowing of the same Type and, in the case of a Eurodollar Borrowing, may elect the Interest Period therefor, all as provided in this Section. The relevant Account Party may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans constituting such Borrowing, and the Loans constituting each such portion shall be considered a separate Borrowing. (b) NOTICE OF ELECTIONS. To make an election pursuant to this Section, XL Capital shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.09 if XL Capital were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by XL Capital. 364-DAY CREDIT AGREEMENT - 32 - (c) CONTENT OF INTEREST ELECTION REQUESTS. Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.08: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) of this paragraph shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period therefor after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period" and permitted under Section 2.08(d). (d) NOTICE BY THE ADMINISTRATIVE AGENT TO THE LENDERS. Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) FAILURE TO ELECT; EVENTS OF DEFAULT. If XL Capital fails to deliver a timely and complete Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period therefor, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies XL Capital, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period therefor. SECTION 2.12. TERMINATION AND REDUCTION OF THE COMMITMENTS. (a) SCHEDULED TERMINATION. Unless previously terminated, the Commitments shall terminate at the close of business on the Commitment Termination Date. (b) VOLUNTARY TERMINATION OR REDUCTION. The Account Parties may at any time terminate, or from time to time reduce, the Commitments; PROVIDED that (i) each reduction of the Commitments shall be in an amount that is $25,000,000 or a larger multiple of $5,000,000 and (ii) the Account Parties shall not terminate or reduce the Commitments if the Credit Exposure would exceed the Commitments or the outstanding Loans would exceed the total Revolving Credit Commitments. (c) NOTICE OF VOLUNTARY TERMINATION OR REDUCTION. XL Capital shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such 364-DAY CREDIT AGREEMENT - 33 - termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by XL Capital pursuant to this Section shall be irrevocable; PROVIDED that a notice of termination of the Commitments delivered by XL Capital may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by XL Capital (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. (d) EFFECT OF TERMINATION OR REDUCTION. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. SECTION 2.13. REPAYMENT OF LOANS; TERM-OUT OPTION; EVIDENCE OF DEBT. (a) REPAYMENT. Each Account Party hereby unconditionally promises to pay to the Administrative Agent for account of the Lenders, (i) in the event that the Term-Out Option has not been exercised, the outstanding principal amount of the Loans made to such Account Party on the Commitment Termination Date and (ii) in the event that the Term-Out Option has been exercised and is in effect, on the Maturity Date, the then unpaid principal amount of the Loans made to such Account Party outstanding at the close of business on the Commitment Termination Date. (b) TERM-OUT OPTION. The Account Parties may, by notice given by XL Capital to the Administrative Agent (which shall promptly notify the Lenders) not less than 15 days prior to the Commitment Termination Date, extend the Maturity Date for all Loans outstanding at the close of business New York City time on the Commitment Termination Date to the first anniversary of the Commitment Termination Date (the "TERM-OUT OPTION"); PROVIDED that such extension shall not be effective with respect to any Lender unless: (i) no Default shall have occurred and be continuing on each of the date of the notice requesting such extension and on the Commitment Termination Date; and (ii) each of the representations and warranties made by the Account Parties in Article IV shall be true and complete on and as of each of the date of the notice requesting such extension and the Commitment Termination Date 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). Notwithstanding the foregoing, the Revolving Credit Commitments of the Lenders to make Loans shall terminate on the Commitment Termination Date. (c) MANNER OF PAYMENT. Prior to any repayment or prepayment of any Borrowings hereunder, XL Capital shall select the Borrowing or Borrowings to be paid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such selection not later than 11:00 a.m., New York City time, three Business Days before the scheduled date of such repayment; PROVIDED that each repayment of Borrowings shall be applied to repay any outstanding ABR Borrowings before any other Borrowings. If XL Capital fails to make a timely selection of the Borrowing or Borrowings to be repaid or prepaid, such payment shall be applied, 364-DAY CREDIT AGREEMENT - 34 - first, to pay any outstanding ABR Borrowings and, second, to other Borrowings in the order of the remaining duration of their respective Interest Periods (the Borrowing with the shortest remaining Interest Period to be repaid first). Each payment of a Borrowing shall be applied ratably to the Loans included in such Borrowing. (d) MAINTENANCE OF RECORDS BY LENDERS. Each Lender shall maintain in accordance with its usual practice records evidencing the indebtedness of each Account Party to such Lender resulting from each Loan made by such Lender to such Account Party, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (e) MAINTENANCE OF RECORDS BY THE ADMINISTRATIVE AGENT. The Administrative Agent shall maintain records in which it shall record (i) the amount of each Loan made to each Account Party hereunder, the Type thereof and each Interest Period therefor, (ii) the amount of any principal or interest due and payable or to become due and payable from such Account Party to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for account of the Lenders and each Lender's share thereof. (f) EFFECT OF ENTRIES. The entries made in the records maintained pursuant to paragraph (d) or (e) of this Section shall be PRIMA FACIE evidence of the existence and amounts of the obligations recorded therein; PROVIDED that the failure of any Lender or the Administrative Agent to maintain such records or any error therein shall not in any manner affect the obligation of the Account Parties to repay the Loans in accordance with the terms of this Agreement. (g) PROMISSORY NOTES. Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, each Account Party shall prepare, execute and deliver to such Lender a promissory note payable to such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 10.04) be represented by one or more promissory notes in such form payable to the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.14. PREPAYMENT OF LOANS. (a) RIGHT TO PREPAY BORROWINGS. The Account Parties shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section. (b) NOTICES, ETC. XL Capital shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; PROVIDED that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.12, then such notice of 364-DAY CREDIT AGREEMENT - 35 - prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.12. Promptly following receipt of any such notice relating to a Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of a Borrowing of the same Type as provided in Section 2.08. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.16 and shall be made in the manner specified in Section 2.13(c). SECTION 2.15. FEES. (a) FACILITY FEE. XL Capital agrees to pay to the Administrative Agent for account of each Lender a facility fee, which shall accrue at a rate per annum equal to 0.06%, (i) prior to the termination of such Lender's Commitment, on the daily amount of such Commitment (whether used or unused) during the period from and including the Effective Date to but excluding the earlier of the date such Commitment terminates and the Commitment Termination Date and (ii) if such Lender continues to have any Credit Exposure after its Commitment terminates, then such facility fee shall continue to accrue on the daily amount of such Lender's Credit Exposure from and including the date on which such Lender's Commitment terminates to but excluding the date on which such Lender ceases to have any Credit Exposure. Accrued facility fees shall be payable on each Quarterly Date and on (i) in the event the Term-Out Option has not been exercised, the earlier of the date the Commitments terminate and the Commitment Termination Date or (ii) in the event the Term-Out Option has been exercised and is in effect, on the Maturity Date; PROVIDED that any facility fees accruing after such earlier date or the Maturity Date, as the case may be, shall be payable on demand. All facility fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) UTILIZATION FEE. XL Capital agrees to pay to the Administrative Agent for account of each Lender a utilization fee at (i) the rate per annum equal to 0.05% on the amount of the outstanding Loans of such Lender for each day that the aggregate principal amount of outstanding Loans shall be greater than 33% but less than or equal to 66% of the aggregate outstanding Revolving Credit Commitments then in effect and (ii) the rate per annum equal to 0.10% on the amount of the outstanding Loans of such Lender for each day that the aggregate principal amount of outstanding Loans shall exceed 66% of the aggregate outstanding Revolving Credit Commitments then in effect; PROVIDED that notwithstanding the foregoing, after the Term-Out Option has been exercised and is in effect, the utilization fee shall accrue at a rate per annum equal to 0.10% on the amount of the amount of the outstanding Loans of such Lender until such Loans are paid in full. Accrued utilization fees shall be payable on each Quarterly Date and on the earlier of the date the Revolving Credit Commitments terminate and the Maturity Date; provided that any utilization fees accruing after such earlier date shall be payable on demand. All utilization fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) SYNDICATED LETTER OF CREDIT FEES. XL Capital agrees to pay to the Administrative Agent for account of each Lender a letter of credit fee which shall accrue at a rate per annum equal to 0.315% on the average daily aggregate undrawn amount of all outstanding Syndicated Letters of Credit during the period from and including the Effective Date to but 364-DAY CREDIT AGREEMENT - 36 - excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure. Syndicated Letter of Credit fees accrued through and including each Quarterly Date shall be payable on the third Business Day following such Quarterly Date, commencing on the first such date to occur after the Effective Date; PROVIDED that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Letter of credit fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (d) NON-SYNDICATED LETTER OF CREDIT FEES. XL Capital agrees to pay to the Administrative Agent for account of each Lender a letter of credit fee which shall accrue at a rate per annum equal to 0.315% on the average daily aggregate undrawn amount of all outstanding Non-Syndicated Letters of Credit during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure, as well as the Administrative Agent's standard administrative fees with respect to the issuance, amendment, renewal or extension of any Non-Syndicated Letter of Credit or processing of drawings thereunder. Non-Syndicated Letter of Credit fees accrued through and including each Quarterly Date shall be payable on the third Business Day following such Quarterly Date, commencing on the first such date to occur after the Effective Date; PROVIDED that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Letter of credit fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (e) PARTICIPATED LETTER OF CREDIT FEES. XL Capital agrees to pay (i) to the Administrative Agent for account of each Lender a participation fee with respect to its participations in Participated Letters of Credit, which shall accrue at a rate of 0.315% per annum on the average daily amount of such Lender's LC Exposure in respect of Participated Letters of Credit (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any such LC Exposure, and (ii) to the Issuing Lender a fronting fee, which shall accrue at a rate of 0.125% per annum on the average daily amount of the LC Exposure in respect of Participated Letters of Credit (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any such LC Exposure, as well as the Issuing Lender's standard administrative fees with respect to the issuance, amendment, renewal or extension of any Participated Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including each Quarterly Date shall be payable on the third Business Day following such Quarterly Date, commencing on the first such date to occur after the Effective Date; PROVIDED that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Lender pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall 364-DAY CREDIT AGREEMENT - 37 - be payable for the actual number of days elapsed (including the first day but excluding the last day). (f) ADMINISTRATIVE AGENT FEES. XL Capital agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between XL Capital and the Administrative Agent. (g) PAYMENT OF FEES. All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of the facility fees, the utilization fees and the letter of credit fees referred to in paragraphs (a) through (e) of this Section, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances. SECTION 2.16. INTEREST. (a) ABR LOANS. The Loans constituting each ABR Borrowing shall bear interest at a rate per annum equal to the Alternate Base Rate. (b) EURODOLLAR LOANS. The Loans constituting each Eurodollar Borrowing shall bear interest at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period for such Borrowing PLUS the Applicable Margin. (c) DEFAULT INTEREST. Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Account Parties hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% PLUS the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% PLUS the rate applicable to ABR Loans as provided in paragraph (a) of this Section. (d) PAYMENT OF INTEREST. Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and upon (i) in the event the Term-Out Option has not been exercised, the date the Commitments terminate or (ii) in the event the Term-Out Option has been exercised, the Maturity Date; PROVIDED that (x) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (y) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Loan prior to the later of the Commitment Termination Date and the Maturity Date), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (z) in the event of any conversion of any Eurodollar Borrowing prior to the end of the Interest Period therefor, accrued interest on such Borrowing shall be payable on the effective date of such conversion. (e) COMPUTATION. All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base 364-DAY CREDIT AGREEMENT - 38 - Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.17. ALTERNATE RATE OF INTEREST. If prior to the commencement of the Interest Period for any Eurodollar Borrowing: (a) the Administrative Agent determines in good faith (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders (acting in good faith) that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their respective Loans included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to XL Capital and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies XL Capital and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or the continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and such Borrowing (unless prepaid) shall be continued as, or converted to, an ABR Borrowing and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing. SECTION 2.18. INCREASED COSTS. (a) INCREASED COSTS GENERALLY. If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement, any Letter of Credit (or any participation therein) or any Eurodollar Loan made by such Lender; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Letter of Credit (or of maintaining any participation therein) or Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the Account Parties jointly and severally agree that they will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) CAPITAL REQUIREMENTS. If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Letters of Credit issued, or the Loans made, by such Lender to a level 364-DAY CREDIT AGREEMENT - 39 - below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Account Parties will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) CERTIFICATES FROM LENDERS. A certificate of a Lender setting forth such Lender's good faith determination of the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to XL Capital and shall be conclusive absent manifest error. The Account Parties shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof by XL Capital. (d) DELAY IN REQUESTS. Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; PROVIDED that the Account Parties shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than 90 days prior to the date that such Lender notifies XL Capital of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; PROVIDED FURTHER that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 90 day period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.19. BREAK FUNDING PAYMENTS. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period therefor (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of an Interest Period therefor, (c) the failure to borrow, convert, continue or prepay any Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.14(b) and is revoked in accordance herewith), or (d) the assignment as a result of a request by XL Capital pursuant to Section 2.22(b) of any Eurodollar Loan other than on the last day of an Interest Period therefor, then, in any such event, the Account Parties shall compensate each Lender for the loss attributable to such event. The loss to any Lender attributable to any such event shall be deemed to be an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBO Rate for such Interest Period, OVER (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for Dollar deposits from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth such Lender's good faith determination of any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to XL Capital and shall be conclusive absent manifest error. The Account Parties shall 364-DAY CREDIT AGREEMENT - 40 - pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof by XL Capital. SECTION 2.20. TAXES. (a) PAYMENTS FREE OF TAXES. Any and all payments by or on account of any obligation of the Account Parties hereunder shall be made free and clear of and without deduction for any Indemnified Taxes; PROVIDED that if any Account Party shall be required to deduct any Indemnified Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Account Party shall make such deductions and (iii) such Account Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) PAYMENT OF OTHER TAXES BY THE ACCOUNT PARTIES. In addition, each Account Party shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) INDEMNIFICATION BY THE ACCOUNT PARTIES. The Account Parties shall indemnify the Administrative Agent and each Lender, within 10 days after written demand to XL Capital therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to XL Capital by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive as between such Lender or the Administrative Agent, as the case may be, and the Account Parties absent manifest error. (d) EVIDENCE OF PAYMENTS. As soon as practicable after any payment of Indemnified Taxes or Other Taxes by any Account Party to a Governmental Authority, XL Capital on behalf of such Account Party shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) EXEMPTIONS. Each Lender and the Administrative Agent shall, at the written request of XL Capital, provide to any Account Party such form, certification or similar documentation, if any (each duly completed, accurate and signed) as is currently required by any Account Party Jurisdiction or any other jurisdiction, or comply with such other requirements, if any, as is currently applicable in such Account Party Jurisdiction or any other jurisdiction, in order to obtain an exemption from, or reduced rate of, deduction, payment or withholding of Indemnified Taxes or Other Taxes to which such Lender or the Administrative Agent is entitled pursuant to an applicable tax treaty or the law of such Account Party Jurisdiction or any other 364-DAY CREDIT AGREEMENT - 41 - jurisdiction; PROVIDED that XL Capital shall have furnished to such Lender or the Administrative Agent in a reasonably timely manner copies of such documentation and notice of such requirements together with applicable instructions. The Account Parties shall not be required to indemnify any Lender or the Administrative Agent under Section 2.20(a) or (c) for any Indemnified Taxes or Other Taxes to the extent such Indemnified Taxes or Other Taxes would not be imposed but for the failure by such Lender or the Administrative Agent, as the case may be, to comply with the provisions of the preceding sentence. Upon the written request of XL Capital, each Lender and the Administrative Agent will provide to XL Capital such form, certification or similar documentation (each duly completed, accurate and signed) as may in the future be required by any Account Party Jurisdiction or any other jurisdiction, or comply with such other requirements, if any, as may be applicable in such Account Party Jurisdiction or any other jurisdiction in order to obtain an exemption from, or reduced rate of, deduction, payment or withholding of Indemnified Taxes or Other Taxes to which such Lender or the Administrative Agent is entitled pursuant to an applicable tax treaty or the law of the relevant jurisdiction, PROVIDED that neither such Lender nor the Administrative Agent shall have any obligation to provide such form, certification or similar document if it would be unduly burdensome, would require such Lender or the Administrative Agent to disclose any confidential information or would otherwise be materially disadvantageous to such Lender or the Administrative Agent and PROVIDED FURTHER that the Account Party shall have furnished to such Lender or the Administrative Agent in a reasonably timely manner copies of such documentation and notice of such requirements together with applicable instructions. (f) If the Administrative Agent or a Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other 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 2.20, it shall pay over such refund to such Account Party (but only to the extent of indemnity payments made, or additional amounts paid, by such Account Party under this Section 2.20 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); PROVIDED, that such Account Party, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to such Account Party (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This Section shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to any Account Party or any other Person. SECTION 2.21. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS. (a) PAYMENTS BY THE ACCOUNT PARTIES. The Account Parties shall make each payment required to be made by them hereunder (whether of principal, interest, fees or reimbursement of LC Disbursements, interest or fees, or under Section 2.18, 2.19 or 2.20, or otherwise) or under any other Credit Document (except to the extent otherwise provided therein) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim; PROVIDED that any payments in respect of Alternative Currency Letters of Credit shall be made in the manner (including the time and place of payment) as shall 364-DAY CREDIT AGREEMENT - 42 - have been separately agreed between the relevant Account Party and Lender pursuant to Section 2.06. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments pursuant to Sections 2.18, 2.19, 2.20 and 10.03, which shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for account of any other Person to the appropriate recipient promptly following receipt thereof. 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. All payments hereunder shall be made in Dollars. (b) APPLICATION OF INSUFFICIENT PAYMENTS. If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) PRO RATA TREATMENT. Except to the extent otherwise provided herein: (i) each reimbursement of LC Disbursements (other than in respect of Alternative Currency Letters of Credit) shall be made to the Lenders, each Borrowing shall be made from the Lenders, each payment of fees under Section 2.15 shall be made for account of the relevant Lenders, and each termination or reduction of the amount of the Commitments under Section 2.12 shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (ii) each Borrowing shall be allocated pro rata among the Lenders according to the amounts of their respective Revolving Credit Commitments (in the case of the making of Loans) or their respective Loans that are to be included in such Borrowing (in the case of conversions and continuations of Loans); (iii) each payment or prepayment of principal of Loans by the Account Parties shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Loans held by them; and (iv) each payment of interest on Loans by an Account Party shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders. (d) SHARING OF PAYMENTS BY LENDERS. If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or LC Disbursements (other than with respect to Alternative Currency Letters of Credit) resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans and LC Disbursements (other than with respect to Alternative Currency Letters of Credit) 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 Loans and LC Disbursements (other than with respect to Alternative Currency Letters of 364-DAY CREDIT AGREEMENT - 43 - Credit) of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and LC Disbursements (other than with respect to Alternative Currency Letters of Credit); PROVIDED that (i) 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 (ii) the provisions of this paragraph shall not be construed to apply to any payment made by any Account Party 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 any of its Loans or LC Disbursements to any assignee or participant, other than to any Account Party or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). Each Account Party 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 such Account Party rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Account Party in the amount of such participation. (e) PRESUMPTIONS OF PAYMENT. Unless the Administrative Agent shall have received notice from an Account Party prior to the date on which any payment is due to the Administrative Agent for account of the Lenders hereunder that such Account Party will not make such payment, the Administrative Agent may assume that such Account Party has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the relevant Account Party has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender 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 Administrative Agent, at the Federal Funds Effective Rate. (f) CERTAIN DEDUCTIONS BY THE ADMINISTRATIVE AGENT. If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.21(e), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.22. MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS. (a) DESIGNATION OF A DIFFERENT LENDING OFFICE. If any Lender requests compensation under Section 2.18, 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 Section 2.20, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Letters of Credit hereunder or to assign 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 (i) would eliminate or reduce amounts payable pursuant to Section 2.18 or 2.20, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. Each Account Party hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. 364-DAY CREDIT AGREEMENT - 44 - (b) REPLACEMENT OF LENDERS. If any Lender requests compensation under Section 2.18, 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 Section 2.20, or if any Lender defaults in its obligation to fund Loans or to make LC Disbursements hereunder, or if any Lender ceases to be an NAIC Approved Lender, then XL Capital may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 10.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); PROVIDED that (i) XL Capital shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and LC Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the relevant Account Party (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.18 or payments required to be made pursuant to Section 2.20, 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. ARTICLE III GUARANTEE SECTION 3.01. THE GUARANTEE. Each Guarantor hereby jointly and severally guarantees to each Lender 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 and LC Disbursements (and interest thereon) made by the Lenders to each of the Account Parties (other than such Guarantor in its capacity as an Account Party hereunder) and all other amounts from time to time owing to the Lenders or the Administrative Agent by such Account Parties under this Agreement, in 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 Account Party (other than such Guarantor in its capacity as an Account Party 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. 364-DAY CREDIT AGREEMENT - 45 - SECTION 3.02. OBLIGATIONS UNCONDITIONAL. The obligations of the Guarantors under Section 3.01 are absolute and unconditional, joint and several, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Account Parties 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 Article 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 Lender exhaust any right, power or remedy or proceed against any Account Party under this Agreement or any other agreement or instrument referred to herein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. SECTION 3.03. 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 Account Party 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 Lender on demand for all reasonable costs and expenses (including reasonable fees of counsel) incurred by the Administrative Agent or such Lender 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. 364-DAY CREDIT AGREEMENT - 46 - SECTION 3.04. 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 3.01, whether by subrogation or otherwise, against any Account Party or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. SECTION 3.05. REMEDIES. The Guarantors jointly and severally agree that, as between the Guarantors and the Lenders, the obligations of the Account Parties under this Agreement may be declared to be forthwith due and payable as provided in Article VIII (and shall be deemed to have become automatically due and payable in the circumstances provided in Article VIII) for purposes of Section 3.01 notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against any Account Party 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 Account Party) shall forthwith become due and payable by the Guarantors for purposes of Section 3.01. SECTION 3.06. CONTINUING GUARANTEE. The guarantee in this Article is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. SECTION 3.07. 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 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 Article III 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 364-DAY CREDIT AGREEMENT - 47 - 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 Article III) 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. SECTION 3.08. 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 3.01 would otherwise, taking into account the provisions of Section 3.07, 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 3.01, 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 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. ARTICLE IV REPRESENTATIONS AND WARRANTIES Each Account Party represents and warrants to the Lenders that: SECTION 4.01. ORGANIZATION; POWERS. Such Account 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. SECTION 4.02. AUTHORIZATION; ENFORCEABILITY. The Transactions are within such Account Parties' 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 Account Party and constitutes a legal, valid and binding obligation of such Account Party, enforceable against such Account 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). SECTION 4.03. 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 (i) such as have been obtained or made and are in full force and effect and (ii) in the case of XL Europe, a notification required pursuant to S.I. 399 of 1999 European Communities (Supervision of 364-DAY CREDIT AGREEMENT - 48 - Insurance Undertakings in an Insurance Group) Regulations 1999, to be filed with the Minister for Trade, Enterprise and Employment within one year of the date hereof, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of such Account 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 Account 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 Account Party or any of its Subsidiaries. SECTION 4.04. FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE. (a) FINANCIAL CONDITION. Such Account Party has heretofore furnished to the Lenders the consolidated balance sheet and statements of income, stockholders' equity and cash flows of such Account Party and its consolidated Subsidiaries (A) as of and for the fiscal years ended December 31, 2000 and December 31, 2001, 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, 2001), and (B) as of and for the fiscal quarter ended March 31, 2002, as provided in XL Capital's Report on Form 10-Q filed with the SEC for the fiscal quarter ended March 31, 2002. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of such Account 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, 2001, there has been no material adverse change in the assets, business, financial condition or operations of such Account Party and its Subsidiaries, taken as a whole. SECTION 4.05. PROPERTIES. (a) PROPERTY GENERALLY. Such Account 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 7.03 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 Account 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 Account 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. 364-DAY CREDIT AGREEMENT - 49 - SECTION 4.06. 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 Account Party, threatened against or affecting such Account 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, 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 Account 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. SECTION 4.07. COMPLIANCE WITH LAWS AND AGREEMENTS. Such Account 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 Default has occurred and is continuing. SECTION 4.08. INVESTMENT AND HOLDING COMPANY STATUS. Such Account Party 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. SECTION 4.09. TAXES. Such Account 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. SECTION 4.10. 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. 364-DAY CREDIT AGREEMENT - 50 - Except as could not reasonably be expected to result in a Material Adverse Effect, (i) all contributions required to be made by any Account 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 Account Party nor any of their Subsidiaries has incurred any obligation in connection with the termination or withdrawal from any Non-U.S. Benefit Plan. SECTION 4.11. DISCLOSURE. The reports, financial statements, certificates or other information furnished by such Account Party to the Lenders 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 Account Party represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. SECTION 4.12. USE OF CREDIT. Neither such Account 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. No part 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 Board 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. SECTION 4.13. SUBSIDIARIES. Set forth in Schedule V is a complete and correct list of all of the Subsidiaries of XL Capital as of March 31, 2002, 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 Account Party. SECTION 4.14. WITHHOLDING TAXES. Based upon information with respect to each Lender provided by each Lender to the Administrative Agent, as of the date hereof, the payment of the LC Disbursements and interest thereon, principal of and interest on the Loans, 364-DAY CREDIT AGREEMENT - 51 - the fees under Section 2.15 and all other amounts payable hereunder will not be subject, by withholding or deduction, to any Taxes imposed by any Account Party Jurisdiction. SECTION 4.15. 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 been paid. SECTION 4.16. 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 Account Party Jurisdiction for the admissibility thereof in the courts of such Account Party Jurisdiction. ARTICLE V CONDITIONS SECTION 5.01. EFFECTIVE DATE. The obligations of the Lenders (or the Issuing Lender), as the case may be, to issue or continue Letters of Credit and to make Loans hereunder are 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 Lender) in form and substance (or such condition shall have been waived in accordance with Section 10.02): (a) EXECUTED COUNTERPARTS. From each party hereto either (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 B-1, (ii) Charles R. Barr, Esq., counsel to XL America, substantially in the form of Exhibit B-2, (iii) Cahill Gordon & Reindel, special U.S. counsel for the Obligors, substantially in the form of Exhibit B-3, (iv) Conyers, Dill & Pearman, special Bermuda counsel to XL Insurance and XL Re, substantially in the form of Exhibit B-4, (v) Hunter & Hunter, special Cayman Islands counsel to XL Capital, substantially in the form of Exhibit B-5 and (vi) A&L Goodbody, special Irish counsel to XL Europe, substantially in the form of Exhibit B-6. (c) OPINION OF SPECIAL NEW YORK COUNSEL TO JPMCB. An opinion, dated the Effective Date, of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to JPMCB, substantially in the form of Exhibit C (and JPMCB hereby instructs such counsel to deliver such opinion to the Lenders). 364-DAY CREDIT AGREEMENT - 52 - (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 5.02. (f) EXISTING AGREEMENTS. Evidence that (i) the Account Parties shall have paid in full all principal of and interest accrued on the loans and reimbursement obligations under the Existing Credit Agreement and the Existing Letter of Credit Agreement (together, the "EXISTING AGREEMENTS") and all fees and expenses owing by the Account Parties thereunder, (ii) all other amounts (if any) payable by the Account Parties under or in respect of the Existing Agreements have been paid in full and (iii) the Commitments (as defined in each of the Existing Agreements, respectively) have terminated. (g) OTHER DOCUMENTS. Such other documents as the Administrative Agent or any Lender or special New York counsel to JPMCB may reasonably request. The obligation of any Lender to make its initial extension of credit hereunder is also subject to the payment by XL Capital of such fees as XL Capital shall have agreed to pay to any Lender or the Administrative Agent in connection herewith, including the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to JPMCB, in connection with the negotiation, preparation, execution and delivery of this Agreement and the other Credit Documents and the extensions of credit hereunder (to the extent that reasonably detailed statements for such fees and expenses have been delivered to XL Capital). The Administrative Agent shall notify the Account Parties and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders (or the Issuing Lender), as the case may be, to issue or continue, Letters of Credit or to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 10.02) on or prior to 3:00 p.m., New York City time, on June 28, 2002 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). SECTION 5.02. EACH CREDIT EVENT. The obligation of each Lender to issue, amend, renew or extend any Letter of Credit or to make any Loan is additionally subject to the satisfaction of the following conditions: (a) the representations and warranties of the Obligors set forth in this Agreement shall be true and correct on and as of the date of issuance, amendment, renewal or extension of such Letter of Credit or the date of such Loan, as applicable (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); 364-DAY CREDIT AGREEMENT - 53 - (b) at the time of and immediately after giving effect to the issuance, amendment, renewal or extension of such Letter of Credit or such Loan, as applicable, no Default shall have occurred and be continuing; and (c) in the case of Alternative Currency Letters of Credit, receipt by the Administrative Agent of a request for offers as required by Section 2.06(a). Each issuance, amendment, renewal or extension of a Letter of Credit and each Borrowing shall be deemed to constitute a representation and warranty by the Obligors on the date thereof as to the matters specified in clauses (a) and (b) of the preceding sentence. ARTICLE VI AFFIRMATIVE COVENANTS Until the Commitments have expired or been terminated, the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Account Parties covenant and agree with the Lenders that: SECTION 6.01. FINANCIAL STATEMENTS AND OTHER INFORMATION. Each Account Party will furnish to the Administrative Agent and each Lender: (a) within 135 days after the end of each fiscal year of each Account 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 Account 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 Lenders 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 Account 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 consolidated 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 the immediately preceding fiscal 364-DAY CREDIT AGREEMENT - 54 - 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), all certified by a Financial Officer of XL America as presenting fairly in all material respects the financial condition and results of operations of XL America and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes, 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 Account Party, the consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Account 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 Account Party as presenting fairly in all material respects the financial condition and results of operations of such Account 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 Lenders 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 Account Party 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 7.03, 7.05, 7.06 and 7.07 and (iii) stating whether any change in GAAP or (in the case of XL Europe, XL Insurance, XL Re and any Insurance Subsidiary of XL America) SAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 4.04 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 clauses (a) and (b)(ii) 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 364-DAY CREDIT AGREEMENT - 55 - examination of such financial statements of any 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 Account 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 Account 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 7.03(g) and the aggregate book value of liabilities which are subject to Liens permitted under Section 7.03(g)(it being understood that the reports required by paragraphs (a), (b) 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 (h) 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 Administrative Agent or any Lender may reasonably request. SECTION 6.02. NOTICES OF MATERIAL EVENTS. Each Account Party will furnish to the Administrative 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 Section shall be accompanied by a statement of a Financial Officer or other executive officer of the relevant Account Party setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken by such Account Party with respect thereto. SECTION 6.03. PRESERVATION OF EXISTENCE AND FRANCHISES. Each Account 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 7.01. Each Account 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. 364-DAY CREDIT AGREEMENT - 56 - SECTION 6.04. INSURANCE. Each Account 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. SECTION 6.05. MAINTENANCE OF PROPERTIES. Each Account 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 Account Party or any Subsidiary of such Account Party any obligation in respect of any property leased by such Account Party or such Subsidiary in addition to such Account Party's obligations under the applicable document creating such Account Party's or such Subsidiary's lease or tenancy. SECTION 6.06. PAYMENT OF TAXES AND OTHER POTENTIAL CHARGES AND PRIORITY CLAIMS; PAYMENT OF OTHER CURRENT LIABILITIES. Each Account 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; (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 7.03) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Account 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 Account Party or such Subsidiary; PROVIDED that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Account 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. SECTION 6.07. FINANCIAL ACCOUNTING PRACTICES. Such Account Party will, and will cause each of its consolidated Subsidiaries to, make and keep books, records and accounts 364-DAY CREDIT AGREEMENT - 57 - 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 6.01 in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. SECTION 6.08. COMPLIANCE WITH APPLICABLE LAWS. Each Account 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 Account Party or any Subsidiary of such Account 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 Account Party to perform its obligations under this Agreement. SECTION 6.09. USE OF LETTERS OF CREDIT AND PROCEEDS. No part of the proceeds of any Loan and 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. Each Account Party will use the proceeds of all Loans for its general corporate purposes. SECTION 6.10. CONTINUATION OF AND CHANGE IN BUSINESSES. Each Account 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. SECTION 6.11. VISITATION. Each Account Party will permit such Persons as any Lender may reasonably designate to visit and inspect any of the properties of such Account Party, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Account Party at such times as such Lender may reasonably request. Each Account Party hereby authorizes its financial management to discuss with any Lender the affairs of such Account Party. ARTICLE VII NEGATIVE COVENANTS Until the Commitments have expired or terminated, the principal of and interest on each Loan and all fees payable hereunder have been paid in full, all Letters of Credit have expired or terminated and all LC Disbursements have been reimbursed, each of the Account Parties covenants and agrees with the Lenders that: SECTION 7.01. MERGERS. No Account Party 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 Account Party may merge or consolidate with any other corporation, including a Subsidiary, if such Account Party shall be the surviving corporation. 364-DAY CREDIT AGREEMENT - 58 - SECTION 7.02. DISPOSITIONS. No Account 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 invested assets classified on such Account Party's or its respective Subsidiaries' balance sheet as available for sale or as a trading account; (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 Account 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 Account Party or its Subsidiaries. SECTION 7.03. LIENS. No Account 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 Part B of Schedule II; (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; (c) Liens on property securing all or part of the purchase price thereof to such Account Party and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Account 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 Account 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; (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 Account Party or any such Subsidiary; 364-DAY CREDIT AGREEMENT - 59 - (e) Liens securing Indebtedness permitted by Section 7.07(b) 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 Account 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); (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 Account Parties' 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 Account Party or any of their Subsidiaries or its becoming a Subsidiary, and Liens existing on any property acquired by any Account 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. SECTION 7.04. TRANSACTIONS WITH AFFILIATES. No Account 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 Account 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 Part A of Schedule II, (ii) transactions among the Account Parties and their wholly-owned Subsidiaries and (iii) transactions with Affiliates in good faith in the ordinary course of such Account Party's 364-DAY CREDIT AGREEMENT - 60 - business consistent with past practice and on terms no less favorable to such Account 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. SECTION 7.05. 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. SECTION 7.06. CONSOLIDATED NET WORTH. XL Capital will not permit its Consolidated Net Worth to be less than $4,400,000,000 at any time. SECTION 7.07. INDEBTEDNESS. No Account 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) secured Indebtedness (including secured reimbursement obligations with respect to letters of credit) of any Account Party or any Subsidiary in an aggregate principal amount (for all Account Parties and their respective Subsidiaries) not exceeding $400,000,000 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 Account Party or any Subsidiary; (e) Indebtedness incurred in transactions described in Section 7.03(f); and (f) 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. SECTION 7.08. 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 Rating Services (or its successor). SECTION 7.09. PRIVATE ACT. No Account Party will become subject to a Private Act other than the X.L. Insurance Company, Ltd. Act, 1989. 364-DAY CREDIT AGREEMENT - 61 - ARTICLE VIII EVENTS OF DEFAULT If any of the following events ("EVENTS OF DEFAULT") shall occur: (a) any Account Party shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement 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 Account Party shall fail to pay any interest on any Loan or LC Disbursement 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 VII; (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 Article) 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 Lender) to such Obligor; (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 secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; 364-DAY CREDIT AGREEMENT - 62 - (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 or XL Europe (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 Article III 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; 364-DAY CREDIT AGREEMENT - 63 - then, and in every such event (other than an event with respect to any Account Party described in clause (g) or (h) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Account Parties, 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 Account Parties 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 Account Parties; and in case of any event with respect to any Account Party described in clause (g) or (h) of this Article, 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 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. If an Event of Default shall occur and be continuing and XL Capital receives notice from the Administrative Agent or the Required Lenders demanding the deposit of cash collateral for the aggregate LC Exposure of all the Lenders pursuant to this paragraph, the Account Parties shall immediately deposit into an account established and maintained on the books and records of the Administrative Agent, which account may be a "securities account" (within the meaning of Section 8-501 of the Uniform Commercial Code as in effect in the State of New York (the "UNIFORM COMMERCIAL CODE")), in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the total LC Exposure as of such date PLUS any accrued and unpaid interest thereon; PROVIDED that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to any Account Party described in clause (g) or (h) of this Article. Such deposit shall be held by the Administrative Agent as collateral for the LC Exposure under this Agreement, and for this purpose each of the Account Parties hereby grant a security interest to the Administrative Agent for the benefit of the Lenders in such collateral account and in any financial assets (as defined in the Uniform Commercial Code) or other property held therein. In addition to the provisions of this Article, each Account Party agrees that upon the occurrence and during the continuance of any Event of Default any Lender which has issued any Alternative Currency Letter of Credit may, by notice to XL Capital and the Administrative Agent: (a) declare that all fees and other obligations of the Account Parties accrued in respect of Alternative Currency Letters of Credit issued by such Lender shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Account Party and (b) demand the deposit (without duplication of any amounts deposited with the Administrative Agent under the preceding paragraph) of cash collateral from the Account Parties in immediately available funds in the currency of such Alternative Currency Letter of Credit or, at the option of such Lender, in Dollars in an amount equal to the then aggregate undrawn face amount of all such Alternative Currency Letters of Credit and in such manner as previously agreed to by the Account Parties and such Lender; 364-DAY CREDIT AGREEMENT - 64 - PROVIDED that, in the case of any of the Events of Default specified in clause (g) or (h) of this Article, without any notice to any Account Party or any other act by the Administrative Agent or the Lenders, all fees and other obligations of the Account Parties accrued in respect of all Alternative Currency Letters of Credit shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Account Party. If the Administrative Agent receives any notice from a Lender pursuant to the previous sentence, then it will promptly give notice thereof to the other Lenders. ARTICLE IX THE ADMINISTRATIVE AGENT Each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such Person and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with any Account Party or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders, and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to any Account Party or any of their Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by an Account Party or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article V 364-DAY CREDIT AGREEMENT - 65 - or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for any Account Party), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. The Administrative Agent may resign at any time by notifying the Lenders and the Account Parties. Upon any such resignation, the Required Lenders shall have the right, in consultation with XL Capital, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent's resignation shall nonetheless become effective and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and (2) the Required Lenders shall perform the duties of the Administrative Agent (and all payments and communications provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly) until such time as the Required Lenders appoint a successor agent as provided for above in this paragraph. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder (if not already discharged therefrom as provided above in this paragraph). The fees payable by XL Capital to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between XL Capital and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 10.03 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 Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance 364-DAY CREDIT AGREEMENT - 66 - upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. Notwithstanding anything herein to the contrary, the Sole Advisor, Lead Arranger, Sole Bookrunner and Co-Syndication Agents named on the cover page of this Agreement shall not have any duties or liabilities under this Agreement, except in their capacity, if any, as Lenders. ARTICLE X MISCELLANEOUS SECTION 10.01. 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 Account Party, to XL Capital at XL House, One Bermudiana Road, Hamilton HM 11 Bermuda, Attention of Roddy Gray (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 JPMorgan Chase 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 JPMorgan Chase Bank, 270 Park Avenue, 15th Floor, New York, New York 10017, Attention of Helen Newcomb (Telecopy No. (212) 270-1511; Telephone No. (212) 270-6260); and (c) if to a Lender, 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 Lender, by notice to the Account Parties and the Administrative 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. SECTION 10.02. WAIVERS; AMENDMENTS. (a) NO DEEMED WAIVERS; REMEDIES CUMULATIVE. No failure or delay by the Administrative Agent or any Lender 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. The rights and remedies of 364-DAY CREDIT AGREEMENT - 67 - the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Account Parties therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, 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 making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) AMENDMENTS. 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 Required Lenders or by the Obligors and the Administrative Agent with the consent of the Required Lenders; PROVIDED that no such agreement shall: (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or the amount of any reimbursement obligation of an Account Party in respect of any LC Disbursement or reduce the rate of interest thereon, or reduce any fees or other amounts payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or 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 an "evergreen" provision"), without the written consent of each Lender affected thereby, (iv) change Section 2.21(c) or 2.21(d) without the consent of each Lender affected thereby, (v) release any of the Guarantors from any of their guarantee obligations under Article III without the written consent of each Lender, and (vi) change any of the provisions of this Section or the percentage in the definition of the term "Required 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 Administrative Agent hereunder without the prior written consent of the Administrative Agent. 364-DAY CREDIT AGREEMENT - 68 - SECTION 10.03. EXPENSES; INDEMNITY; DAMAGE WAIVER. (a) COSTS AND EXPENSES. The Account Parties shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of one legal counsel for the Administrative Agent and one legal counsel for the Lenders, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including in connection with any workout, restructuring or negotiations in respect thereof and (iii) 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. (b) INDEMNIFICATION BY THE ACCOUNT PARTIES. The Account Parties shall indemnify the Administrative 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 (but not including Excluded Taxes), incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) 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, (ii) any Loan or the use of the proceeds thereof or any Letter of Credit or the use thereof (including any refusal by any Lender to honor 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), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by any Account Party or any of its Subsidiaries, or any Environmental Liability related in any way to any Account Party or any of its Subsidiaries, or (iv) 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 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 willful misconduct of such Indemnitee. (c) REIMBURSEMENT BY LENDERS. To the extent that the Account Parties fail to pay any amount required to be paid by them to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative 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 Administrative Agent in its capacity as such. 364-DAY CREDIT AGREEMENT - 69 - (d) WAIVER OF CONSEQUENTIAL DAMAGES, ETC. To the extent permitted by applicable law, no Account Party shall assert, and each Account Party hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof. (e) PAYMENTS. All amounts due under this Section shall be payable promptly after written demand therefor. SECTION 10.04. 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 (i) no Account Party may 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 an Account Party without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. 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, Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) ASSIGNMENTS BY LENDERS. (i) Subject to the conditions set forth in paragraph (b)(ii) of this Section, any Lender may assign to one or more NAIC Approved Lenders all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans and LC Disbursements at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of: (A) the Account Parties, PROVIDED that no consent of any Account Party shall be required for an assignment to a Lender, an Affiliate of a Lender, an Approved Fund or, if an Event of Default under clause (a), (b), (g) or (h) of Article VIII has occurred and is continuing, any other assignee; and (B) the Administrative Agent, PROVIDED that no consent of the Administrative Agent shall be required for an assignment to an assignee that is a Lender immediately prior to giving effect to such assignment. (ii) Assignments shall be subject to the following additional conditions: (A) except in the case of an assignment to a Lender, an Approved Fund or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than 364-DAY CREDIT AGREEMENT - 70 - $5,000,000 unless each of the Account Parties and the Administrative Agent otherwise consent, PROVIDED that no such consent of the Account Parties shall be required if an Event of Default under clause (a), (b), (g) or (h) of Article VIII has occurred and is continuing; (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement; (C) 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; (D) the assignee, if it shall not be a Lender, shall deliver an Administrative Questionnaire to the Administrative Agent (with a copy to XL Capital); and (E) in the case of an assignment to a CLO, the assigning Lender shall retain the sole right to approve any amendment, modification or waiver of any provision of this Agreement, PROVIDED that the Assignment and Acceptance between such Lender and such CLO may provide that such Lender will not, without the consent of such CLO, agree to any amendment, modification or waiver described in the first proviso to Section 10.02(b) that affects such CLO. (iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(v) 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 Lender under this Agreement, and the assigning Lender 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 Lender'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 Sections 2.18, 2.19, 2.20 and 10.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 10.04 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 paragraph (c) of this Section. (iv) 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 Administrative Agent and the Account Parties, the option to provide to the Account Parties all or any part of any Loan or LC Disbursement that such Granting Lender would otherwise be obligated to make to the Account Parties pursuant to Section 2.01, PROVIDED that (i) nothing herein shall constitute a commitment by any SPV to make any Loan or LC Disbursement, (ii) if an SPV elects not to exercise such option or otherwise fails to provide all or any part of such Loan or LC Disbursement, the Granting Lender shall be obligated to make such Loan or LC Disbursement pursuant to the terms hereof and (iii) the Account Parties may bring any proceeding against 364-DAY CREDIT AGREEMENT - 71 - either or both the Granting Lender or the SPV in order to enforce any rights of the Account Parties hereunder. The making of a Loan or LC Disbursement by an SPV hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan or 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, 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 Account Parties or the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loan or Letter of Credit to its Granting Lender or to any financial institutions (consented to by the Account Parties 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 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 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 or LC Disbursements under this Agreement. (v) The Administrative Agent, acting for this purpose as an agent of the Account Parties, 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 Lenders, the Commitment and Revolving Credit Commitment of, and principal amount of the Loans and 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 Parties, the Administrative Agent 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. (vi) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b)(ii)(C) of this Section and any written consent to such assignment required by paragraph (b)(i) 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. (c) PARTICIPATIONS. (i) Any Lender may, without the consent of the Account 364-DAY CREDIT AGREEMENT - 72 - Parties or the Administrative Agent, sell participations to one or more banks 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, Revolving Credit Commitment, the Loans and LC Disbursements owing to it); PROVIDED that (A) any such participation sold to a Participant which is not a Lender, an Approved Fund 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, (B) such Lender's obligations under this Agreement and the other Credit Documents shall remain unchanged, (C) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (D) the Account Parties, the Administrative Agent 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 Credit Documents. 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 Credit Documents and to approve any amendment, modification or waiver of any provision of this Agreement or the other Credit 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 Section 10.02(b) that affects such Participant. Subject to paragraph (c)(ii) of this Section, the Account Parties agree that each Participant shall be entitled to the benefits of Sections 2.18, 2.19 and 2.20 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.21(d) as though it were a Lender. (ii) A Participant shall not be entitled to receive any greater payment under Section 2.18 or 2.19 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant or the Lender interest assigned, unless the sale of the participation to such Participant is made with the Account Parties' prior written consent. (d) CERTAIN PLEDGES. 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, including any such pledge or assignment to secure obligations 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 Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. (e) NO ASSIGNMENTS TO ANY ACCOUNT PARTY OR AFFILIATES. Anything in this Section to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan or LC Exposure held by it hereunder to any Account Party or any of its Affiliates or Subsidiaries without the prior consent of each Lender. SECTION 10.05. SURVIVAL. All covenants, agreements, representations and warranties made by the Account Parties herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been 364-DAY CREDIT AGREEMENT - 73 - relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans 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 Administrative 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 the principal of, or any accrued interest on, any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.18, 2.19, 2.20 and 10.03 and Article IX shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. SECTION 10.06. COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract between and among 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. Except as provided in Section 5.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page to this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 10.07. SEVERABILITY. Any provision of this Agreement 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; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 10.08. RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to 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 such Lender to or for the credit or the account of any Account Party against any of and all the obligations of such Account Party now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. 364-DAY CREDIT AGREEMENT - 74 - SECTION 10.09. GOVERNING LAW; JURISDICTION; ETC. (a) GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) SUBMISSION TO JURISDICTION. Each Obligor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against any Obligor or its properties in the courts of any jurisdiction. (c) WAIVER OF VENUE. Each Obligor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) SERVICE OF PROCESS. Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. (e) WAIVER OF IMMUNITIES. To the extent that any Account Party 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. SECTION 10.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER 364-DAY CREDIT AGREEMENT - 75 - AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 10.11. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 10.12. TREATMENT OF CERTAIN INFORMATION; CONFIDENTIALITY. (a) TREATMENT OF CERTAIN INFORMATION. Each of the Account Parties acknowledge that from time to time financial advisory, investment banking and other services may be offered or provided to any Account Party 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 Account Parties hereby authorizes each Lender to share any information delivered to such Lender by such Account Party 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 (i) any such information shall be used only for the purpose of advising the Account Parties or preparing presentation materials for the benefit of the Account Parties 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 Lender hereunder. Such authorization shall survive the repayment of the Loans, the expiration or termination of the Letters of Credit, 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 Lenders 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 Lender, (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 Account Parties, 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 Account Party and its obligations, (vii) with the consent of the Account Parties or (viii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this paragraph or (B) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than an Account Party. For the purposes of this paragraph, "INFORMATION" means all information received from an Account Party relating to an Account Party or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by such Account Party; PROVIDED that, in the case of information received from an 364-DAY CREDIT AGREEMENT - 76 - Account Party 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 Lenders agree that they will not trade the securities of any of the Account Parties based upon non-public Information that is received by them. SECTION 10.13. JUDGMENT CURRENCY. This is an international loan transaction in which the specification of Dollars and payment in New York City is of the essence, and the obligations of each Account Party under this Agreement to make payment to (or for account of) a Lender in Dollars shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any other currency or in another place except to the extent that such tender or recovery results in the effective receipt by such Lender in New York City of the full amount of Dollars payable to such Lender under this Agreement. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in Dollars into another currency (in this Section called the "JUDGMENT CURRENCY"), the rate of exchange that shall be applied shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase such Dollars at the principal office of the Administrative Agent in New York City with the judgment currency on the Business Day next preceding the day on which such judgment is rendered. The obligation of each Account Party in respect of any such sum due from it to the Administrative Agent or any Lender hereunder (in this Section called an "ENTITLED PERSON") 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 such Entitled Person of any sum adjudged to be due hereunder in the judgment currency such Entitled Person may in accordance with normal banking procedures purchase and transfer Dollars to New York City with the amount of the judgment currency so adjudged to be due; and each Account Party hereby, as a separate obligation and notwithstanding any such judgment, agrees to indemnify such Entitled Person against, and to pay such Entitled Person on demand, in Dollars, the amount (if any) by which the sum originally due to such Entitled Person in Dollars hereunder exceeds the amount of the Dollars so purchased and transferred. 364-DAY CREDIT AGREEMENT - 77 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. X.L. AMERICA, INC., as an Account Party and a Guarantor By -------------------------------- Name: Title: XL INSURANCE (BERMUDA) LTD, as an Account Party and a Guarantor By -------------------------------- Name: Title: XL EUROPE LTD, as an Account Party and a Guarantor By -------------------------------- Name: Title: XL RE LTD, as an Account Party and a Guarantor By -------------------------------- Name: Title: 364-DAY CREDIT AGREEMENT - 78 - 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 an Account Party and a Guarantor --------------------------- witness By -------------------------- Name: Title: 364-DAY CREDIT AGREEMENT - 79 - LENDERS JPMORGAN CHASE BANK, individually and as Administrative Agent By: ----------------------------------------- Name: Title: CITIBANK, N.A. By: ----------------------------------------- Name: Title: DEUTSCHE BANK AG NEW YORK BRANCH By: ----------------------------------------- Name: Title: By: ----------------------------------------- Name: Title: MELLON BANK, N.A. By: ----------------------------------------- Name: Title: 364-DAY CREDIT AGREEMENT - 80 - BANK OF AMERICA, N.A. By: ----------------------------------------- Name: Title: BANK ONE, NA By: ----------------------------------------- Name: Title: By: ----------------------------------------- Name: Title: BARCLAYS BANK PLC By: ----------------------------------------- Name: Title: CREDIT LYONNAIS NEW YORK BRANCH By: ----------------------------------------- Name: Title: 364-DAY CREDIT AGREEMENT - 81 - DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: ----------------------------------------- Name: Title: By: ----------------------------------------- Name: Title: FLEET NATIONAL BANK By: ----------------------------------------- Name: Title: HSBC BANK USA By: ----------------------------------------- Name: Title: LLOYDS TSB BANK PLC By: ----------------------------------------- Name: Title: By: ----------------------------------------- Name: Title: 364-DAY CREDIT AGREEMENT - 82 - WACHOVIA BANK, N.A. By: ----------------------------------------- Name: Title: ABN AMRO BANK N.V. By: ----------------------------------------- Name: Title: By: ----------------------------------------- Name: Title: NATIONAL WESTMINSTER BANK PLC By: ----------------------------------------- Name: Title: THE BANK OF NOVA SCOTIA By: ----------------------------------------- Name: Title: THE BANK OF NEW YORK By: ----------------------------------------- Name: Title: 364-DAY CREDIT AGREEMENT COMERICA BANK By: ----------------------------------------- Name: Title: ING BANK N.V., LONDON BRANCH By: ----------------------------------------- Name: Title: MERRILL LYNCH BANK USA By: ----------------------------------------- Name: Title: NATIONAL AUSTRALIA BANK LIMITED By: ----------------------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY By: ----------------------------------------- Name: Title: 364-DAY CREDIT AGREEMENT EX-99.9 4 c25171_ex99-9.txt Exhibit 99.9 XL CAPITAL ASSURANCE INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 XL CAPITAL ASSURANCE INC. CONDENSED CONSOLIDATED BALANCE SHEETS AS AT JUNE 30, 2002 AND DECEMBER 31, 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
ASSETS: 2002 2001 --------- --------- Investments: Fixed maturities available for sale, at fair value (amortized cost: 2002 - $106,991; 2001 - $76,940) $ 109,419 $ 78,586 Short-term investments, at fair value, which approximates cost 21,015 38,681 ------------------------- Total investments available for sale 130,434 117,267 Cash and cash equivalents 72,818 39,204 Premiums receivable 1,821 1,070 Accrued investment income 1,546 897 Reinsurance balances recoverable on unpaid losses 5,627 1,786 Prepaid reinsurance premium 110,332 41,727 Current Federal income tax recoverable 1,651 1,651 Deferred Federal income tax asset 5,205 3,495 Intangible assets - acquired licenses 11,529 11,529 Other assets 484 922 ------------------------- TOTAL ASSETS $ 341,447 $ 219,548 ========================= LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Deferred premium revenue $ 120,516 $ 44,933 Unpaid losses and loss adjustment expenses 6,027 1,846 Deferred ceding commission, net 9,147 1,118 Reinsurance premiums payable 50,567 17,648 Payable for securities purchased 1,557 12,974 Accounts payable and accrued expenses 5,021 3,767 Intercompany payable to affiliates 5,828 11,309 ------------------------- TOTAL LIABILITIES $ 198,663 $ 93,595 ------------------------- SHAREHOLDER'S EQUITY: Common stock (par value $7,500 for June 30, 2002 and December 31, 2001, 2,000 shares authorized, issued and outstanding for June 30, 2002 and December 31, 2001) $ 15,000 $ 15,000 Additional paid-in capital 139,154 119,154 Accumulated other comprehensive income (Net of deferred Federal income taxes of: 2002 - $869; 2001 - $592) 1,558 1,054 Accumulated deficit (12,928) (9,255) ------------------------- TOTAL SHAREHOLDER'S EQUITY $ 142,784 $ 125,953 ------------------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 341,447 $ 219,548 =========================
See notes to condensed consolidated financial statements. XL CAPITAL ASSURANCE INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 ------- ------- -------- ------- REVENUES Net premiums earned $ 676 $ 50 $ 1,362 $ 60 Net investment income 1,317 1,880 2,916 2,821 Net realized gains 344 21 580 467 -------------------------------------------- Total revenue $ 2,337 $ 1,951 $ 4,858 $ 3,348 -------------------------------------------- EXPENSES Losses and loss adjustment expenses $ 169 $ 12 $ 341 $ 15 Operating expenses 4,071 2,836 10,177 9,218 -------------------------------------------- Total expenses $ 4,240 $ 2,848 $ 10,518 $ 9,233 -------------------------------------------- Loss before Federal income tax (benefit) expense $(1,903) $ (897) $ (5,660) $(5,885) -------------------------------------------- Current Federal income tax benefit $ -- $(2,060) $ -- $(2,060) Deferred Federal income tax (benefit) expense (750) 2,232 (1,987) 688 -------------------------------------------- Total tax (benefit) expense $ (750) $ 172 $ (1,987) $(1,372) -------------------------------------------- NET LOSS $(1,153) $(1,069) $ (3,673) $(4,513) ============================================ Other comprehensive income (loss) 1,060 (287) 504 (165) -------------------------------------------- COMPREHENSIVE LOSS $ (93) $(1,356) $ (3,169) $(4,678) ============================================
See notes to condensed consolidated financial statements.
XL CAPITAL ASSURANCE INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002 AND THE YEAR ENDED DECEMBER 31, 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - ----------------------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, 2002 2001 --------- --------- COMMON SHARES Number of shares, beginning of year 2,000 2,500 Shell acquisition - retirement of XL Capital Assurance Inc. shares -- (2,500) Shell acquisition - issue new XL Capital Assurance Inc. shares -- 2,000 ------------------------- Number of shares, end of period 2,000 2,000 ========================= COMMON STOCK Balance - beginning of year $ 15,000 $ 15,000 ------------------------- Balance-end of period $ 15,000 $ 15,000 ========================= ADDITIONAL PAID-IN CAPITAL Balance - beginning of year $ 119,154 $ 70,000 Contribution of The London Assurance of America Inc. -- 24,154 Capital contribution 20,000 25,000 ------------------------- Balance-end of period $ 139,154 $ 119,154 ========================= ACCUMULATED OTHER COMPREHENSIVE INCOME Balance - beginning of year $ 1,054 $ 951 Net change in unrealized appreciation of investments, net of deferred Federal tax expense of $227 in 2002 and $80 in 2001 504 103 ------------------------- Balance-end of period $ 1,558 $ 1,054 ========================= ACCUMULATED DEFICIT Balance - beginning of year $ (9,255) $ (3,067) Net loss (3,673) (6,188) ------------------------- Balance-end of period $ (12,928) $ (9,255) ========================= TOTAL SHAREHOLDER'S EQUITY $ 142,784 $ 125,953 =========================
See notes to condensed consolidated financial statements. XL CAPITAL ASSURANCE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
JUNE 30, JUNE 30, 2002 2001 --------- -------- CASH PROVIDED BY OPERATING ACTIVITIES: Net loss $ (3,673) $ (4,513) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Net realized gains on sale of investments (580) (467) Amortization of premium on bonds 245 73 Amortization of fair value of acquired licenses -- 97 Increase in unpaid losses and loss adjustment expenses, net 341 15 Increase in deferred premium revenue, net 6,978 797 Increase (decrease) in deferred commission revenue, net 8,029 (1,018) Increase in reinsurance premiums payable 32,919 4,665 Increase in premiums receivable (751) (409) Increase in accrued investment income (649) (16) Increase in current Federal income tax recoverable -- (2,206) (Increase) decrease in deferred Federal income tax asset (1,987) 688 Increase in accounts payable and accrued expenses 1,254 1,336 Decrease in intercompany payable to affiliates (5,481) (22) Other 444 (769) ------------------------ Total adjustments 40,762 2,764 ------------------------ Net cash provided by (used in) operating activities 37,089 (1,749) ------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed maturities and short term investments 20,196 20,475 Proceeds from maturity of fixed maturities and short term investments 110,297 37,099 Purchase of fixed maturities and short term investments (142,551) (56,987) Payable for securities purchased (11,417) -- ------------------------ Net cash (used in) provided by investing activities (23,475) 587 ------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash of contributed company -- 11,279 Capital contribution 20,000 -- ------------------------ Net cash provided by financing activities 20,000 11,279 ------------------------ INCREASE IN CASH AND CASH EQUIVALENTS 33,614 10,117 CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 39,204 5,004 ------------------------ CASH AND CASH EQUIVALENTS-END OF PERIOD $ 72,818 $ 15,121 ======================== TAXES PAID $ -- $ 143 ========================
See notes to condensed consolidated financial statements. XL CAPITAL ASSURANCE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND OWNERSHIP XL Capital Assurance Inc. ("the Company") is a wholly owned subsidiary of XL Reinsurance America Inc. ("XL RE AM"), formerly known as NAC Reinsurance Corporation, which is an indirect wholly owned subsidiary of X.L. America, Inc ("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 holding company incorporated in the Cayman Islands. XLA is XL Capital's U.S. holding company. The Company is an insurance company domiciled in the State of New York. The Company is engaged in the business of providing credit enhancements primarily through the sale of financial guaranty insurance contracts on asset-backed structured finance, essential infrastructure project finance, future flows and public finance transactions. The Company issued its first insurance contract in December 2000. On May 15, 2002, the Company received a $20,000,000 cash infusion from XLA, the parent company, as additional paid in capital. The funds were used to capitalize XL Capital Assurance (U.K.) Ltd, ("XLCA-UK"), a financial guaranty insurance company in the United Kingdom. XLCA-UK is a wholly owned subsidiary of the Company. 2. BASIS OF PRESENTATION The accompanying condensed financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments, which include normal recurring adjustments considered necessary to present fairly the financial position, results of operations and cash flows at June 30, 2002 and for all periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These statements should be read in conjunction with the Company's December 31, 2001 financial statements and notes thereto. The accompanying condensed balance sheet as of December 31, 2001 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended June 30, 2002 and 2001 are not necessarily indicative of the operating results for the full year. 3. 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. Credit Default Swaps meet the definition of a derivative under FAS 133. The Company has recorded these products at management's estimate of fair value. Credit Default Swaps are considered, in substance, financial guaranty contracts as the Company has the intent to hold them to maturity. Therefore, the change XL CAPITAL ASSURANCE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 3. CREDIT DEFAULT SWAPS (CONTINUED) in fair value is split between premiums, losses and loss adjustment expenses, and adjustments to fair value, which are reported in "net realized 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 fair value adjustment for the period ended June 30, 2002 was a gain of $184,000, which was recorded as follows : Earned premiums (net of ceded premiums of $4,021) $237 Losses and loss adjustment expenses (net of ceded losses of $1,005) (59) Change in fair value of credit derivatives 6 ---- Total fair value adjustment $184 ==== 4. NEW 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. The adoption of SFAS No. 141 on July 1, 2001 had no impact on the Company's financial position or results of operations. The merger with The London Assurance of America, Inc. on February 22, 2001 had previously been 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 resulted in the Company's discontinuation of amortization of its intangible asset. The Company tested its intangible asset for impairment under the new standard and determined that no adjustment to recorded balances was necessary. Amortization expense for the six and three month periods ended June 30, 2001 was $97,000 and $74,000, respectively. Amortization expense for the year ended December 31, 2001 was $244,000. 5. SPECIAL PURPOSE VEHICLES The Company utilizes special purpose vehicles to a limited extent both directly and indirectly in the normal 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 special purpose vehicles by the transferors. 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 special purpose vehicles for fixed premiums at market rates but does not hold any XL CAPITAL ASSURANCE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 5. SPECIAL PURPOSE VEHICLES (CONTINUED) equity positions or subordinated debt in these off-balance sheet arrangements. Accordingly, these special purpose vehicles are not consolidated. On June 28, 2002, the FASB published an Exposure Draft relating to consolidation of special purpose vehicles. The public comment period ends on August 30, 2002. A finalized pronouncement containing accounting guidance and implementation dates is expected in the fourth quarter, 2002. 6. TAX SHARING AGREEMENT 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 June 30, 2002 and December 31, 2001 the Company had a current Federal income tax receivable of $1,651,000 from XLA. At June 30, 2002 and December 31, 2001 the Company had a deferred Federal income tax asset of $5,205,000 and $3,495,000, respectively. The Company believes that a valuation allowance is unnecessary in connection with the deferred tax asset. 7. 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 guaranty insurer, which is 86.8% owned by XL Insurance. 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. 8. REINSURANCE The effect of reinsurance on premiums written and earned for the six months ended June 30, 2002 and 2001 is shown below: Direct Ceded Net ------- -------- ------ Six months ended June 30, 2002 Premium written $92,312 $(83,972) $8,340 Premium earned 16,729 (15,367) 1,362 Six months ended June 30, 2001 Premium written $ 9,402 $ (8,545) $ 857 Premium earned 1,431 (1,371) 60 EX-99.10 5 c25171_ex99-10.txt Exhibit 99.10 XL FINANCIAL ASSURANCE LTD. (Incorporated in Bermuda) CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 XL FINANCIAL ASSURANCE LTD. CONDENSED BALANCE SHEETS AS AT JUNE 30, 2002 AND DECEMBER 31, 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
2002 2001 ---------------------- ASSETS: Investments : Fixed maturities, at fair value (amortized cost: 2002 - $375,624; 2001 - $418,904) $378,514 $420,914 Short-term investments, at fair value (amortized cost: 2002 - $45,170; 2001 - $18,780) 45,298 18,769 ---------------------- Total investments available for sale 423,812 439,683 Cash and cash equivalents 61,975 50,243 Accrued investment income 3,266 3,088 Reinsurance balances receivable 52,425 22,171 Deferred acquisition costs 16,697 15,184 Prepaid reinsurance premiums 45,373 10,966 Unpaid losses & loss expenses recoverable 2,197 594 Amounts due from parent and affiliates 9,347 1,523 Other assets 105 87 ---------------------- TOTAL ASSETS $615,197 $543,539 ====================== LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued liabilities $ 901 $ 1,768 Derivative liabilities 10,429 17,939 Deferred premium revenue 149,208 83,756 Unpaid losses and loss expenses 18,954 11,831 Reinsurance premiums payable 25,350 4,863 Net payable for investments purchased 80,704 122,315 Dividend payable on preferred shares 7,632 1,932 ---------------------- TOTAL LIABILITIES $293,178 $244,404 ---------------------- REDEEMABLE PREFERRED SHARES: Redeemable preferred shares (par value of $120 per share; 10,000 shares authorized; 363 issued and outstanding as at June 30, 2002 and December 31, 2001, respectively) $ 44 $ 44 Additional paid-in capital 38,956 38,956 ---------------------- TOTAL REDEEMABLE PREFERRED SHARES $ 39,000 $ 39,000 ---------------------- SHAREHOLDERS' EQUITY: Common shares (par value of $120 per share; 10,000 shares authorized; 2,057 issued and outstanding as at June 30, 2002 and December 31, 2001, respectively) $ 247 $ 247 Additional paid-in capital 220,653 220,653 Accumulated other comprehensive income 3,018 1,998 Retained earnings 59,101 37,237 ---------------------- TOTAL SHAREHOLDERS' EQUITY $283,019 $260,135 ---------------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY $615,197 $543,539 ======================
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 2002 2001 2002 2001 ----------------------------------------------- REVENUES : Net premiums earned $ 11,953 $ 6,953 $ 21,833 $ 12,510 Net investment income 5,048 4,875 9,704 9,661 Net realized gains (losses) on investments 2,231 (299) 4,028 5,067 Net realized and unrealized gains (losses) on derivative instruments 988 (231) 7,511 (585) ----------------------------------------------- Total revenues $ 20,220 $ 11,298 $ 43,076 $ 26,653 ----------------------------------------------- EXPENSES : Losses and loss expenses $ 3,032 $ 1,240 $ 5,519 $ 1,459 Acquisition costs 4,522 1,385 6,791 2,108 Operating expenses 1,439 1,752 3,201 2,895 ----------------------------------------------- Total expenses $ 8,993 $ 4,377 $ 15,511 $ 6,462 ----------------------------------------------- Net income before cumulative effect of accounting change $ 11,227 $ 6,921 $ 27,565 $ 20,191 Cumulative effect of accounting change -- -- -- (1,350) ----------------------------------------------- Net income before dividends on preferred shares $ 11,227 $ 6,921 $ 27,565 $ 18,841 Dividends on preferred shares (5,220) (1,143) (5,701) (1,624) ----------------------------------------------- NET INCOME FOR COMMON SHAREHOLDERS $ 6,007 $ 5,778 $ 21,864 $ 17,217 =============================================== COMPREHENSIVE INCOME Net income for common shareholders $ 6,007 $ 5,778 $ 21,864 $ 17,217 Unrealized gains (losses) 8,289 (2,893) 5,048 1,490 Less: reclassification for gains (losses) realized in income 2,231 (299) 4,028 5,067 ----------------------------------------------- Change in net unrealized appreciation (depreciation) of investments $ 6,058 (2,594) $ 1,020 $ (3,577) ----------------------------------------------- COMPREHENSIVE INCOME $ 12,065 $ 3,184 $ 22,884 $ 13,640 ===============================================
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
ADDITIONAL PAID-IN ACCUMULATED CAPITAL - OTHER COMMON COMMON COMPREHENSIVE RETAINED SHARES SHAREHOLDERS INCOME (LOSS) EARNINGS TOTAL --------------------------------------------------------------- BALANCE, JANUARY 1, 2001 $ 247 $ 220,653 $3,932 $17,603 $242,435 Net income for common shareholders for the year 19,634 19,634 Other comprehensive loss (1,934) (1,934) --------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 $ 247 $ 220,653 $1,998 $37,237 $260,135 Net income for common shareholders for the period 21,864 21,864 Other comprehensive income 1,020 1,020 --------------------------------------------------------------- BALANCE, JUNE 30, 2002 $ 247 $ 220,653 $3,018 $59,101 $283,019 ---------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
2002 2001 ----------------------------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $ 27,565 $ 20,191 Adjustments to reconcile net income to net cash provided by operating activities: Realized gains on investments (4,028) (5,067) Net realized and unrealized losses (gains) on derivative instruments (7,511) 585 Amortization of discount on fixed maturities (517) (496) Accrued investment income (178) 559 Reinsurance premiums receivable (30,254) (780) Deferred acquisition costs (1,513) (2,594) Prepaid reinsurance premiums (34,407) 255 Unpaid losses & loss expenses recoverable (1,603) (33) Amounts due from parent and affiliates (7,824) 515 Other assets and liabilities (18) (171) Accounts payable and accrued liabilities (867) (364) Reinsurance premiums payable 20,487 (201) Deferred premium revenue 65,452 10,597 Unpaid losses and loss expenses 7,123 1,847 Portfolio transfer -- 25,669 ----------------------------- Total adjustments $ 4,342 $ 30,321 ----------------------------- Net cash provided by operating activities $ 31,907 $ 50,512 ----------------------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES : Proceeds from sale of fixed maturities and short-term investments $ 1,040,503 $ 1,229,220 Proceeds from redemption of fixed maturities and short-term investments 19,663 6,783 Purchase of fixed maturities and short-term investments (1,080,341) (1,230,860) ----------------------------- Net cash provided by (used in) investing activities $ (20,175) $ 5,143 ----------------------------- CASH FLOWS USED IN FINANCING ACTIVITY Dividends paid on preferred shares $ -- $ (1,492) ----------------------------- INCREASE IN CASH AND CASH EQUIVALENTS $ 11,732 $ 54,163 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 50,243 17,154 ----------------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 61,975 $ 71,317 =============================
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 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 March 31, 2002 and 2001, 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 The accompanying condensed financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at June 30, 2002 and for all periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These statements should be read in conjunction with the Company's December 31, 2001 financial statements and notes thereto. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended June 30, 2002 and 2001 are not necessarily indicative of the operation results for the full year. The preparation of condensed financial statements 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 those estimates. Any such adjustments are reflected in income in the period in which the XL FINANCIAL ASSURANCE LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION (CONTINUED) adjustments are made. The financial statement estimates subject to most uncertainty are estimates for loss reserves and calculation of the fair value of credit default swap instruments. Certain comparative figures have been reclassified to conform with the current year's presentation. 3. DERIVATIVE INSTRUMENTS The following table summarizes the change in fair value of the Company's credit default swaps recognized in income for the six month period ended June 30, 2002. Net premiums earned $ 3,506 Losses and loss expenses (876) Net realized and unrealized (losses) gains on derivative instruments 7,511 -------- Total fair value adjustment $ 10,141 ======== 4. FACULTATIVE QUOTA SHARE REINSURANCE TREATY On October 6, 1999, the Company entered into a Facultative Quota Share Reinsurance Treaty ("Treaty") with XL Capital Assurance Inc. ("XLCA"). The Treaty was amended and restated on June 22, 2001. Under the terms of this agreement, the Company agrees to reinsure up to 90% of the XLCA's acceptable risks. The Company is subject to a 30% ceding commission on premiums assumed under the terms of this agreement. 5. SPECIAL PURPOSE VEHICLES The Company utilizes special purpose vehicles to a limited extent both directly and indirectly in the normal 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 special purpose vehicles by the transferors. 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 special purpose 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 special purpose vehicles are not consolidated. -----END PRIVACY-ENHANCED MESSAGE-----