-----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, JKkAPdnpcUk65z38DF1wNItH4Yc71Pfl3AWMp9Dx2rich8pPCZa6do2tqW0B1QZg MzTu9opMc2BNnLbFaqmQ2w== 0000950131-99-001240.txt : 19990305 0000950131-99-001240.hdr.sgml : 19990305 ACCESSION NUMBER: 0000950131-99-001240 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 32 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990301 DATE AS OF CHANGE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XL CAPITAL LTD CENTRAL INDEX KEY: 0000875159 STANDARD INDUSTRIAL CLASSIFICATION: 6351 IRS NUMBER: 980058718 FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10804 FILM NUMBER: 99555112 BUSINESS ADDRESS: STREET 1: CUMBERLAND HOUSE STREET 2: 1 VICTORIA ST CITY: HAMILTON HM11 BERMUD STATE: D2 BUSINESS PHONE: 4412928515 MAIL ADDRESS: STREET 1: CAHILL GORDON & REINDEL(IMMANUEL KOHN) STREET 2: 80 PINE STREET CITY: NEW YORKI STATE: NY ZIP: 10005 FORMER COMPANY: FORMER CONFORMED NAME: EXEL LTD DATE OF NAME CHANGE: 19950720 10-K 1 FORM 10-K - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1998 Commission file number 1-10804 ---------------- XL Capital Ltd (Exact name of registrant as specified in its charter) Cayman Islands 98-0058718 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Cumberland House, 1 Victoria Street, HM 11 Hamilton, Bermuda (Zip Code) (Address of principal executive offices) (441) 292-8515 (Registrant's telephone number, including area code) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange Title of each class on which registered ------------------- --------------------- Class A Ordinary Shares, Par Value $0.01 New York Stock Exchange, Inc. per Share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the shares of all classes of voting stock of the registrant held by non-affiliates of the registrant on February 19, 1999 was approximately $6.9 billion computed upon the basis of the closing sales price of all Ordinary Shares on that date. For purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. As of February 19, 1999, there were outstanding 108,423,500 Class A Ordinary Shares, $0.01 par value per share, and 3,115,900 Class B Ordinary Shares, $0.01 par value per share, of the registrant. Documents Incorporated by Reference The registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the annual meeting of shareholders scheduled to be held on April 9, 1999 is incorporated by reference in Part III of this Form 10-K. - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- XL CAPITAL LTD TABLE OF CONTENTS
Page ---- PART I Item 1. Business............................................................................... 1 Item 2. Properties............................................................................. 19 Item 3. Legal Proceedings...................................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders.................................... 19 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............... 22 Item 6. Selected Financial Data................................................................ 23 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition . 24 Item 8. Financial Statements and Supplementary Data............................................ 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 63 PART III Item 10. Directors and Executive Officers of the Registrant..................................... 63 Item 11. Executive Compensation................................................................. 63 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 63 Item 13. Certain Relationships and Related Transactions......................................... 63 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 63
This Annual Report on Form 10-K contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. A non- exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements is set forth herein under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition--Cautionary Note Regarding Forward-Looking Statements." PART I Item 1. Business Introduction XL Capital Ltd ("XL" or the "Company") is a holding company organized under the laws of the Cayman Islands. XL was incorporated on March 16, 1998 as the successor to EXEL Limited, a Cayman Islands corporation organized in 1986 ("EXEL"), in connection with EXEL's merger with Mid Ocean Limited, a Cayman Islands corporation ("Mid Ocean"). In the merger, which was completed on August 7, 1998, all of the shares of EXEL and Mid Ocean were exchanged for shares in the Company pursuant to two schemes of arrangement (the "Arrangements") approved by the Grand Court of the Cayman Islands in accordance with Section 85 of the Companies Law (1995 Revision) of the Cayman Islands. The Company operated under the name "EXEL Limited" from completion of the merger until February 1, 1999, when its current name was approved by the requisite vote of the Company's shareholders. References herein to "XL" or the "Company" also shall include EXEL unless the context otherwise requires. Through its subsidiaries, the Company is a leading provider of insurance and reinsurance, including coverages relating to certain financial risks, to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. XL Insurance Ltd, an insurance company organized under the laws of Bermuda ("XLI"), and its subsidiaries are the Company's principal insurance subsidiaries. XLI was formed in 1986 in response to a shortage of high excess liability coverage for Fortune 500 companies in the United States. In 1990, XLI formed XL Europe Insurance, an insurance company organized under the laws of the Republic of Ireland ("XLE"), to serve European clients. In 1998, XLI acquired Folksamerica General Insurance Company (renamed X.L. Insurance Company of America, Inc. ("XLIA")), an insurance company domiciled in the State of New York and possessing property and casualty insurance licenses in approximately 20 states and reinsurance licenses in approximately 14 states, and formed X.L. Risk Solutions, Inc., an insurance company domiciled in the State of Connecticut ("XLRS"). XLI also has a representative office in Australia. The Company's reinsurance operations are conducted primarily through XL Mid Ocean Reinsurance Ltd, an insurance company organized under the laws of Bermuda ("XLMORe"), and its subsidiaries. On August 7, 1998, XLMORe was formed through the merger of X.L. Global Reinsurance Company, Ltd. ("XLGRe") and Mid Ocean Reinsurance Company Ltd. ("MORe"). XLGRe was formed in November 1997 through the merger of X.L. Reinsurance Company, Ltd. ("XLRe") and Global Capital Reinsurance Company Limited ("GCRe") following EXEL's acquisition of GCR Holdings Limited, a Cayman Islands holding company ("GCR"), on June 12, 1997. XLRe commenced operations on December 1, 1995 to write specialty reinsurance business. MORe and GCRe were organized in 1992 and 1993, respectively, initially to write property catastrophe reinsurance following severe hurricanes which struck the southeastern United States in the late 1980's and early 1990's. Each of XLRe, MORe and GCRe was organized as an insurance company under the laws of Bermuda. XLMORe maintains branches in London and Singapore and a European contact office in Munich. The Company's operations at Lloyd's are conducted through The Brockbank Group plc, a company organized under the laws of England, and its subsidiaries (together, "Brockbank"). Brockbank is a leading Lloyd's managing agency which manages five Lloyd's syndicates, two of which are dedicated corporate syndicates ("corporate syndicates") whose capital is provided solely by the Company and its subsidiaries. Mid Ocean acquired 51% of Brockbank in December 1995 and the remaining 49% in August 1997. The two corporate syndicates, which commenced operations with effect from January 1, 1996, underwrite property, marine and energy, aviation, satellite, professional indemnity, U.K. motor and other specialty lines of insurance and reinsurance to a global client base. In 1998, the aggregate premium limit of the two corporate syndicates was approximately $340 million, and the total capacity under management by Brockbank was approximately $900 million. As a managing agency, Brockbank receives fees and commissions in respect of the underwriting services it provides to syndicates. 1 In October 1998, the Company sold its 21% interest in Venton Holdings Limited, a Bermuda holding company for the Venton managing agency group at Lloyd's (together, the "Venton Group"). Prior to the sale, subsidiaries of the Company provided reinsurance coverage to the Venton Group, which writes principally professional indemnity, directors and officers liability and fiduciary liability insurance coverages. The Company participates in several joint ventures of strategic importance. In general, the Company has pursued a strategy of entering into joint ventures with organizations which possess expertise in lines of business that the Company wishes to enter. The Company's principal joint ventures are in the areas of financial guaranty insurance, life insurance for high net worth individuals, Latin American reinsurance, political risk insurance and currency overlay and related risk management. In November 1998, the Company entered into a joint venture (the "FSA Joint Venture") with Financial Security Assurance Holdings Ltd., a New York corporation ("FSA"), to write certain types of financial guaranty insurance and reinsurance. FSA, through its subsidiaries, is primarily engaged in the business of providing financial guaranty insurance on asset-backed and municipal obligations. Under the terms of the joint venture, each of the Company and FSA formed a Bermuda insurance company in which it is the majority shareholder and made a minority investment in the company formed by its co- venturer. The Company formed and maintains majority ownership of XL Financial Assurance Ltd ("XLFA"). FSA formed and maintains majority ownership of Financial Security Assurance International Ltd. ("FSAI"). Each of XLFA and FSAI has a capitalization of approximately $100 million. As part of the joint venture, the Company and FSA exchanged approximately $80 million of each other's stock, following which the Company owned approximately 6% of the issued and outstanding common stock of FSA. In June 1998, the Company formed Reeve Court Insurance Ltd., an insurance company organized under the laws of Bermuda ("Reeve Court"), as a joint venture with such company's management for the purpose of providing life insurance to high net worth individuals. Reeve Court has a total capitalization of approximately $100 million. In October 1997, the Company and Risk Capital Holdings, Inc., a Delaware corporation ("RCHI"), which holds all of the outstanding shares of Risk Capital Reinsurance Company, a Nebraska corporation ("RCRe"), organized LARC Holdings, Ltd., a Bermuda corporation ("LARC"), which holds all of the shares of Latin American Reinsurance Company, Ltd., a Bermuda insurance company ("LARe"). LARe has approximately $100 million in shareholders' equity and provides multi-line reinsurance to the Latin American reinsurance market, concentrating on short-tail, multi-peril property reinsurance and, to a lesser extent, casualty, marine, aviation and other lines of reinsurance on both a treaty and facultative basis. XLMORe owns approximately 75% of the outstanding shares of LARC. The Company indirectly owns approximately 28% of RCHI. In March 1997, XLI became a founding shareholder along with RCHI and another insurance company of Sovereign Risk Insurance Ltd. ("Sovereign"), a Bermuda- based managing general agency formed to underwrite selected political risk insurance coverages. The Company owns 40.5% of Sovereign. In 1996, the Company acquired approximately 28% of Pareto Partners ("Pareto"), a firm which specializes in foreign currency overlay management and related services. At December 31, 1998, Pareto had approximately $26 billion of assets under management. The Company works closely with Pareto to develop new products and ventures, including the F/XLSM foreign currency protection product offered by XLI. On December 2, 1998, the Company signed a definitive agreement to acquire all of the outstanding shares of Intercargo Corporation, a Delaware corporation ("Intercargo"), for $12.00 per share, or approximately $88 million. Intercargo, through its subsidiaries, underwrites specialty insurance products for companies engaged in international trade, including U.S. customs bonds and marine cargo insurance. At September 30, 1998, Intercargo had total assets of $165 million and shareholders' equity of $81 million. The transaction is subject to approval by Intercargo's shareholders, regulatory approvals and customary closing conditions. Each of XLI, XLE and XLMORe possesses claims paying ratings of AA from Standard & Poor's Corporation ("S&P") and A+ from A.M. Best Company, Inc. 2 Business Strategy The Company's strategy is to be the premier provider of strategic financial risk solutions to specific global markets by applying intellectual and financial resources to assure its customers' economic vitality and enhance their competitive positions. Management believes that pursuing this strategy will improve the Company's ability to differentiate itself from its competitors, diversify its mix of business and revenue stream, reduce its dependence on business lines which may be highly price sensitive and build shareholder value. The Company's strategy calls for its subsidiaries to go beyond offering traditional insurance and reinsurance products to designing risk transfer programs that address specific customer needs with respect to a broad range of risks. These include certain types of financial risks and other non- traditional insurance risks which the Company believes can be properly analyzed and underwritten. As part of this approach, the Company's strategy contemplates providing income statement and balance sheet protection to its customers, involving in some instances structured portfolio transfers of strategic importance to its customers. The Company also believes there will be opportunities to build investment features into its risk transfer products. The Company intends to retain its traditional focus generally on high severity, low frequency risks. In order to pursue its strategy effectively, the Company may need to secure access to skills and capabilities in areas which historically have not been found in the insurance and reinsurance industry. Accordingly, successful implementation of the Company's strategy is expected to involve not only maximizing its financial strength but attracting and retaining highly skilled and motivated employees. It may also require entering into coordinated initiatives, joint ventures or alliances with one or more strategic partners, making strategic investments and, where appropriate, acquiring other businesses of strategic value to the Company and its subsidiaries. Business Operations The Company reported net premiums written of $649.9 million, $439.4 million and $467.7 million for the years ended November 30, 1998, 1997 and 1996, respectively.
Net Premiums Written 1998 1997 1996 ($ in millions) -------------- ------------- --------------- Insurance.......................... $350.3 52.1% $296.4 93.6% $ 452.2 75.7% Reinsurance........................ 238.9 35.6% 20.2 6.4% 144.9 24.3% Lloyd's Syndicates................. 82.8 12.3% -- -- -- -- ------ ------ ------ ------ ------- ------ $672.0 100.0% $316.6 100.0% $ 597.1 100.0% ====== ====== ====== Multi-year premiums................ (22.1) 122.8 (129.4) ------ ------ ------- Annualized net premiums written.... $649.9 $439.4 $ 467.7 ====== ====== =======
Insurance The Company, through its subsidiaries, provides third-party general liability insurance, other liability insurance (including directors and officers liability insurance, professional liability insurance, employment practices liability insurance and integrated liability insurance), property insurance and other insurance covers (including political risk insurance and financial products). The liability insurance is written on an excess basis and the loss experience is characterized as low frequency and high severity. Property insurance is written on a pro rata as well as an excess basis. Property policies written on a pro rata basis can have losses attaching at lower levels, resulting in loss experiences that can be higher frequency and lower severity than those associated with the Company's other insurance lines.
Net Premiums Written 1998 1997 1996 ($ in millions) ------------- ------------- ------------- General liability..................... $136.1 38.9% $150.8 50.9% $319.7 70.7% Other liability....................... 152.5 43.5% 116.2 39.2% 101.8 22.5% Property.............................. 24.8 7.1% 29.4 9.9% 30.7 6.8% Other................................. 36.9 10.5% -- -- -- -- ------ ------ ------ ------ ------ ------ $350.3 100.0% $296.4 100.0% $452.2 100.0% ====== ====== ====== ====== ====== ======
3 As the Company's U.S. insurance subsidiaries were not yet fully operational in 1998, the descriptions which follow relate to coverages offered by XLI and XLE. The descriptions which follow are summary in nature. The terms and conditions of individual policies govern, and nothing set forth herein constitutes an admission of coverage or other liability or an interpretation as to how any particular policy provision should be interpreted. General Liability General liability policies offered by the Company's insurance subsidiaries cover occurrences causing unexpected and unintended personal injury or property damage (as well as advertising liability) to third parties arising from events or conditions which commence at or subsequent to an inception date (or retroactive date, if applicable, but not prior to January 1, 1986) and prior to the expiration of the policy, provided proper notice is given during the term of the policy or the discovery period. With respect to the use of products, the coverage applies where unexpected and unintended personal injury or property damage to a third party caused, allegedly caused or deemed to have been caused by the use of a product takes place during the term of the policy. Where certain injury, damage or liability to third parties is expected or intended by the insured, the policy provides coverage for injury, damage or liability when the actual injury, damage or liability incurred is fundamentally different in nature or vastly greater in order of magnitude than expected. All claims for integrated occurrences are added together and treated as one occurrence (thereby limiting such losses to one policy limit) with respect to the policy in effect when the occurrence or claim is first reported regardless of the length of the period over which such losses or liabilities occur, although special notice requirements are imposed with respect to such losses. The general liability policies generally do not "drop down" to provide coverage below the per-occurrence attachment point even in the event of exhausted underlying insurance policy aggregates. Coverage includes product liability, claims resulting from abrupt pollution, punitive damages (for unexpected or unintended damage/injury) and payment of legal fees, as well as a broad range of catastrophic exposures such as explosions, fires, utility blackouts and other catastrophic events not excluded from coverage. Coverage generally excludes gradual pollution (other than gradual pollution resulting from a products liability claim), property damage arising out of most professional services, commercial airline risks, certain marine exposures, and liability for injury or damage caused by, among other things, asbestos, tobacco, intra-uterine devices, silicone implants and nuclear risks. Unlike traditional insurance policy forms, disputes under the policies are required to be settled by arbitration in London. Under the policy arbitration clause, each party selects one arbitrator and the two arbitrators so selected choose a third arbitrator. The English Arbitration Act of 1950, as amended and supplemented, governs the arbitration under XLI policies (with International Chamber of Commerce rules governing XLE policies). Rather than issuing separate annual policies, a perpetual policy is issued (which is subject to an annual underwriting review) with an annual aggregate limit (subject to reinstatement). The policy remains in effect until canceled or not continued. The terms, conditions, exclusions, deductibles and limit applicable to an occurrence are determined by the policy in effect at the time notice thereof is first given. Coverage is provided on an occurrence-reported policy form up to a maximum of $200 million per occurrence and annual aggregate in excess of a minimum attachment point of $15 million per occurrence. Because the inception date (or, if applicable, the retroactive date) remains unchanged, the exposure under each policy usually increases each additional year that the policy is in force. The exposure to unreported claims thus rolls forward each year, which is provided for by the establishment of significant incurred but not reported ("IBNR") reserves. Each year's coverage, however, is subject to an aggregate limit, and the limits of any given year are not available for occurrences first reported in a subsequent year notwithstanding that the injury or damage took place in that year. Premiums are adjusted annually. A single event or set of circumstances may constitute an insured occurrence under policies of different policyholders, resulting in multiple claims exposure with respect thereto. Such events or circumstances could have a material adverse effect on the results of the Company. The policy permits cancellation by the insurer with refund of the unearned premium at any time, except in the case of discovery period coverage, upon 90 days' prior written notice to the policyholder. The policy permits 4 cancellation by a policyholder at any time with a pro-rata refund of premium. If the basic coverage of the policy is canceled or discontinued, the insured is given the option of purchasing discovery coverage (in respect of occurrences taking place subsequent to the inception/retroactive date and prior to cancellation or discontinuance of basic coverage) on an ongoing basis for as long as is desired by the policyholder (with no maximum duration) for predetermined annual premiums. As contrasted with the standard policy form which provides for annual determination of premiums and limits, the Company offers to certain of its policyholders endorsements providing cover generally for two additional annual periods (aggregating a total of three years), with either an annual aggregate or term limit and with the provision for reinstatement of the limit selected. Premiums are generally prepaid in whole or in part for the period of the contract. Such endorsements limit the circumstances under which either the policyholder or the insurer may cancel and provide that the otherwise predetermined premium for the three-year period may be adjusted in certain specified circumstances. It is contemplated that policyholders may be given the opportunity to roll the three-year term forward year-by-year based on premiums and other terms and conditions to be negotiated each year. Other Liability Other liability includes directors and officers liability insurance, professional liability insurance, employment practices liability insurance and integrated liability insurance branded as XL Risk Solutions. Directors and Officers Liability. Directors and Officers liability coverage is written on a claims-made basis providing up to a maximum of $25 million in excess of $20 million for United States risks and up to $50 million for individual director indemnification and excluding corporate reimbursement in excess of $20 million, or $15 million in excess of $15 million for non-United States risks, or a limit of $25 million in excess of not less than $25 million. The policy generally adopts the terms, conditions and exclusions in the primary or other underlying policy. Each insured is rated separately. In contrast to the general liability policy, the directors and officers policy is for a designated period. Also, unlike the general liability policy, the directors and officers policy "drops down" upon erosion or exhaustion of underlying aggregates by multiple claims. The policy can be canceled by the insurer upon typically 90 days' notice (with the insurer retaining a pro rata proportion of the premium) or by the policyholder at any time with the insurer retaining a short rate proportion (i.e., more than pro rata) of the premium. If the insurer cancels or refuses to renew the policy, the policyholder is given the option of purchasing discovery coverage for a specified period of time (generally one to three years) at a predetermined premium. As with the general liability form, disputes are required to be settled by arbitration in London. Under the policy arbitration clause, each party selects one arbitrator and the two arbitrators so selected choose a third arbitrator. Professional Liability. Professional liability risks are written either on a follow-form basis (i.e., the policy generally adopts the terms, conditions and exclusions of the underlying policy, which usually is a "claims-made" policy) or on a form which is structured similarly to the general liability form in that it is extended from year to year (with annual underwriting reviews). Coverage is provided for certain categories of risk up to a maximum of $50 million with a minimum attachment of $25 million, or $20 million for law firms. The policy covers "wrongful acts" (instead of occurrences), subject to customary exclusions, and covers punitive damages arising therefrom. As with the other policy forms, disputes are required to be settled by arbitration in London. In contrast to the general liability policy, the discovery period is of finite duration (generally one to three years). Where the policy is written on a claims made "stand alone" basis (i.e., it does not follow the warranties, terms, conditions or exclusions of underlying policies), it does "drop down" upon erosion or exhaustion of the aggregate limits of underlying policies by multiple wrongful acts in the case of law firms and certain other insureds (i.e., in these instances the attachment point applies on an aggregate rather than a per wrongful act basis). The underlying policies of an insured seeking professional liability coverage are reviewed and evaluated as part of the underwriting process. Employment Practices Liability. In 1997, XLI introduced coverage for employment practices liability. Coverage is provided up to $100 million with a minimum attachment of $1 million. Employment practices 5 liability risks are written on a claims made and reported policy. The policy is written on an annual basis and covers claims brought by an employee against an insured for certain covered employment practices such as job discrimination, sexual harassment and other employment related misconduct. As with other XLI products, the employment practices liability policy has XLI's standard arbitration clause which requires disputes to be settled by arbitration in London. XL Risk Solutions. XL Risk Solutions is a coordinated initiative with CIGNA Risk Solutions offering multi-year, combined line coverages for traditional casualty coverages, including general, directors and officers and professional liability, and property coverage plus blended finite coverage for risks which traditionally have had difficulty placing cover. The target market is large and medium size companies that are trying to simplify and streamline the risk transfer process. CIGNA Corporation ("CIGNA") provides services and fronting policies to meet U.S. regulatory requirements and provides an excess policy for the balance of capacity and coverages required. Available capacity by line of coverage is $60 million to $200 million depending upon the lines selected. Attachment levels may in certain situations be provided below traditional stated levels subject to the underwriting requirements. Programs are typically custom designed to meet specific needs with each customer. Property Property policies are primarily underwritten on an excess of loss occurrence and pro rata form (except earthquake and flood when provided) utilizing engineering reports, statement of values, prior loss history, annual report and other publicly available information. Earthquake and flood coverage are written on an excess of loss attachment basis which may be eroded in a given policy year by accumulated losses from separate occurrences as customary in the industry. When written as such, earthquake and flood have annual aggregate limits. All classes of business are considered. The minimum attachment points are generally $25 million for industrial/commercial accounts and $100 million for oil/petrochemical accounts. Industrial/commercial accounts will also be written on a pro rata basis with attachments as low as $1 million. Coverage can be provided worldwide on an all-risk or named peril basis of direct physical loss or damage with options for time element (e.g., business interruption, extra expense, rental value, etc.), earthquake, flood, and boiler and machinery coverage. Policies can be written on a modified follow form or XLI form. Typical exclusions include but are not limited to war risk, nuclear, pollution, and others customary in property policy coverage. Unlike traditional property policies, disputes under XLI policies are required to be settled by arbitration in London with each party selecting one arbitrator and the two arbitrators so selected choosing a third arbitrator. The maximum net capacity for any of the insurance subsidiaries for any one insured is $100 million per occurrence with $10 million annual aggregate for high frequency/severity earthquake (California, Japan, etc.) when provided. Earthquake and coastal wind exposures are identified and monitored (policy limit accumulations) by subzones worldwide in order to limit exposure to an excessive concentration of catastrophic loss. Other Insurance is also provided to cover political risk. Political risk insurance, including coverages for expropriation, currency inconvertibility and certain other types of political risk associated with cross-border investment, is provided through the Company's interest in Sovereign. Policies written by Sovereign are subscribed 50% by each of XLI and Sovereign's other insurance company shareholder, with RCRe participating in up to 10% of each risk written on a quota share basis. Sovereign's per-country aggregate limit is $100 million, except with respect to Argentina, Brazil, China and Indonesia which have an aggregate limit of $250 million each, and its per risk limit is $50 million. 6 XLI also offers insurance and reinsurance solutions for certain types of financial risks. In 1998, XLI introduced a foreign currency protection product and began writing financial guaranty insurance and reinsurance in respect of selected credit risks. XLI sells customized basket and, in certain circumstances, single-currency options for the purpose of mitigating exposures which corporate and financial institution customers have to selected major currencies. XLI engages Pareto as an advisor to assist in the evaluation of particular foreign currency protection contracts and to manage the risk associated with such transactions. Options have a duration of up to one year. Unrealized gains and losses are marked to market on a periodic basis and reflected quarterly in the Company's consolidated statements of income. At fiscal year-end 1998, XLI had written options having an aggregate nominal value of $200 million, with no single option accounting for more than $100 million. Using its proprietary foreign currency overlay management technology, Pareto attempts to manage XLI's risk of loss so that it generally will not exceed 3% of the nominal amount of each option under the vast majority of possible scenarios. Gains from Pareto's management activities are also possible. Although XLI believes that Pareto generally will manage at or above the 3% loss floor and may produce gains on some contracts, actual losses and gains may be greater or less, respectively, than anticipated due to a variety of factors, including, without limitation, flaws in Pareto's highly quantitative, model-driven technology, the inability to execute hedging and other transactions called for by Pareto's technology in a timely or cost efficient manner, especially in periods of significant financial market volatility or illiquidity, and uncertainties surrounding the application of Pareto's technology, which is predicated on a basket option approach, to single-currency or other non-basket option types of transactions. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Cautionary Note Regarding Forward-Looking Statements" for a list of factors which could cause actual results to differ materially from those contained in any forward-looking statement. XLI and XLFA provide financial guaranty insurance and reinsurance in respect asset-backed, future flow and municipal obligations. Financial guaranty policies generally cover non-payment of principal and interest when due. Particular types of transactions which XLI and XLFA have underwritten or considered underwriting include financial guaranty insurance or reinsurance in respect of bonds issued by public utilities, collateralized bond and collateralized loan obligations, mortgage-backed securities, certain low income housing tax credits, prime and sub-prime automobile loans, credit default swaps, project finance-related obligations and other types of structured insurance or reinsurance risks, including residual value insurance for certain asset classes. The underlying risks guaranteed include both OECD (Organization of Economic Cooperation and Development) and emerging market issuers and assets. Guarantees provided by XLI an XLFA relate generally, but not exclusively, to investment grade obligations. Gross and net retentions in respect of financial guaranty and related risks are determined by XLI and XLFA on a case-by-case basis in light of the particular credit, actuarial, structuring and other risks associated with each transaction. Exposure to a financial guaranty or related risk can exceed $100 million. XLI and XLFA also may provide financial guaranty "fronting" services in return for fees and other revenues on behalf of insurers or reinsurers whose claims paying ratings are below their own. The fronting party is generally required to pay the full amount of any claim even if it cannot recover all or part of the balance due from an insurer or reinsurer for which the service was provided. Reinsurance The Company, through its subsidiaries, writes property catastrophe, property excess of loss, property pro rata, marine and energy, aviation and satellite and various other reinsurance to insurers on a worldwide basis. XLMORe maintains branch offices in London and Singapore as well as a European contact office in Munich, Germany. The London branch underwrites marine, energy and aviation risks on a worldwide basis. The Singapore branch underwrites general reinsurance, treaty and facultative business. A significant portion of XLMORe's business underwritten consists of large aggregate exposures to man-made and natural disasters and generally loss experience is characterized as low frequency and high severity. This may result in volatility in the Company's financial results. The Company endeavors to manage its exposures 7 to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide and requiring that its property catastrophe contracts provide for aggregate limits and varying attachment points.
Net Premiums Written 1998 1997 1996 ($ in millions) ------------- -------------- ------------- Property catastrophe............... $ 76.5 32.1% ($78.9) 44.3% $ 64.1 44.3% Other property..................... 25.4 10.6% 17.0 9.5% 2.1 1.5% Marine and energy.................. 24.7 10.3% 17.8 10.0% 20.9 14.4% Aviation and satellite............. 37.3 15.6% 37.5 21.1% 13.5 9.2% Other.............................. 75.0 31.4% 26.8 15.1% 44.3 30.6% ------ ------ ------ ------ ------ ------ $238.9 100.0% $ 20.2 100.0% $144.9 100.0% ====== ====== ====== ====== ====== ======
Property Catastrophe XLMORe's property catastrophe reinsurance account is generally "all risk" in nature. It is therefore exposed to losses from sources as diverse as windstorms, earthquakes, snow and ice storms, riots, floods, industrial explosions, fires or any number of other potential disasters. In accordance with market practice, XLMORe's policies generally exclude certain risks such as war, nuclear contamination or radiation. XLMORe's predominant exposure under such coverage is to property damage. However, other risks, including business interruption, death and injury under workers compensation policies and other non-property losses also may be covered under a property reinsurance contract when arising from a covered peril. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expenses from a single occurrence of a covered peril exceed the attachment point specified in the policy. Some of XLMORe's property catastrophe contracts limit coverage to one occurrence in any one policy year, but most contracts generally provide for one reinstatement. In 1998, XLMORe's exposure to the following geographic regions based on net premiums written were as follows: (i) United States 53.5%; (ii) United Kingdom 5.6%; (iii) Japan 2.6%; (iv) worldwide 28.4%; (v) continental Europe 1.7%; (vi) Australasia 6.6%; (vii) Caribbean 0.6% and (viii) other 1.0%. XLMORe's exposures in the United States are concentrated primarily in Florida, Texas, and the southeastern United States with respect to property damage caused by hurricanes and other wind-related storms and California for property damage caused by earthquakes. Other Property Other property reinsurance written by XLMORe includes property risk excess of loss and property pro rata business. Risk excess of loss reinsurance responds to a loss of the reinsured on a single "risk" of the type reinsured rather than to aggregate losses for all covered risks as does catastrophe reinsurance. The risk excess of loss policy protects the reinsured from losses in excess of its retention level on a single risk. A "risk" in this context might mean the insurance coverage on one building or a group of buildings or the insurance coverage under a single policy, which the reinsured treats as a single risk. Risk excess contracts are generally "all risk" in nature, as previously described. XLMORe's property pro rata account includes proportional reinsurance of direct written property insurance. XLMORe considers this business to be related to its catastrophe and other property exposures. In proportional reinsurance, XLMORe assumes a specified proportion of the risk on the specified coverage and receives an equal proportion of the premium. The ceding insurer receives a commission, based upon the premiums ceded to the reinsurer, and the ceding insurer may also be entitled to receive a profit commission based on the ratio of losses, loss adjustment expense and the reinsurer's expenses to premiums ceded. A proportional reinsurer is dependent upon the ceding insurer's underwriting, pricing and claims administration to yield an underwriting profit. In some instances, XLMORe may be entitled to the benefit of other reinsurance, known as common account reinsurance, purchased by the ceding company on an account reinsured by XLMORe on a proportional basis. 8 Marine and energy XLMORe's marine and energy account is written on both a proportional and excess of loss basis. The proportional business is based on specific areas of account that are clearly defined with the exception of the reinsurance of Brockbank Syndicate 861 which is written on a "whole account" basis. Aviation and satellite XLMORe's aviation portfolio comprises both direct insurance and reinsurance, on both a proportional and excess of loss basis. The exposures are derived through proportional relationships on defined segments of account following market leaders in the field, with the exception of the reinsurance of Brockbank Syndicate 861 which is written on a "whole account" basis. Due to the highly technical nature of the satellite business, the exposures retained by XLMORe under this portfolio are acquired mostly through proportional reinsurances of specialist underwriters. Other Other reinsurance written by XLMORe includes political risk, nuclear, accident, fidelity and professional indemnity. Lloyd's Syndicates
1998 1997 1996 ----- ---- ---- Net Premiums Written...................................... $82.8 -- -- ----- --- --- ($ in millions)
Brockbank is a leading Lloyd's managing agency which manages five Lloyd's syndicates, two of which are dedicated corporate syndicates whose capital is provided solely by the Company. Corporate syndicate number 1209 writes property, marine and energy, aviation and satellite, professional indemnity, political risk and other specific lines, primarily of insurance but also reinsurance, to a globally diverse group of clients. Corporate syndicate number 2253 writes direct and broker-based motor insurance in the United Kingdom. These corporate syndicates underwrite parallel to the other syndicates managed by Brockbank (syndicate number 253 which writes direct motor insurance and syndicate numbers 588 and 861 which write a composite book of business). Reinsurance Ceded From Insurance Operations Effective December 1, 1995, XLI and XLE entered into a quota share reinsurance policy with five U.S. reinsurers and one non-U.S. reinsurer covering general liability risks only. Effective fiscal 1998, three additional U.S. reinsurers were added to this program, of which one is RCRe. Under the terms of the policy, XLI will cede 20% of risks with total limits up to $100 million and 25% of risks with total limits in excess of $100 million up to $150 million. Effective December 1, 1998, 20% of all general liability business is ceded up to a limit of $150 million. The maximum amount recoverable from the reinsurers will be the ceded percentage of the original policy limit on a per occurrence basis, with an annual aggregate of 225% of the total premium ceded. No single reinsurer participates in excess of 20% of the quota share. All the reinsurers are rated, of which the lowest as rated by S&P is BBB. The most significant reinsurers on this program are Fireman's Fund, Hannover Re and Hartford Re. These companies are rated A, AA+ and AA+ by S&P with participations of 16.0%, 18.7% and 16.0%, respectively on a reinsurance balance receivable of $176.9 million. Effective September 1, 1997, XLI and XLE entered into an excess of loss casualty catastrophe contract covering all general liability risks. Under the terms of this policy, XLI and XLE are reinsured for $80 million ultimate net loss each occurrence excess of a per occurrence retention, subject to an annual aggregate retention. The maximum amount recoverable from the reinsurers will be an annual aggregate of $250 million. This policy 9 was extended to November 30, 1998 and renewed December 1, 1998. For the year ended November 30, 1998, 97.75% of this reinsurance was placed with seventeen reinsurers, all of which are rated. With the exception of two reinsurers, the lowest as rated by S&P is A-. The other two reinsurers are rated BBB and BB by S&P, representing a participation of less than 4% on this program. Property quota share reinsurance of 25% (subject to catastrophe occurrence limit restrictions) of XLI's property policy limit is purchased from two Bermuda-based property reinsurers, four U.S. reinsurers and one non-U.S. reinsurer. All property reinsurers are rated with a minimum S&P rating of A-. XLI reinsures one third of the first $75 million in limits of employment practices liability to a U.S. insurer and the remaining excess layer of $25 million to a Bermuda-based insurer. A quota share arrangement exists between XLI and subsidiaries of CIGNA based on pre-agreed percentages by line of coverage for blended covers written through XL Risk Solutions and CIGNA Risk Solutions. These percentages vary from 12.5% to 90%, but do not exceed XLI's normal capacity on individual lines of cover. XLI may underwrite an account 100% without CIGNA participation. From Reinsurance Operations For the years ended October 31, 1997 and 1996, XLMORe participated in limited retrocessions. Initially, the majority of such retrocessions originated from common account reinsurance on assumed business. In August 1998, XLMORe successfully placed $200 million of retrocessional property catastrophe cover in a combination reinsurance and capital market swap transaction. The transaction was offered in two tranches and covered the upper layers, with a remote possibility of attachment, of XLMORe's hurricane and earthquake exposure in the United States and its territories and possessions in the Caribbean. The risk securitization structure is unique in that it provides retrocessional cover in financial swap form, with claim recovery triggered by catastrophe losses actually incurred by XLMORe rather than by a catastrophe index or industry size event. From Lloyd's Operations Brockbank, as a part of its business strategy, has historically purchased a significant amount of reinsurance for its syndicates, including the corporate syndicates. Corporate syndicate 1209 benefits from the same reinsurance programs as its parallel syndicates 861 and 588. Reinsurance cover is purchased to protect the syndicates against extraordinary loss and/or loss involving one or more of their underwriting classes. The amount purchased is determined with reference to the syndicates aggregate exposure and potential loss scenarios. Corporate syndicate 2253 benefits from the same reinsurance programmes as its parallel syndicate 253. Reinsurance cover is purchased on a quota share and excess of loss basis. Competition The property-casualty insurance and reinsurance industry, including the Lloyd's market, is highly competitive. The markets for the Company's insurance and reinsurance products are characterized by strong, and at times intense price competition driven largely by the substantial amount of excess capacity currently present in the industry. The Company believes that such competitive forces will be present in the industry over the short to medium term. Whereas only a small number of insurers used to compete with the Company's property-casualty insurance business at the attachments and limits offered by it, the Company currently estimates there to be at least 12 competitors worldwide with respect to such business. Similarly, the Company believes there to be a large number of reinsurers which compete with its reinsurance business. Many of the Company's competitors possess significantly greater financial and other resources than the Company. The Company generally competes on the basis of price, financial strength, coverage terms, claims paying reputation and customer service. 10 Underwriting and Marketing Underwriting XLI and XLE write liability and property insurance coverage for a wide array of industry groups, including chemical, industrial, pharmaceutical, property owners, landlords and tenants, utilities, auto, consumer, rail, oil and construction with respect to third-party general liability and first-party property; industrial/manufacturing, utilities, chemical/pharmaceutical and financial advisors with respect to directors and officers liability; and lawyers, insurance brokers and insurance companies for professional liability. Although rates are influenced by a number of factors, including competition, the Company's insurance rating methodology seeks to set rates individually for each insured in accordance with claims potential as measured by past experience and future expectations, the attachment point and amount of underlying insurance, the nature and scope of insured operations (including the industry group in which the insured operates), exposures to loss, and other specific risk factors relevant in the judgement of the underwriters and insurance market conditions. Underwriters separately evaluate each industry category (and sub- groups within each category) and premiums are set and adjusted for an insured based in large part on the industry group in which the insured is placed and the insured's risk relative to the other risks in the insured's industry group. Each industry group is reviewed annually to take into account outstanding case losses and new loss incident reports within each group. Rates may vary significantly according to the industry group of the insured as well as within the group. XLMORe employs an analytical approach to underwriting designed to specify an adequate premium for a given exposure that is intended to be commensurate with the amount of capital it anticipates placing at risk. For its property catastrophe reinsurance business, XLMORe has developed underwriting guidelines under which it generally limits the amount of exposure it will directly underwrite for any one reinsured and the amount of the aggregate exposure to catastrophe losses in any geographic zone. XLMORe believes it has defined zones such that a single occurrence, such as an earthquake or hurricane, generally should not affect more than one zone. The definition of XLMORe's zones are subject to periodic review and change. XLMORe also generally seeks an attachment point for its property catastrophe reinsurance anticipated to be high enough to produce a low frequency of loss. XLMORe limits its aggregate exposure in the retrocessional and pro rata business because it is sometimes difficult to allocate risks associated with such business to specific geographic areas. As part of its underwriting process, XLMORe typically assesses a variety of factors, including: the reputation of the proposed cedent and the likelihood of establishing a long-term relationship with the cedent; the geographic area in which the cedent does business and its market share; a detailed assessment of catastrophe and risk exposures; historical loss data for the cedent and, where available, for the industry as a whole in the relevant regions, in order to compare the cedent's historical catastrophe loss experience to industry averages; and the perceived financial strength of the cedent. At Brockbank, the daily acceptance of risk is performed by the active underwriter, the class underwriters and senior underwriting assistants. Underwriting authority limits are agreed between the active underwriter, the class underwriter and the managing agency's board of directors. As part of the underwriting process, all of the Company's insurance and reinsurance underwriting operations, including Lloyd's, evaluate potential exposures to claims, losses and defense costs associated with Year 2000-related issues. Such claims, losses and costs, to the extent they materialize, could have a material adverse affect on the Company's results of operations and financial condition. For more information concerning the impact of Year 2000 issues on underwriting results, see "Management's Discussion and Analysis of Results of Operation and Financial Condition--Year 2000 Considerations" and "-- Cautionary Note Regarding Forward-Looking Statements." Marketing Clients are referred to the Company's subsidiaries through a large number of insurance brokers who receive from the insured or ceding company a brokerage commission equal to a percentage of gross premiums. No 11 subsidiary of the Company is committed to accept any business from any particular broker, and brokers do not have the authority to bind any subsidiary of the Company. All policy applications are subject to approval and acceptance by the Company's subsidiaries. Since the Company's inception, J&H Marsh McLennan Global Broking Limited ("J&H Marsh") and its predecessors companies have placed a significant amount of business with the Company's subsidiaries. In fiscal 1996, 1997 and 1998 approximately 52%, 52% and 45%, respectively, of the Company's consolidated gross premiums were placed by J&H Marsh or its predecessors and approximately 17%, 19% and 30% respectively, were placed by AON Corporation in fiscal 1996, 1997 and 1998, respectively. Concentration in the insurance and reinsurance brokerage industry could have a material adverse effect on the Company's business and results of operations in the future. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Cautionary Note Regarding Forward-Looking Statements." No other broker accounted for more than 10% of gross premiums written in any fiscal year during such period. Unpaid Losses and Loss Expenses Loss reserves are established due to the significant periods of time that may elapse between the occurrence of an insured loss, the reporting of the loss to the Company's operating subsidiaries and the payment of that loss. To recognize liabilities for unpaid losses, the Company establishes reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have been reported to the Company. The Company's reserving practices and the establishment of any particular reserve reflect management's judgement concerning sound financial practice and do not represent any admission of liability with respect to any claims made against the Company's subsidiaries. The method of establishing case reserves for reported claims differs between the insurance and reinsurance operations. When an insurance claim is reported to the Company's subsidiaries, its claims personnel determine whether to establish a "case reserve" for the estimated amount of the ultimate settlement, if any. The estimate reflects the judgment of claims personnel, based on general corporate reserving practices and on the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. Reserves are also established to provide for the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process ("loss expense"). Reinsurance case reserves are established based upon reports received from insureds and reinsureds supplemented by the Company's case reserve estimates. Periodically, adjustments to the case reserves may be made as additional information regarding the claims becomes known or partial payments are made. Most of the Company's IBNR (incurred but not reported) loss reserves are derived from its insurance operations. This is because the liability business that these operations write has a much longer tail than the Company's other operations. The insurance IBNR is estimated in two steps. First, case reserve development is estimated with the use of the loss development factor ("LDF") method. Second, "pure" IBNR is estimated with a frequency and severity approach. Since coverage is usually triggered when a notice is submitted by an insured, "pure" IBNR losses exist only when claims with a loss notice develop into their layers of coverage. The method calculates the ultimate number of claims (i.e. frequency) via the Bornhuetter-Ferguson technique. The severity component (average claim size) is developed via a single parameter pareto loss distribution, adjusted for average attachment points and limits. The Company believes the methods presently adopted provide a reasonably objective result as it is based upon the Company's loss data rather than more theoretical models often used in the low frequency high layer business the Company writes. Several aspects of the Company's insurance operations complicate the actuarial reserving techniques for loss reserves as compared to other insurance companies. Among these aspects are the differences in the policy forms from more traditional forms, the lack of complete historical loss data for losses of the same type intended to be covered by the policies and the expectation that losses in excess of the attachment level of the Company's policies generally will be characterized by low frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. Accordingly, the ultimate insurance claims experience cannot be 12 as reliably predicted as may be the case with other insurance companies, and there can be no assurance that losses and loss expenses will not exceed the total reserves. The reinsurance operations and Lloyd's syndicates, unlike the insurance operations, have industry data available to support estimated reserves. This data, supported by business knowledge, general market trends and actual experience, is used to develop reporting patterns and initial expected loss ratios. Most claims for these operations become known relatively soon. Claims under property catastrophe and property risk excess treaties will generally become known and ascertainable within approximately 18 to 24 months from the date of occurrence giving rise to a claim. Claims under a significant number of Lloyd's syndicate policies, with the exception of motor, will often become known and ascertainable with 36 months of the date of the occurrence giving rise to the claim, but many significant claims will not become known until after such period. Motor claims involving property damage will generally be known and paid within 12 months of the occurrence giving rise to the claim, but claims involving personal injury can take more than 12 months to resolve. Conversely, claims on the insurance operations generally develop on average 5 to 8 years from the date of occurrence giving rise to the claim. Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the accumulation of case reserves, loss expense reserves and IBNR. During the loss settlement period, additional facts regarding individual claims and trends usually will become known. As these become apparent, it often may become necessary to refine and adjust the reserves upward or downward from time to time. The final liability nonetheless may be significantly less than or greater than prior estimates. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the tables below. Analysis of Consolidated Loss and Loss Expense Reserve Development
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 -------- -------- -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands) Gross liability for unpaid losses and loss expenses......... $381,106 $616,611 $799,222 $957,344 $1,169,003 $1,359,701 $1,665,434 $1,920,500 $2,099,096 $2,342,254 Paid (cumulative) as of: One year later.. 517 98,519 141,863 103,970 163,086 138,072 188,370 299,465 233,162 199,066 Two years later. 23,285 240,207 169,656 266,191 296,213 326,610 487,264 531,694 409,818 Three years later.......... 76,844 267,777 235,095 340,551 482,251 619,186 718,735 702,469 Four years later.......... 87,639 296,095 258,589 432,506 688,064 806,140 843,046 Five years later.......... 107,863 302,028 260,385 610,936 873,832 919,208 Six years later. 107,863 303,791 341,337 714,764 984,956 Seven years later.......... 107,863 384,717 357,051 732,430 Eight years later.......... 107,863 385,951 366,376 Nine years later.......... 107,916 387,753 Ten years later. 107,970 Eleven years later.......... Twelve years later.......... Liability re-estimated as of: End of year..... $381,106 $616,611 $799,222 $957,344 $1,169,003 $1,359,701 $1,665,434 $1,920,500 $2,099,096 $2,342,254 One year later.. 383,949 654,931 808,642 973,711 1,203,360 1,435,500 1,667,334 1,964,402 1,863,250 2,169,248 Two years later. 348,152 654,160 700,733 929,176 1,282,051 1,441,018 1,628,191 1,665,418 1,754,002 Three years later.......... 329,403 587,758 557,782 876,071 1,270,410 1,485,101 1,468,588 1,605,576 Four years later.......... 279,106 447,360 531,264 878,597 1,359,848 1,365,998 1,404,774 Five years later.......... 159,117 434,326 465,605 967,410 1,325,166 1,356,523 Six years later. 107,863 444,213 479,940 959,363 1,304,338 Seven years later.......... 107,863 452,662 475,136 953,289 Eight years later.......... 107,863 459,023 512,601 Nine years later.......... 108,063 507,510 Ten years later. 158,068 Eleven years later.......... Twelve years later.......... Redundancy (deficiency).... 223,038 109,101 286,621 4,055 (135,335) 3,178 260,660 314,924 345,094 173,006 1998 ---------- Gross liability for unpaid losses and loss expenses......... $3,121,739 Paid (cumulative) as of: One year later.. Two years later. Three years later.......... Four years later.......... Five years later.......... Six years later. Seven years later.......... Eight years later.......... Nine years later.......... Ten years later. Eleven years later.......... Twelve years later.......... Liability re-estimated as of: End of year..... $3,121,739 One year later.. Two years later. Three years later.......... Four years later.......... Five years later.......... Six years later. Seven years later.......... Eight years later.......... Nine years later.......... Ten years later. Eleven years later.......... Twelve years later.......... Redundancy (deficiency)....
13 The following table presents a reconciliation of beginning and ending reserve balances for the periods indicated (in thousands): Reconciliation of Unpaid Losses and Loss Expenses
Year Ended November 30, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Unpaid losses and loss expenses at beginning of period....................... $2,342,254 $2,099,096 $1,920,500 Losses and loss expenses incurred in respect of losses occurring in: Current year............................. 713,059 735,313 436,334 Prior years.............................. (164,158) (260,407) 14,465 ---------- ---------- ---------- Gross losses incurred...................... 548,901 474,906 450,799 Interest (paid) incurred on experiences reserves.................................. 1,798 886 1,752 Portfolio transfer (assumption of reserves with acquisitions)........................ 595,261 34,593 28,687 Losses and loss expenses paid in respect of losses occurring in: Current year............................. 167,409 34,055 3,177 Prior years.............................. 199,066 233,172 299,465 ---------- ---------- ---------- Gross paid losses.......................... 366,475 267,227 302,642 ---------- ---------- ---------- Unpaid losses and loss expenses at end of period.................................... 3,121,739 2,342,254 2,099,096 ========== ========== ==========
Gross case and loss expense reserves as a component of total gross reserves in 1998 increased to $1.4 billion from $863 million after the payment of $366 million in losses. One of the main reasons for the increase relates to the acquisition of Mid Ocean and its related reserves. The case reserves for the reinsurance operations at November 30, 1998 were $318 million compared to $27 million at the beginning of the year. Included in these reserves was $63 million established in respect to hurricane Georges and the SwissAir airline disaster. One of the contributing factors to the reduction in prior losses was the related reduction in loss reserves that were acquired with Mid Ocean. The balance of the change is not attributable to any single or group of related events, but to normal attrition as losses have developed over time into the Company's layers of exposure, consistent with the nature of excess casualty insurance. The 1998 current year losses reflect the inclusion of the operations of Mid Ocean acquired on August 7, 1998. The results include four months of XLMORe and three months of Brockbank. These operations incurred $169 million in gross losses for the reported period. These losses were largely attributable to Hurricane Georges and the SwissAir airline disaster. In addition, losses for Brockbank attach at the primary layers and therefore are more frequent in nature. Brockbank's losses are also significantly reinsured. Prior year incurred losses in 1998 were affected in part, by the release of insurance reserves established for the Company's professional lines. These reserves were reduced in accordance with actuarial estimates. In addition, reserves were released on certain specialty cover policies for the years 1995 through 1997 due to the absence of losses that would affect the Company's layers. These policies were for a three-year period, written on a claims made basis and expired in 1998. Due to the nature of the Company's general liability policy form and the level of coverage provided, with limits up to $200 million, adjustments to reserves for individual years can be irregular and significant. Such adjustments are part of the normal course of business for the Company. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it is inappropriate to extrapolate future redundancies or deficiencies based upon historical experience. See generally "Management's Discussion and Analysis of Results of Operations and Financial Condition--Cautionary Note Regarding Forward-Looking Statements." 14 Claims Administration All claims management activities are conducted by each insurance subsidiary of the Company at such subsidiary's offices. Claims management includes the review of initial loss reports, creation of claims files, administration of claims data base, generation of appropriate response to claims reports, including identification and handling of coverage issues, determination of whether further investigation is required and, where appropriate, retention of claims counsel, establishment of case reserves, payment of claims, and notification to reinsurers. Claims arising from contracts written by the Company's reinsurance subsidiaries are managed in Bermuda by their own claims departments. Loss notifications are received from brokers, reviewed and entered into a claims database and loss reserves are established for the reinsurer's share of the loss. Loss reserves are adjusted based on receipt of further notifications from brokers. The claims handled by the Singapore branch are done in a similar manner at that location. Claims in respect of business written by corporate syndicate 1209 and XLMORe's London branch are entered into a claims database maintained at each location. Losses are primarily notified by various central market bureaus, such as through a daily electronic data interchange message. Where a syndicate is a "leading" syndicate on a Lloyd's policy, it will act with its underwriters and claims adjusters in dealing with the broker or insured on behalf of itself and the following market in dealing with the broker or insured for any particular claim. This may involve appointing attorneys or loss adjusters. The claims bureaus and the leading syndicate advise movements in loss reserves to all syndicates participating on the risk. The claims departments can vary the case reserves it records from those advised by the bureaus and all adjustments are recorded on the claims system. Claims in respect of the direct motor business written by corporate syndicate 2253 are handled by Admiral Insurance Services ("Admiral") at two tele- servicing centers in Cardiff and Swansea, Wales. The majority of accidental damage claims are handled by Admiral's national network of 135 approved repair centers, most of which have direct video links with Admiral's in-house engineering team. Personal injury cases are handled by a team of in-house specialists who, where necessary, appoint attorneys from a preferred panel. Investments The Finance Committee of the Board of the Company and management oversee investment strategy, establish guidelines for the various investment managers and implement investment decisions with the assistance of such managers. The current investment policy is based on a total return strategy and seeks to maximize investment income through a high-quality, diversified portfolio while focusing on preserving principal and maintaining liquidity. In this regard, at November 30, 1998, the Company's fixed income investment portfolio included U.S. and non-U.S. sovereign government obligations, corporate bonds and other securities, 58% of which were rated Aa or AA or better by a nationally recognized rating agency. Under current investment guidelines, up to 30% of the Company's investment portfolio may be invested in equity securities. Applicable insurance laws and regulations generally do not restrict the Company's investments except that certain types of investments (such as unquoted equity securities, investments in affiliates, real estate and collateral loans) may not qualify as a "relevant asset" for purposes of satisfying Bermuda statutory financial requirements. The Company's U.S. insurance subsidiaries and Brockbank are subject to restrictions on investment prescribed by laws applicable to such operations. At each of November 30, 1998, 1997 and 1996, 11%, 19% and 14% of the Company's investments in fixed maturity and short-term investments and 34%, 42% and 45% of the Company's investments in equity securities were represented by securities of non-U.S. issuers. The Company did not have an aggregate investment in a single entity (other than the U.S. government) in excess of 10% of total consolidated shareholders' equity at November 30, 1998, 1997 or 1996. 15 The following table reflects investment results for the Company for each of the five years in the period ended November 30, 1997:
Net Pre-Tax Pre-Tax Realized Annualized Average Investment Gains Effective Year Ended November 30, Investments(1) Income(2) (Losses) Yield ----------------------- -------------- ---------- -------- ---------- (dollars in thousands) 1998...................... $5,323,308 $279,375 $191,795 5.25% 1997...................... 4,125,244 216,552 335,939 5.25 1996...................... 3,888,001 198,598 206,212 5.11 1995...................... 3,559,454 200,145 49,774 5.62 1994...................... 3,267,286 182,262 (95,197) 5.58
- - -------- (1) Average of the beginning and ending amounts of investments and cash and cash equivalents net of pending trades for the period. Investment securities are carried at market value. (2) After investment expenses, excluding realized net capital gains (losses). Regulation Bermuda The Insurance Act 1978 of Bermuda, amendments thereto and related regulations (the "Act"), regulates the business of XLI and XLMORe. The Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements and grants to the Minister of Finance powers to supervise, investigate and intervene in the affairs of insurance companies. XLI and XLMORe are designated as Class 4 insurers under the Act because they carry on insurance and reinsurance business including excess liability business and property catastrophe reinsurance business, respectively. Class 4 insurers are required to maintain total statutory capital and surplus of not less than $100 million. Both companies are restricted from paying dividends in any one financial year in excess of 25% of the prior year's statutory capital and surplus unless the companies' directors attest such dividends will not cause the companies to fail to meet their relevant margins. As both companies are highly capitalized, they are not materially affected by this requirement. In addition to other regulatory requirements, each Class 4 insurer is required to appoint a loss reserve specialist, who must be approved by the Minister of Finance of Bermuda, to review and report on the loss reserves of the insurer on an annual basis. Other subsidiaries of the Company based in Bermuda, including XLFA, LARe and Reeve Court, are also subject to regulation under the Act. Republic of Ireland XLE is permitted to cover risks throughout the European Community (subject to certain restrictions) pursuant to the "Third Directive" relating to non- life insurance. Its operations, however, are largely restricted to the Republic of Ireland and are subject to regulation under Irish regulatory authority. The principal legislation and regulations governing the insurance activities of Irish insurance companies are the Companies Act of 1963 to 1990 and a range of Irish Insurance Acts from 1909 through 1995 (the "Irish Acts"). In addition, there is a comprehensive network of regulations and statutory provisions empowering the making of regulations of which the most relevant are the European Communities (Non-Life Insurance) Framework Regulations, 1994, the European Communities (Insurance Undertakings Accounts) Regulations, 1996 and a range of other European Communities Regulations and administrative rules (the "Irish Regulations"). XLE's insurance activities are subject to extensive regulation in the Republic of Ireland, principally under the Irish Acts and Irish Regulations, which impose on insurers headquartered in the Republic of Ireland minimum solvency and reserve standards and auditing and reporting requirements and grant to the Minister for Enterprise, Trade and Employment (the "Irish Minister") wide powers to supervise, investigate and intervene in the affairs of such insurers. The Irish Minister's powers and functions are exercised through the Department of Enterprise, Trade and Employment. 16 United States The Company's U.S. insurance subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business, including requirements as to premium rates and policy forms, adequacy of reserves, types and quality of investments, dividends and changes of control. Any entity wishing to acquire more than 10 percent of the voting securities of the Company would require prior regulatory approval from one or more U.S. state insurance regulatory authorities. Brockbank, via Lloyd's, is licensed in the states of Illinois and Kentucky and in the U.S. Virgin Islands ("USVI"). It is also an eligible surplus lines writer in all states other than Kentucky and USVI, and an accredited reinsurer in every state other than Michigan. Brockbank Insurance Services, Inc. is licensed in California as a surplus and special lines broker. The insurance laws of each state of the United States and of many foreign countries regulate the sale of insurance within their jurisdictions by alien insurers, such as XLI and XLMORe, which conduct their businesses in Bermuda. The Company believes it and its subsidiaries are not in violation of the insurance laws of any state in the U.S. or any foreign country. From time to time, various proposals for federal legislation within the United States have been circulated which could indirectly require the Company's non-U.S. subsidiaries to, among other things, register as surplus lines insurers. The Company believes that generally its subsidiaries could meet and comply with the requirements to be registered as surplus lines insurers and such compliance would not have a material impact on the ability of the Company's subsidiaries to conduct their businesses. There can be no assurance, however, that the activities of the Company's subsidiaries will not be challenged in the future or that the Company's subsidiaries will be able to successfully defend against such challenges or that legislation will not be enacted that will affect its subsidiaries' ability to conduct their businesses or subject them to additional U.S. regulation. United Kingdom The United Kingdom Financial Services Authority ("UK FSA") regulates reinsurance entities that are "effecting and carrying on" insurance business in the United Kingdom. XLMORe, through its London branch, "effects and carries on" business in the United Kingdom and is therefore regulated by the UK FSA. Lloyd's As a result of the Company's ownership of Brockbank, the Company and Brockbank are subject to the regulatory jurisdiction of the Council of Lloyd's (the "Council"). Unlike other financial markets in the UK, Lloyd's is not subject to direct UK government regulation through The Financial Services Act of 1986 but, instead, is self regulating by virtue of The Lloyd's Act of 1982 through bye-laws, regulations and codes of conduct written by the Council, which governs the market. Under the Council, there are two boards, the Market Board and the Regulatory Board. The former is led by working members of the Council and is responsible for strategy and the provision of services such as premium and claims handling, accounting and policy signing. The Regulatory Board is responsible for the regulation of the market, compliance and the protection of policyholders and capital providers. Under the regulations, the approval of the Council has to be obtained before any person can be a "major shareholder" or "controller" of a corporate Name or a managing agency. The Company has been approved as both a "major shareholder" and a "controller" of its corporate Names (the "CCVs") and managing agencies. A person would be viewed by Lloyd's as a "major shareholder" of the CCVs if such person owns 15% or more of the Company's outstanding capital stock and as a "controller" if it owns 30% or more of the Company's outstanding capital stock. Therefore, any person that becomes the owner of 15% or more of the Company's stock may be required to deliver a declaration and undertaking to Lloyd's, in the form prescribed by Lloyd's, unless Lloyd's exempts such person from this requirement. 17 As a "controller", the Company is required to give certain undertakings, directed principally towards ensuring that there is no direct interference in the conduct of the business of the relevant managing agency, but there are no provisions in The Lloyd's Act of 1982, the bye-laws or the regulations which provide for any liabilities of the CCVs or the Brockbank group as a whole to be met by the Company. In addition, a managing agency is required to comply with various capital and solvency requirements, and to submit to regular monitoring and compliance procedures. The CCVs, as corporate members of Lloyd's, are each required to commit a specified amount approximately equal to 50% of their underwriting capacity on the syndicates to support its underwriting on those syndicates. The Lloyd's Act of 1982 generally restricts certain direct or indirect equity cross-ownership between a Lloyd's broker and a Lloyd's managing agent. Other The Company is subject to regulation in Australia, Singapore and Germany as a result of its representative offices and branches in such jurisdictions. The Company or its subsidiaries also may become subject to regulation in jurisdictions not described herein from time to time based on their activities. Tax Matters Corporate Income Tax The Company is a Cayman Islands corporation and, except as described below, neither it nor its non-U.S. subsidiaries have ever paid United States corporate income taxes (other than withholding taxes on dividend income) on the basis that they are not engaged in a trade or business in the United States; however, because definitive identification of activities which constitute being engaged in trade or business in the United States is not provided by the Internal Revenue Code of 1986 (the "Code"), regulations or court decisions, there can be no assurance that the Internal Revenue Service ("IRS") will not contend that the Company or its non-U.S. subsidiaries are engaged in trade or business in the United States. If the Company or its non-U.S. subsidiaries were considered to be engaged in trade or business in the United States (and, if the Company or such subsidiaries were to qualify for the benefits under the income tax treaty between the United States and Bermuda or the Republic of Ireland, such businesses were attributable to a "permanent establishment" in the United States), the Company or such subsidiaries could be subject to U.S. tax at regular tax rates on its taxable income that is effectively connected with its U.S. trade or business plus an additional 30% "branch profits" tax on such income remaining after the regular tax, in which case there could be a material adverse effect on the Company's shareholders' equity and earnings. Lloyd's names are required to pay U.S. income tax on U.S. connected income ("U.S. income") written by Lloyd's syndicates in which they participate. Lloyd's has a closing agreement with the IRS whereby the amount of tax due on this business is calculated by Lloyd's and remitted directly to the IRS. These amounts are then charged to the personal accounts of the names in proportion to their participation in the relevant syndicates. The CCVs are subject to this arrangement but, as UK domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge. Certain subsidiaries of the Company and certain branches and offices of such subsidiaries are located in taxable jurisdictions such as the United States, the United Kingdom, Ireland, Australia, Singapore and Germany. The Company pays corporate income taxes and other taxes, including applicable value added and premium taxes, to which its subsidiaries and their branches and offices are subject in such jurisdictions. Employees At November 30, 1998, the Company and its subsidiaries employed a total of 506 employees; of which 181 were located in Bermuda, 261 were located in the United Kingdom, 43 in the Republic of Ireland, 6 in the United States with the balance located in the Company's offices in Munich and Singapore. None of the these employees are represented by a labor union, and the Company believes that its employee relations are excellent. 18 Item 2. Properties The Company rents space for its principal executive offices under leases which expire up to June 2009. Total rent expense for the years ended November 30, 1998, 1997 and 1996 were approximately $3.7 million, $2.1 million and $1.8 million, respectively. Future minimum rental commitments under existing leases are expected to be approximately $4.0 million annually. In 1997, the Company acquired commercial real estate in Bermuda for the purpose of securing long- term office space to meet its anticipated needs. The Company is in the process of developing this property and constructing its worldwide headquarters. The total cost of this development, including the land, is expected to be approximately $110.0 million, of which $23.7 million has been spent to date. It is estimated that the headquarters project will be completed early in 2001. Item 3. Legal Proceedings The Company, through its subsidiaries, in common with the insurance and reinsurance industry in general, is subject to litigation in the normal course of its business. Although most of its insurance policies provide for resolution of disputes by arbitration in London, XLI has been sued several times in United States courts and is defending each suit vigorously, both on procedural grounds and the merits. As of November 30, 1998, the Company was not a party to any material litigation other than as routinely encountered in claims activity, none of which is expected by management to have a material adverse effect on the Company's financial condition. The Company, Mid Ocean and the directors of Mid Ocean have been named as defendants in a purported class action lawsuit (the "Shareholder Action") filed in connection with the Arrangements in the Supreme Court, County of New York, State of New York (the "Supreme Court"). Harbor Finance Partners v. Newhouse, et al., C.A. No. 1998/601266. The Shareholder Action alleges that the defendants breached their fiduciary duties to the Mid Ocean shareholders by failing to exercise independent business judgment (due to their alleged conflict of interest) and by agreeing to sell Mid Ocean at an unfair and inadequate price. The Shareholder Action is brought on behalf of a purported class of persons consisting of Mid Ocean shareholders other than the defendants. As relief, the Shareholder Action seeks, among other things, an order enjoining consummation of the Arrangements, or, in the event the Arrangements are consummated, rescission of the Arrangements, and an award of compensatory damages in an unspecified amount, as well as costs, including fees for plaintiff's counsel and experts' fees and expenses. On January 25, 1999, the Supreme Court granted the defendants' motion to dismiss the Shareholder Action on the grounds that the Shareholder Action (i) failed to state a claim upon which relief may be granted under Cayman Islands law and (ii) was not brought in an appropriate forum (forum non conveniens). The Supreme Court's decision is subject to appeal. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. 19 Executive Officers of the Company The table below sets forth the names, ages and titles of the persons who were the executive officers of the Company for the year ended November 30, 1998.
Name Age Position ---- --- -------- Brian M. O'Hara......... 50 President, Chief Executive Officer and Director of the Company Robert R. Lusardi....... 42 Executive Vice President and Chief Financial Officer of the Company. Robert J. Cooney........ 44 Executive Vice President of the Company and President and Chief Executive Officer of XLI Henry C. V. Keeling..... 43 Executive Vice President of the Company and President and Chief Executive Officer of XLMORe Mark E. Brockbank....... 46 Executive Vice President of the Company and Chief Executive Officer of Brockbank K. Bruce Connell........ 46 Executive Vice President of the Company and President and Chief Executive Officer of XL Capital Products Ltd Christopher V. Greetham. 54 Executive Vice President and Chief Investment Officer of the Company Paul S. Giordano........ 36 Senior Vice President, General Counsel and Secretary of the Company, XLI and XLMORe
Brian M. O'Hara has been President and Chief Executive Officer of the Company since 1994 and a Director of the Company since 1986, having previously served as Vice Chairman of the Company from 1987. He is Chairman of XLI and XLMORe, and was Chief Executive Officer of XLI until 1998, having previously served as Chairman, President and Chief Executive Officer from 1994, President and Chief Executive Officer from 1992, and as President and Chief Operating Officer from 1986. Robert R. Lusardi has been Executive Vice President and Chief Financial Officer of the Company since February 1998. Prior to joining the Company, Mr. Lusardi was Managing Director at Lehman Brothers from 1980 to 1998. Robert J. Cooney has been Executive Vice President of the Company since March 1995 and President and Chief Executive Officer of XLI since August 1998, having previously served as President and Chief Operating Officer of XLI from December 1995, having previously served as Executive Vice President and Chief Underwriting Officer of XLI from 1992, and as a Senior Vice President from 1987. Henry C. V. Keeling has been Executive Vice President of the Company and President and Chief Executive Officer of XLMORe since August 1998. Mr. Keeling was President, Chief Operating and Underwriting Officer of MORe from 1992 to 1998, and previously served as a director of Taylor Clayton (Underwriting Agencies) Ltd. and deputy underwriter for syndicate 51 at Lloyd's from 1984 through 1992. Mark E. Brockbank has been Executive Vice President of the Company since August 1998 and is a director and the Chief Executive Officer of Brockbank. Mr. Brockbank has been employed at Lloyd's since 1974 when he joined Willis Faber Dumas as a marine broker. He was an underwriter of syndicate 861 from 1983 through to 1998. He was appointed a Director of Brockbank Syndicate Management Ltd in 1983 and of The Brockbank Group plc in 1988. K. Bruce Connell has been Executive Vice President of the Company since March 1998 and is President and Chief Executive Officer of XL Capital Products Ltd. Mr. Connell previously served as President and Chief Operating Officer of XLGRe from November 1997 to August 1998, President of XLGRe from December 1995 and as Senior Vice President of XLI from 1990 to 1995. 20 Christopher V. Greetham has been an Executive Vice President of the Company since December 1998 and has served as its Chief Investment Officer since 1996. From 1996 until December 1998, Mr. Greetham was a Senior Vice President of the Company. Prior to joining the Company, Mr. Greetham served as Senior Vice President and Chief Financial Officer of OIL Insurance Ltd. from 1982 to 1996 and as Vice President of Bankers Trust Company from 1975 to 1982. Paul S. Giordano has been Senior Vice President and General Counsel of the Company and XLI since January 1997. Mr. Giordano was appointed Secretary of the Company and XLI on December 31, 1997. Mr. Giordano was appointed Senior Vice President, General Counsel and Secretary of XLMORe in August 1998. Mr. Giordano was associated with major law firms in New York and London prior to joining the Company. 21 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters (a) The Company's Class A Ordinary Shares, $0.01 par value, are listed on the New York Stock Exchange under the symbol XL. The following table sets forth the high and low closing sales prices per share of the Company's Class A Ordinary Shares per fiscal quarter, as reported on the New York Stock Exchange Composite Tape, adjusted for the one-for-one stock dividend on July 26, 1996.
High Low ------- ------- 1997: 1st Quarter............................................. $45.000 $36.500 2nd Quarter............................................. 44.500 39.000 3rd Quarter............................................. 57.500 44.500 4th Quarter............................................. 64.000 55.063 1998: 1st Quarter............................................. $66.688 $59.063 2nd Quarter............................................. 80.813 66.938 3rd Quarter............................................. 83.250 66.813 4th Quarter............................................. 77.688 62.125
Each Class A Ordinary Share has one vote, except that if, and so long as, the Controlled Shares of any person constitute ten percent (10%) or more of the issued Class A Ordinary Shares, the voting rights with respect to the Controlled Shares owned by such person shall be limited, in the aggregate, to a voting power of approximately ten percent (10%), pursuant to a formula specified in the Articles of Association. "Controlled Shares" shall include, among other things, all Class A Ordinary Shares for which such person is deemed to beneficially own directly, indirectly or constructively (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934). (b) The approximate number of record holders of Class A Ordinary Shares as of November 30, 1998 was 360. (c) The Company paid four regular quarterly dividends in 1997, three of $0.32 per share to shareholders of record at February 6, April 22 and July 11 and one of $0.40 per share to shareholders of record at September 25. The Company paid four regular quarterly dividends in 1998, three of $0.40 per share to shareholders of record on February 6, April 16 and July 15 and one of $0.44 per share to shareholders of record on September 28. The declaration and payment of future dividends by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, financial condition, business needs, the capital and surplus requirements of the Company's operating subsidiaries and regulatory considerations. As a holding company, the Company's principal source of income is dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable insurance laws and regulations of Bermuda, the United States and the United Kingdom, including those promulgated by the Society of Lloyd's. In order to pay dividends, the amount of which is limited to accumulated net realized profits, XLI and XLMORe must maintain certain minimum levels of share capital, solvency and liquidity pursuant to Bermuda statutes and regulations. At November 30, 1998, XLI and XLMORE could have paid dividends in the amount of approximately $1.8 billion and $1.3 billion, respectively. Neither the Company nor any of its material subsidiaries other than XLI, XLMORe, XLE, XLIA or XLRS had any other restrictions preventing them from paying dividends. No assurance, however, can be given that the Company or its subsidiaries will not be prevented from paying dividends in the future. (d) Rights to purchase Class A Ordinary Shares were distributed as a dividend at the rate of one Right for each outstanding Class A Ordinary Share held of record as of the close of business on October 31, 1998. Each 22 Right will entitle holders of XL Class A Ordinary Shares to buy one ordinary share at an exercise price of $350.00. The Rights would be exercisable, and would detach from the Class A Ordinary Shares, only if a person or group were to acquire 20 percent or more of XL's outstanding Class A Ordinary Shares, or were to announce a tender or exchange offer that, if consumated, would result in a person or group beneficially owning 20 percent or more of XL's Class A Ordinary Shares. Upon a person or group without prior approval of the Board acquiring 20 percent or more of XL's Class A Ordinary Shares, each Right would entitle the holder (other than such an acquiring person or group) to purchase XL Class A Ordinary Shares (or, in certain circumstances, Class A Ordinary Shares of the acquiring person) with a value of twice the Rights exercise price upon payment of the Rights exercise price, XL will be entitled to redeem the Rights at $0.01 per Right at any time until the close of business on the tenth day after the Rights become exercisable. The Rights will expire at the close of business on September 30, 2008, and do not initially have a fair value. The Company has initially reserved 119,073,878 Class A Ordinary Shares being authorized and unissued for issuance upon exercise of the Rights. (e) On November 3, 1998, the Company issued 1,066,667 Class A Ordinary Shares to FSA in connection with entering into the FSA Joint Venture. The consideration for the Class A Ordinary Shares was common stock of FSA. The transaction was exempt from the registration requirements of the Securities Act of 1933 by virtue of the exemption provided under Section 4(2) of such Act. Item 6. Selected Financial Data The selected consolidated financial data below should be read in conjunction with the consolidated financial statements and the notes thereto presented under Item 8.
1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (in thousands of U.S. dollars, except per share amounts and ratios) Income Statement Data: Gross premiums written.............. $ 806,861 $ 441,290 $ 729,446 $ 698,020 $ 638,294 Net premiums written.. 672,044 316,626 597,102 694,337 627,987 Net premiums earned... 685,200 540,653 517,892 558,049 521,177 Net investment income. 279,375 216,552 198,598 200,145 182,262 Net realized gains (losses)............. 191,795 335,939 206,212 49,774 (95,197) Equity in net income of affiliates........ 47,980 65,882 59,249 51,074 25,028 Losses and loss expenses............. 390,483 365,325 405,357 440,922 407,172 Acquisition costs and administration expenses............. 197,864 98,665 79,476 83,602 81,219 Interest expense...... 11,523 7,176 -- -- -- Amortization of intangible assets.... 23,926 5,844 -- -- -- Income before minority interest and income tax expense.......... 593,852 682,016 497,118 334,518 144,879 Net income............ 587,663 676,961 494,313 332,798 143,954 Net income per share-- basic (1)(2)......... $ 6.32 $ 7.95 $ 5.45 $ 6.48 $ 2.66 Net income per share-- diluted (1)(2)....... $ 6.20 $ 7.84 $ 5.41 $ 6.44 $ 2.65 Weighted average shares outstanding-- basic (2)............ 92,975 85,120 90,734 51,326 54,088 Weighted average shares outstanding-- diluted (2).......... 94,785 86,314 91,328 51,648 54,338 Cash dividends per share (2)............ $ 1.64 $ 1.36 $ 0.95 $ 0.71 $ 0.62 Balance Sheet Data: Total investments..... $6,462,396 $4,254,668 $3,772,976 $3,355,295 $2,943,712 Cash and cash equivalents.......... 443,654 394,599 252,734 673,433 456,176 Investment in affiliates........... 154,044 517,396 414,891 351,669 230,852 Total assets.......... 10,108,650 6,088,462 5,031,538 4,721,466 3,853,152 Unpaid losses and loss expenses............. 3,121,739 2,342,254 2,099,096 1,920,500 1,665,434 Loans payable......... 301,000 141,000 11,000 -- -- Shareholders' equity.. 4,817,880 2,479,130 2,116,038 2,006,133 1,684,393 Book value per share (2).................. $ 43.09 $ 29.37 $ 24.27 $ 21.22 $ 15.73 Fully diluted book value per share (2).. $ 42.79 $ 29.33 $ 24.21 $ 21.11 $ 15.73 Operating Ratios: Loss and loss expense ratio................ 57.0% 67.6% 78.3% 79.0% 78.1% Underwriting expense ratio................ 26.3 18.2 15.3 15.0 15.6 Combined ratio........ 83.3 85.8 93.6 94.0 93.7
23 - - -------- (1) Net income per share is based on the weighted average number of ordinary shares and ordinary share equivalents outstanding for each period as required by Statement of Financial Accounting Standard No. 128. (2) All share and per share information has been retroactively restated to give effect to a one for one stock dividend paid to shareholders of record on July 26, 1996. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations for the Years Ended November 30, 1998, 1997 and 1996 The following is a discussion of the Company's results of operations and financial condition. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and notes thereto presented under Item 8. The following table presents an analysis of the Company's revenues for the years ended November 30, 1998, 1997 and 1996 (U.S. dollars in thousands):
1998 Change 1997 Change 1996 ---------- ------ ---------- ------ -------- Net premiums earned.............. $ 685,200 26.7% $ 540,653 4.4% $517,892 Net investment income............ 279,375 29.0% 216,552 9.0% 198,598 Net realized gains............... 191,795 NM 335,939 NM 206,212 Equity in net earnings of affiliates...................... 47,980 (27.2)% 65,882 11.2% 59,249 Fee and other income............. 13,298 NM -- NM -- ---------- ---------- -------- $1,217,648 $1,159,026 $981,951 ========== ========== ========
Both net earned premiums and net investment income increased significantly in 1998 over 1997, compared to the change from 1996 to 1997. These results were affected by the Company's acquisition of GCR in June 1997 and the merger with Mid Ocean in August 1998. Accordingly, such growth may not be indicative for future periods. Mid Ocean prior to the acquisition was an affiliate of the Company. Consequently, the equity in net earnings from affiliates only reflects the Company's share of Mid Ocean's earnings for the first nine months of 1998. Subsequent results for Mid Ocean are now consolidated. The Company is effectively organized into three business operations: insurance, reinsurance and Lloyd's Syndicates. The insurance business is written primarily by XLI, based in Bermuda, and its subsidiaries, XLE, based in Dublin, Ireland, XLIA and XLRS, based in New York and Connecticut, respectively. The insurance operations are leading providers of high excess coverage for general third party liability, other liability, including directors and officers, professional and employment practices liability, property and other specialty covers. The reinsurance business is written primarily by XLMORe, based in Bermuda, with branch operations in London and Singapore and an office in Munich. It also has controlling ownership of LARe. MORe, a subsidiary of Mid Ocean, was acquired by merger on August 7, 1998, and was amalgamated with XLGRe. The reinsurance group is a leading writer of property catastrophe, other property, including property excess of loss and property pro rata, marine and energy, aviation and satellite and specialty liability and other covers. The Lloyd's operations are managed by Brockbank which provides underwriting and other services to five Lloyd's syndicates, two of which are dedicated corporate syndicates whose capital is provided by the Company. These syndicates write property, marine and energy, aviation and satellite, professional indemnity, motor and other specialty lines primarily of insurance but also reinsurance, to a globally diverse group of clients. The Brockbank operations were acquired through the merger with Mid Ocean. The results of Brockbank are only included in the Company's 1998 fourth quarter. Premiums written for the first nine months relate to the Company's interest in Venton Holdings Limited ("Venton"). The Company's interest in Venton was sold in the fourth quarter of the Company's 1998 fiscal year. 24 Premiums
1998 1997 1996 -------- -------- -------- (in thousands) Gross premiums written Insurance Operations General liability............................... $185,081 $252,790 $432,002 Other liability................................. 161,423 127,321 111,892 Property........................................ 35,567 38,261 40,691 Other........................................... 42,213 -- -- Reinsurance Operations Property catastrophe............................ 89,084 (78,331) 64,130 Other property.................................. 29,014 17,069 2,111 Marine and energy............................... 26,169 17,797 20,931 Aviation and satellite.......................... 37,602 37,470 13,433 Other........................................... 79,909 28,913 44,256 Lloyd's Syndicates............................... 120,799 -- -- -------- -------- -------- 806,861 441,290 729,446 Multi-year premiums............................... (26,433) 115,645 (164,033) -------- -------- -------- $780,428 $556,935 $565,413 ======== ======== ======== Net premiums written Insurance Operations General liability............................... $136,095 $150,816 $319,745 Other liability................................. 152,491 116,230 101,818 Property........................................ 24,822 29,367 30,678 Other........................................... 36,875 -- -- Reinsurance Operations Property catastrophe............................ 76,549 (78,940) 64,130 Other property.................................. 25,335 17,068 2,111 Marine and energy............................... 24,714 17,797 20,931 Aviation and satellite.......................... 37,332 37,470 13,433 Other........................................... 75,029 26,818 44,256 Lloyd's Syndicates............................... 82,802 -- -- -------- -------- -------- 672,044 316,626 597,102 Multi-year premiums............................... (22,116) 122,762 (129,432) -------- -------- -------- $649,928 $439,388 $467,670 ======== ======== ======== Net premiums earned Insurance Operations General liability............................... $178,735 $263,543 $325,777 Other liability................................. 95,166 91,364 80,427 Property........................................ 23,273 21,264 20,622 Other........................................... 5,124 -- -- Reinsurance Operations Property catastrophe............................ 122,199 40,892 26,927 Other property.................................. 42,247 16,581 419 Marine and energy............................... 31,068 20,420 21,536 Aviation and satellite.......................... 44,033 36,421 7,256 Other........................................... 70,478 50,168 34,928 Lloyd's Syndicates............................... 72,877 -- -- -------- -------- -------- $685,200 $540,653 $517,892 ======== ======== ========
25 The growth in gross and net premiums written and net premiums earned have been affected by the Company's acquisitions (as discussed previously), the development of new product lines and the ability to maintain a relatively high level of policy retention despite the highly competitive environment that the Company and its subsidiaries operate in. The increase in gross premiums written of $356.6 million in 1998 compared to 1997 was caused by several factors. The level of multi-year premiums written increased in 1998 compared a decline in such business in 1997. The 1997 fiscal year was negatively affected by several multi-year property catastrophe contracts which were rewritten during the year resulting in the return of premiums written for future years that had not yet been collected or earned. This also resulted in a reduction of premiums receivable and unearned premiums. Additionally, as previously mentioned, the growth in gross premiums written was affected by the acquisitions of GCR and Mid Ocean. The 1998 year includes a full year of GCR's premiums compared to five and a half months in 1997, plus four months of Mid Ocean results and three months of Brockbank results. The GCR and Mid Ocean premiums are included under Reinsurance Operations and the Brockbank premiums are included under Lloyd's Syndicates. Property catastrophe premiums through the first nine months of 1998 reflect business assumed primarily by XLGRe prior to its amalgamation with MORe while premiums thereafter reflect the combined MORe and XLGRe. Other reinsurance represents specialty liability reinsurance related primarily to tailored programs written by XLI. Premiums written by Lloyd's Syndicates for the first nine months of the year, approximately $25 million gross and $7 million net, relate solely to the Company's interest in Venton. As mentioned previously, Venton was sold in the fourth quarter of 1998. Accordingly, all results from Lloyd's Syndicates from the fourth quarter of 1998 and forward are attributable to Brockbank. Gross premiums written in 1998 and 1997 were also affected by a significant decline in premiums written for general liability insurance. The Company continues to experience high levels of competition, particularly on a price basis and coverage terms, although business retention has remained in excess of 80%. Policy retention for general liability insurance was 86.1% in 1998 compared to 80.1% in 1997 and 87.9% in 1996. The Company's response has been to move generally to higher attachment levels which results in lower premiums as the Company moves further away from risk. As at November 30, 1998, the average limits for general liability insurance was $84.4 million in excess of $135.2 million attachment point, as compared to average limits of $86.4 million and $80.2 million in excess of attachment points of $104.0 million and $78.7 million for the years ended November 30, 1997 and 1996, respectively. Other liability insurance (comprising mostly professional lines), increased significantly primarily as a result of several tailored multi-year programs written in the year. These transactions tend to be complex in nature and often take a significant period of time to structure, thus premiums written in any given year may not be representative of future years and/or may be irregular in nature. The growth in net premiums written (gross premiums net of reinsurance ceded) in 1998 over 1997 was likewise affected by the above mentioned factors. In addition, the Insurance Operations purchased general liability excess of loss reinsurance contract for $33.8 million at the beginning of the Company's 1997 fourth quarter resulting in a reduction of net premiums written. Such reinsurance was extended to the Company's year end and has been renewed for 1999. There was no equivalent reinsurance for 1996. 26 The increase in net premiums earned reflects the corresponding growth in net premiums written. Unlike net premiums written, the timing differences created by the writing of multi-year premiums are smoothed as net premiums are earned over the lives of the policies. Thus net earned premiums earned may give a better indication of the trends in the Company's underlying business. Net Investment Income
1998 1997 1996 -------- -------- -------- (in thousands) Net investment income........................ $279,375 $216,552 $198,598
The increase in net investment income in 1998 over 1997 is due to a number of factors. The average asset base increased primarily due to the merger with Mid Ocean during the third quarter of 1998 and the Company's positive operational cash flow. In addition, the average yield of the portfolio was higher due to a widening of interest spreads and a decrease in the proportionate amount of equity securities held as a percentage of the total investment portfolio. Similarly, in 1997, the average asset base increased with the acquisition of GCR. Average investment yields were also higher than 1996. The proportion of equity securities relative to the fixed income portfolio decreased marginally in 1997 compared to 1996. Net Realized Investment Gains
1998 1997 1996 -------- -------- -------- (in thousands) Net realized investment gains....................... $191,795 $335,939 $206,212
Gains realized in 1998 reflected the strong performance of both the equity and certain sectors of the fixed income markets early in 1998, offset by dramatic price declines in the third quarter, followed by recoveries in the fourth quarter. Regarding the latter, generally declining interest rates and sector volatility have resulted in spreads widening in the corporate and mortgage markets, thereby providing the Company with opportunities to increase the yield on its investments despite the general decline in interest rates. Also, volatile markets may promote opportunities for the Company's investment managers to pursue their total return objectives with a goal of generating investment gains in the process. The equity markets world-wide have remained strong but also have been subject to greater volatility through the year. This resulted in $136.7 million in gains being realized as some of the Company's equity managers locked in gains where they felt valuations had reached their targets. The Company also sold its minority investment in Venton during the fourth quarter, realizing a $14.1 million gain. During 1997, both the fixed income and equity portfolios were restructured, resulting in above normal turnover of the portfolio and contributing to the significant gains realized during the year. Market conditions were also very strong during 1997. The Company also maintains a synthetic equity portfolio holding S&P 500 Index futures that realized net gains of $25.8 million and $37.4 million for the years ended November 30, 1998 and 1997, respectively. Equity in Net Income of Affiliates
1998 1997 1996 ------- ------- ------- (in thousands) Equity in net income of affiliates..................... $47,980 $65,882 $59,249
Equity in net income from affiliates was derived mostly from the Company's equity position in Mid Ocean, which ended in August 1998 upon the acquisition of the balance of the outstanding Mid Ocean shares. As a result, only nine months of earnings were accounted for on this basis in 1998, compared to a full year in 1997. 27 The increase in equity in net income of affiliates in 1997 over 1996 reflected an improvement in reported earnings of Mid Ocean plus contributions of $3.9 million from the Company's equity positions in Risk Capital Holdings, Inc. and certain limited partnerships. No positive contributions were recorded from these affiliates in 1998. Fee and Other Income
1998 1997 1996 ------- ---- ---- (in thousands) Fee and other income.......................................... $13,298 -- --
Approximately one half of all fee income represents net managing agency income for fees earned by Brockbank and are only for one reported quarter in 1998. These fees are received from the management of Lloyd's syndicates, and profit commissions are earned under GAAP based upon estimated results of the syndicates managed. Profit commissions are settled and paid to the managing agent after an underwriting year has been closed under Lloyd's rules, which is normally three years after its inception. Of the remaining balance, $2.2 million represents a fee to the Company's insurance operations for structuring a specialty insurance cover and $3.6 million represents a distribution from one of its limited partnership investments. Combined Ratio
1998 1997 1996 ----- ----- ----- Loss and loss expense ratio................................... 57.0% 67.6% 78.3% Underwriting expense ratio.................................... 26.3% 18.2% 15.3% ----- ----- ----- Combined ratio................................................ 83.3% 85.8% 93.6% ===== ===== =====
The decrease in the loss ratio primarily reflects the diversification of the Company's business over the past two years to include a lower proportion of liability business, which tends to be long-tail in nature. Loss ratios for this longer tail business can be higher but usually pay out claims over several years. The Company experienced lower losses in shorter tail lines resulting in an overall lower loss ratio. The decrease in the proportion of longer tail business will cause overall Company loss ratios to decrease in periods of low catastrophic activity. It should also be noted that the converse may also occur. The 1998 year reflects a full year of the results of GCR acquired in June 1997 and four months of MORe acquired in August 1998. Most of the business written by these companies is short tail in nature. The 1998 loss ratio was also affected by the reduction of insurance reserves established for the Company's professional lines to bring them in line with updated actuarially determined reserve estimates. The Company generally attempts to take a conservative stance with respect to initial reserves, particularly on new lines of business due to the limited loss development the Company would have experienced to date and the long tail nature of certain lines of cover. In addition, reserves were reduced on specialty cover policies for the years 1995 through 1997 due to the absence of losses on these policies. These policies were for a three-year period, written on a claims made basis, and expired in 1998. During the fourth quarter of 1998 the Company incurred reinsurance losses of $63 million relating to Hurricane Georges and the SwissAir airline disaster. These losses were offset in part by reserves accrued during the year that were transferred to the Company through the merger with Mid Ocean. Prior to the acquisition of GCR, reinsurance business was not a significant component of the Company's total book of business. As the relative proportion of this business increased, the loss ratio decreased for the reasons explained above resulting in a lower loss ratio in 1997 over 1996. 28 The increase in the expense ratio reflects the change in the Company's business mix. The reinsurance and Lloyd's syndicate businesses typically have higher acquisition costs than the Company's insurance business. The underwriting expense ratio excludes interest costs, the amortization of intangible assets and one time charges totaling $17.5 million associated with the realignment of the Company's reinsurance systems and operations. XLGRe and MORe were amalgamated in August 1998, requiring the merging of data from two different underwriting systems to effectively monitor the spread of geographic and other risks. This also required the conversion of all the contracts on one system to the other. Duplicate office facilities were closed and their associated capitalized costs were expensed. The Company's severance costs relating to redundant staff were expensed as well as certain professional expenses incurred in connection with the merger. Net Income
1998 1997 1996 -------- -------- -------- (in thousands except per share amounts) Income excluding net realized gains on investments, amortization of intangible assets and one time realignment charges................ $437,254 $346,836 $288,101 Net realized gains............................... 191,795 335,939 206,212 Amortization of intangible assets................ (23,926) (5,844) -- Alignment charges................................ (17,460) -- -- -------- -------- -------- Net income....................................... $587,663 $676,961 $494,313 ======== ======== ======== Earnings per share--basic........................ $ 6.32 $ 7.95 $ 5.45 ======== ======== ======== Earnings per share--diluted...................... $ 6.20 $ 7.84 $ 5.41 ======== ======== ========
Net income for 1998 decreased over 1997 which had increased over 1996 primarily due to the amount of investment gains realized in 1997 compared to 1998 and 1996. The increase in income before realized gains and the other disclosed charges in 1998 and 1997 reflect the Company's acquisitions of Mid Ocean on August 7, 1998 and GCR on June 12, 1997. Earnings per share were also affected by the weighted average number of shares outstanding. On a diluted basis, these were 94,785,000 shares for 1998, 86,314,000 shares for 1997 and 91,328,000 for 1996. The decrease in the weighted average number of shares outstanding in 1997 reflects the repurchase of shares in 1996 and 1997. The increase in the number of shares for 1998 is primarily due to the issue of shares in exchange for Mid Ocean Limited shares. Financial Condition and Liquidity As a holding company, the Company's assets consist primarily of its investments in the stock of its 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, rules and regulations of Bermuda, the United States, the Republic of Ireland and the United Kingdom insurance law and regulations, including those promulgated by the Society of Lloyd's. In order to pay dividends, the amount of which is limited to accumulated net realized profits, XLI and XLMORe must maintain certain minimum levels of share capital, solvency and liquidity pursuant to Bermuda statutes and regulations. At November 30, 1998, XLI and XLMORe could have paid dividends in the amount of approximately $1.8 billion and $1.3 billion, respectively. Neither the Company nor any of its material subsidiaries other than XLI, XLMORe, XLE, XLIA and XLRS had any other restrictions preventing them from paying dividends. No assurance, however, can be given that the Company or its subsidiaries will not be prevented from paying dividends in the future. The Company's shareholders' equity at November 30, 1998 was $4.8 billion, of which $2.4 billion was retained earnings. At November 30, 1998, total investments and cash net of unsettled investment trades was $6.4 billion, compared to $4.3 billion at November 30, 1997. The increase is due to the acquisition of cash and investments included in the merger with Mid Ocean, as well as the reinvestment of investment income and realized gains and 29 the strengthening of the bond and equity markets during the year. However, as the Company's long-tail casualty insurance business matures over the next three to five years, it is possible that claims payments may increase due to the increased exposure to events which occurred in prior years but have not yet been reported or paid. It is also possible that funds available for investment will be reduced as compared to prior years due to potential increased claims payments. The Company's fixed income investments (including short-term investments and cash equivalents) at November 30, 1998 represented approximately 83% of invested assets and were managed by several outside investment managers with different strategies. Of the fixed income securities, 83% are of investment grade, with 58% rated Aa or AA or better by a nationally recognized rating agency. The average quality of the fixed income portfolio was AA-. The payable for investments purchased has increased from $382.3 million at November 30, 1997 to $526.4 million at November 30, 1998. This increase results from timing differences as it is the Company's policy to account for its investments on a trade basis. In fiscal 1996, 1997 and 1998, the total amount of losses paid by the Company was $302.6 million, $267.2 million and $366.5 million respectively. The Company establishes reserves to provide for the estimated expenses of settling claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are calculated by 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 judgement concerning sound financial practice and does not represent any admission of liability with respect to any claims made against the Company's subsidiaries. No assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. Inflation can have an effect on the Company in that inflationary factors can increase damage awards and potentially result in more claims exceeding applicable minimum attachment points. The Company's underwriting philosophy is to adjust premiums in response to inflation, although this may not always be possible due to competitive pressure. Inflationary factors are considered in determining the premium level on multi-year policies at the time contracts are written. In addition, the Company from time to time evaluates whether minimum attachment points should be raised to take into account inflationary factors. The Company commenced its initial stock repurchase program in September 1993 as authorized by its Board of Directors and obtained approval for subsequent programs as each program was completed. On January 24, 1997, the Board of Directors authorized the Company to repurchase 3 million shares as circumstances warrant. As at November 30, 1997, the Company had purchased 595,000 shares at cost of $25.3 million. On March 13, 1998, the Board of Directors discontinued this program with 2.4 million shares remaining and replaced it with an authorization to repurchase $500 million of its shares. Of this amount, $300 million was used to repurchase 3.7 million shares related to the merger with Mid Ocean. In addition, the Company had purchased a further 732,000 shares at a cost of $51.2 million during the year. On January 22, 1999, the Board of Directors discontinued this program with $148.8 million remaining and replaced it with an authorization to repurchase $500 million of its shares. On June 11, 1997, subsidiaries of the Company obtained two revolving lines of credit each for $250 million, one for 364 days and the other for 5 years. The one-year facility has been extended until June 1999. These facilities are provided by a syndicate of banks in order to facilitate strategic acquisitions and to supplement operational cash flow. The weighted average interest rate on the funds borrowed during 1998 was 5.667%. The balance of the loan outstanding under the facilities as at November 30, 1998 was $190 million, which was extended for an additional three months at its due date on December 16, 1998. This amount represents the balance remaining of $250 million that was borrowed to fund the cash election option available to shareholders in connection with the Mid Ocean merger. Mid Ocean had obtained multi-currency committed lines of credit provided by a syndicate of banks which provides for unsecured borrowing up to an aggregate amount of $200 million subject to certain conditions in 30 August 1997. The Mid Ocean facility is split evenly between a 364-day and a 5-year facility. These facilities remained in place following the merger with Mid Ocean. In August 1998, $50 million was borrowed from the 5-year facility and used by the Company in connection with the purchase of shares as part of the Mid Ocean merger. This was repaid in November 1998. In 1998, X.L. America, Inc. ("XLA") obtained an unsecured revolving line of credit of $100 million for 364 days from a U.S. bank. During the year the full amount of this facility was borrowed and used to fund the Company's U.S. operations. This line of credit was replaced in December 1998 with a $150 million commercial paper funding facility of which $100 million has been drawn. XLI guarantees the indebtedness of XLA under this facility. On February 27, 1998, subsidiaries of the Company obtained a $500 million letter of credit facility from a syndicate of banks, which is secured against the Company's investment portfolio. This facility is used to collateralize certain reinsured's technical reserves with the Company. The Company has committed to letters of credit of approximately $80.6 million as at November 30, 1998. Mid Ocean had a $325 million letter of credit facility with Citibank N.A., London Branch, which is secured against its investment portfolio. Letters of credit totaling approximately $223.0 million under this facility were outstanding as at November 30, 1998. Year 2000 Considerations The Company is exposed to risks associated with Year 2000 issues in terms of both the technology systems on which it depends and the underwriting exposures which it assumes. In 1997, the Company initiated a project to address Year 2000 issues with respect to the Company's computer software and information technology systems as well as its non-information technology systems. The project has two distinct areas of focus--assessment of the Year 2000 compliance of the Company's software, systems and technology platforms, and the evaluation of the Year 2000 preparedness of significant third parties with whom the Company conducts business, including vendors and customers. The Company has substantially completed its assessment of Company software and systems and has adopted a plan to implement compliant components, targeted to be substantially complete by June 1999. The Company estimates that through November 30, 1998 the remediation and validation efforts are approximately 50% complete, with the costs through such date aggregating approximately $3 million. Future costs of remediation are not expected to have a material impact on the Company's financial position, results of operation or cash flows. The Company recognizes the potential impact of Year 2000 issues from its service providers and customers. The Company is currently communicating with its significant service providers to assess their readiness and will address compliance risks with each new significant vendor. In addition, the Company's potential exposure to its customers' Year 2000 issues is being reviewed. Formal contingency plans will not be formulated until the Company has identified specific areas where there is a substantial risk of Year 2000 problems occurring, and no such areas are identified as of this date. All insurance and reinsurance subsidiaries of the Company examine the potential exposure to Year 2000-related risks associated with the coverages that they provide. In some instances, Year 2000-related risks are expressly excluded from or included in certain coverages, and in other instances, coverage in respect of such risks is neither expressly excluded nor included. To the extent that Year 2000-related risks materialize, participants in the property and casualty insurance and reinsurance industry, including the Company, could pay or incur significant claims, losses or defense costs which could have a material adverse effect on the Company's results of operations and financial condition. In view of the inherent uncertainties surrounding the likelihood that Year 2000-related risks will materialize and the extent to which such risks will result in insurance and reinsurance losses, it is not possible at this time to estimate the Company's potential exposure, if any, to claims associated with Year 2000-related issues. 31 Financial Risk Management This risk management discussion and the estimated amounts generated from the sensitivity analyses are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The methods used by the Company to assess and mitigate risk should not be considered projections of future events of losses or lack of losses. The Company's investment portfolio consists of fixed income and equity securities, denominated in both U.S. dollars and non-U.S. currencies. Accordingly, earnings will be affected by changes in interest rates, equity prices and foreign currency exchange rates. An immediate 100 basis point adverse shift in the treasury yield curve would result in a decrease in total return of 4.6% or $246 million on the Company's fixed income portfolio as of November 30, 1998. The Company has short term debt outstanding. Interest rates are LIBOR based. Accordingly, any changes in interest rates will affect interest expense. The Company only has open positions on its five year facility. There are three and a half years remaining before this facility must be renewed. In evaluating the impact of price changes of the equity portfolio, including the synthetic portion thereof, the annual volatility (standard deviation adjusted to an immediate time horizon) of the S&P (Standard and Poor's) Index and the Morgan Stanley EAFE (European Australia Far East) Index were used as proxies for U.S. and non-U.S. securities, respectively. Based upon one standard deviation, total return would be impacted by $12 million. A 10% change in equity prices would effect total return by approximately $113 million. Foreign Currency Exposure Management The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of its non-U.S. dollar fixed maturities and its non-U.S. dollar equity investments on an overlay basis. These contracts are not designated as specific hedges for financial reporting purposes and, therefore realized and unrealized gains and losses recognized on them are recorded as a component of net realized gains and losses in the period in which they occur. These contracts generally have maturities of three months or less. In addition, where the Company's investment managers are of the opinion that potential gains exist in a particular currency, a forward contract will not be entered into. At November 30, 1998, forward foreign exchange contracts with notional principal amounts totaling $322.3 million were outstanding. The fair value of these contracts as at November 30, 1998, was $308.4 million with unrealized losses of $13.9 million. Gains of $3.8 million were realized during the year. Based on this value, a 10% appreciation or depreciation of the U.S. dollar as compared to the level of other currencies under contract at November 30, 1998 would have resulted in approximately $11.2 million in unrealized gains and $33.2 million in unrealized losses. In addition, the Company also enters into foreign exchange contracts to buy and sell foreign currencies in the course of trading its non-U.S. dollar investments. These contracts are not designated as specific hedges for financial reporting purposes, and generally have maturities of weeks or less. As such, any realized or unrealized gains or losses are recorded in income in the period in which they occur. At November 30, 1998, the Company had $2.4 million of such contracts outstanding, and had recognized a total of $0.4 million in realized and unrealized losses for the twelve month period. Based on this value, a 10% appreciation or depreciation of the U.S. dollar as compared to the level of other currencies under contract at November 30, 1998, would have had no material effect on income. The Company attempts to hedge directly the foreign currency exposure of a portion of its non-U.S. Dollar fixed maturity investments using forward foreign exchange contracts that generally have maturities of three months or less, and which are rolled over to provide continuing coverage for as long as the investments are held. Where an investment is sold, the related foreign exchange sale contract is closed by entering into an offsetting purchase contract. At November 30, 1998 the Company had, as hedges, foreign exchange contracts for the sale of $17.5 million and the purchase of $0.1 million of foreign currencies at fixed rates, primarily New Zealand Dollars (73% of net contract value), Danish Kroner (14%) and Swedish Kroner (13%). The market value of non-U.S. Dollar fixed maturities held by the Company as at November 30, 1998 was $19.0 million. 32 Unrealized foreign exchange gains or losses on foreign exchange contracts hedging non-U.S. Dollar fixed maturity investments are deferred and included in shareholders' equity. As at November 30, 1998, unrealized deferred losses amounted to $0.1 million, and were offset by corresponding decreases in the dollar value of the investments. Realized gains and losses on the maturity of these contracts are also deferred and included in shareholders' equity until the corresponding investment is sold. As at November 30, 1998, realized deferred losses amounted to $2.0 million. In January 1999, eleven Member States of the European Union ("EU") began their participation in the EU's Economic and Monetary Union pursuant to which participating Member States currencies were converted into the Euro, the common currency for the EU. The Company is uncertain as to the impact of the conversion on its business and financial condition and the Company has not yet initiated a detailed analysis and plan with respect to the Euro. Although the Company does not anticipate the costs associated with the conversion to be material, such costs are not known with precision at this time. Financial Market Exposure The Company also invests in a synthetic equity portfolio of S&P Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at November 30, 1998, the portfolio held $138.3 million in exposure to S&P 500 Index futures together with fixed maturities, short-term investments and cash amounting to $139.5 million. Based on this value, a 10% increase or decrease in the price of these futures would have resulted in a total value, or exposure, of $152.2 million and $124.5 million, respectively. The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the year ended November 30, 1998, net realized gains from index futures totalled $25.8 million as a result of the 21.5% increase in the S&P Index during the twelve- month period. Derivative investments are also utilized to add value to the portfolio where market inefficiencies are believed to exist. At November 30, 1998, bond and stock index futures outstanding were $333.4 million, with underlying investments having a market value of $2.1 billion (all portfolio managers are prohibited by the Company's investment guidelines from leveraging their positions). A 10% appreciation or depreciation of these derivative instruments at this time would have resulted in unrealized gains and losses of $33.3 million, respectively. Accounting Standards The Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 15, 1997. This statement established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographical areas and major customers. Under SFAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company has not yet assessed the affect of the adoption of this accounting standard on its consolidated financial statement disclosures. FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. This Statement revises employers' disclosures about pensions and other postretirement benefit plans. This standard is expected to have a minimal impact on the Company's consolidated financial disclosures. FASB also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. 33 The accounting for changes in fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The Company has not yet assessed the affect of the adoption of this accounting standard on its consolidated financial statement disclosures. SFAS No. 131 and No. 133 are not expected to have a significant impact on the Company's overall results but will affect the Company's financial statements and disclosures. Current Outlook The Company believes competition in the property casualty insurance and reinsurance industry will continue to be strong and may intensify in 1999, exerting pressure on rates in general across virtually all property and casualty product lines. Although the Company believes some opportunities will exist in 1999 for growth in certain product lines, no assurances can be made that growth in such product lines will be sufficient to offset the competitive pressures affecting the Company's other product lines. Cautionary Note Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a "safe harbor" for forward-looking statements. This Form 10-K, the Company's Annual Report to Stockholders, any proxy statement, any 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 and the insurance and reinsurance sectors in general (both as to underwriting and investment matters). Statements which include the words "expect", "intend", "plan", "believe", "project", "anticipate", "will" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, the following: (i) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (ii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (iii) 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; (v) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments; (vi) changes in regulation or tax laws applicable to the Company, its subsidiaries, brokers or customers; (vii) acceptance of the Company's products and services, including new products and services; (viii) changes in the availability, cost or quality of reinsurance; (ix) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (x) the impact of Year 2000-related issues on the Company's technology systems and underwriting exposures; (xi) loss of key personnel; (xii) the effects of mergers, acquisitions and divestitures; (xiii) changes in rating agency policies or practices; (xiv) changes in accounting policies or practices; and (xv) changes in general economic conditions, including inflation, foreign currency exchange rates, the introduction of the Euro and other factors. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Related Notes Page - - ------------------------------------------------------------ ---- Consolidated Balance Sheets as of November 30, 1998 and 1997.............. 35 Consolidated Statements of Income for the years ended November 30, 1998, 1997 and 1996............................................................ 36 Consolidated Statements of Shareholders' Equity for the years ended November 30, 1998, 1997 and 1996......................................... 37 Consolidated Statements of Cash Flows for the years ended November 30, 1998, 1997 and 1996...................................................... 38 Notes to Consolidated Financial Statements for the years ended November 30, 1998, 1997 and 1996.................................................. 39 Independent Auditors' Report.............................................. 62
34 XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS AS AT NOVEMBER 30, 1998 AND 1997 (Expressed in thousands of U.S. dollars)
ASSETS 1998 1997 ------ ----------- ---------- Investments available for sale: Fixed maturities, available for sale at fair value (amortized cost: 1998--$5,197,246; 1997--$3,144,642)................ $ 5,212,581 $3,196,872 Equity securities, at fair value (cost: 1998-- $995,873; 1997--$729,888).......................... 1,128,601 837,827 Short-term investments, at fair value (amortized cost: 1998--$121,177; 1997--$220,138).................................... 121,214 219,969 ----------- ---------- Total investments available for sale.............. 6,462,396 4,254,668 Cash and cash equivalents............................. 443,654 394,599 Investment in affiliates (cost: 1998--$140,201; 1997-- $336,680)............................................ 154,044 517,396 Other investments..................................... 41,369 27,244 Accrued investment income............................. 59,699 48,576 Deferred acquisition costs............................ 97,951 22,272 Prepaid reinsurance premiums.......................... 141,385 108,916 Premiums receivable................................... 689,516 254,238 Reinsurance balances receivable....................... 388,954 156,025 Intangible assets..................................... 1,500,404 267,695 Other assets.......................................... 129,278 36,833 ----------- ---------- Total assets...................................... $10,108,650 $6,088,462 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Unpaid losses and loss expenses....................... $ 3,121,739 $2,342,254 Unearned premiums..................................... 1,010,907 566,911 Premiums received in advance.......................... 19,167 40,706 Accounts payable and accrued liabilities.............. 143,529 40,923 Reinsurance premiums payable.......................... 121,291 69,305 Loans payable......................................... 301,000 141,000 Net payable for investments purchased................. 526,357 382,345 Minority interest..................................... 46,780 25,888 ----------- ---------- Total liabilities................................. $ 5,290,770 $3,609,332 ----------- ---------- Shareholders' Equity: Class A ordinary shares (par value $0.01; authorized, 999,990,000 shares including Class B shares; issued and outstanding, 108,688,081 shares and 84,407,638 shares at November 30, 1998 and 1997, respectively).. 1,087 844 Class B ordinary shares (par value $0.01; authorized, 999,990,000 shares including Class A shares; issued and outstanding, 3,115,873 shares and nil shares at November 30, 1998 and 1997 respectively)............. 31 -- Contributed surplus................................... 2,289,456 290,085 Net unrealized appreciation on investments............ 159,953 188,444 Deferred compensation................................. (18,104) (11,362) Retained earnings..................................... 2,385,457 2,011,119 ----------- ---------- Total shareholders' equity........................ $ 4,817,880 $2,479,130 ----------- ---------- Total liabilities and shareholders' equity........ $10,108,650 $6,088,462 =========== ==========
See accompanying notes to Consolidated Financial Statements 35 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996 (Expressed in thousands of U.S. dollars, except per share amounts)
1998 1997 1996 --------- --------- -------- Revenues: Net premiums earned............................ $ 685,200 $ 540,653 $517,892 Net investment income.......................... 279,375 216,552 198,598 Net realized gains on sales of investments..... 191,795 335,939 206,212 Equity in net income of affiliates............. 47,980 65,882 59,249 Fee and other income........................... 13,298 -- -- --------- --------- -------- Total revenues............................... 1,217,648 1,159,026 981,951 --------- --------- -------- Expenses: Losses and loss expenses....................... 390,483 365,325 405,357 Acquisition costs.............................. 88,596 46,108 35,556 Administration expenses........................ 109,268 52,557 43,920 Interest expense............................... 11,523 7,176 -- Amortization of intangible assets.............. 23,926 5,844 -- --------- --------- -------- Total expenses............................... 623,796 477,010 484,833 --------- --------- -------- Income before minority interest and income tax expense......................................... 593,852 682,016 497,118 Minority interest in net income of subsidiary.. 826 (30) -- Income tax expense............................. 5,363 5,085 2,805 --------- --------- -------- Net income....................................... $ 587,663 $ 676,961 $494,313 ========= ========= ======== Weighted average ordinary shares and ordinary share equivalents outstanding--basic............ 92,975 85,120 90,734 ========= ========= ======== Weighted average ordinary shares and ordinary share equivalents outstanding--diluted.......... 94,785 86,314 91,328 ========= ========= ======== Earnings per ordinary share and ordinary share equivalent--basic............................... $ 6.32 $ 7.95 $ 5.45 ========= ========= ======== Earnings per ordinary share and ordinary share equivalent--diluted............................. $ 6.20 $ 7.84 $ 5.41 ========= ========= ========
See accompanying notes to Consolidated Financial Statements 36 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996 (Expressed in thousands of U.S. dollars)
1998 1997 1996 ---------- ---------- ---------- Ordinary Shares: Balance-beginning of year................ $ 844 $ 872 $ 473 Issue of shares.......................... 12 3 1 Issue of shares--Mid Ocean acquisition... 303 -- -- Stock dividend........................... -- -- 441 Exercise of stock options................ 3 3 4 Repurchase of treasury shares............ (44) (34) (47) ---------- ---------- ---------- Balance-end of year.................... 1,118 844 872 ---------- ---------- ---------- Contributed Surplus: Balance-beginning of year................ 290,085 282,980 295,209 Issue of shares.......................... 88,959 10,771 7,493 Issue of shares Mid Ocean acquisition.... 2,189,414 -- -- Exercise of stock options................ 9,147 6,277 6,045 Repurchase of treasury shares............ (288,149) (9,943) (25,767) ---------- ---------- ---------- Balance-end of year.................... 2,289,456 290,085 282,980 ---------- ---------- ---------- Net Unrealized Appreciation (Depreciation) on Investments: Balance-beginning of year................ 188,444 256,430 283,289 Net change in investment portfolio....... (24,194) (82,521) (26,621) Net change in investment portfolio of affiliate............................... (4,297) 14,535 (238) ---------- ---------- ---------- Balance-end of year.................... 159,953 188,444 256,430 ---------- ---------- ---------- Deferred Compensation: Balance-beginning of year................ (11,362) (4,169) (1,657) Issue of restricted shares............... (11,103) (10,387) (3,799) Amortization............................. 4,361 3,194 1,287 ---------- ---------- ---------- Balance-end of year.................... (18,104) (11,362) (4,169) ---------- ---------- ---------- Retained Earnings: Balance-beginning of year................ 2,011,119 1,579,925 1,428,819 Net income............................... 587,663 676,961 494,313 Cash dividends paid...................... (150,294) (115,372) (86,586) Repurchase of treasury shares............ (63,031) (130,395) (256,621) ---------- ---------- ---------- Balance-end of year.................... 2,385,457 2,011,119 1,579,925 ---------- ---------- ---------- Total shareholders' equity................. $4,817,880 $2,479,130 $2,116,038 ========== ========== ========== Comprehensive Income: Net income............................... 587,663 676,961 494,313 Change in net unrealized appreciation (depreciation) of investments........... (28,491) (67,986) (26,859) ---------- ---------- ---------- Comprehensive income................... $ 559,172 $ 608,975 $ 467,454 ========== ========== ==========
See accompanying notes to Consolidated Financial Statements 37 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996 (Expressed in thousands of U.S. dollars)
1998 1997 1996 ----------- ----------- ---------- Cash flows provided by operating activities: Net income before minority interest. $ 588,489 $ 676,961 $ 494,313 ----------- ----------- ---------- Adjustments to reconcile net income before minority interest to net cash provided by operating activities: Net realized gains on sales of investments.......................... (191,795) (335,939) (206,212) Amortization of (discounts) premium on fixed maturities..................... (12,953) (2,163) 7,021 Equity in net income of affiliates net of cash received..................... (23,585) (34,395) (44,329) Amortization of deferred compensation. 4,361 3,194 1,287 Amortization of intangible assets..... 23,926 5,844 -- Unpaid losses and loss expenses....... 179,075 208,565 178,596 Reinsurance balances receivable....... (144,910) (109,581) (45,442) Unearned premiums..................... (16,751) (178,584) 140,239 Prepaid reinsurance premiums.......... 2,973 (45,449) (61,029) Premiums received in advance.......... (21,539) 16,450 19,376 Deferred acquisition costs............ (3,818) 17,292 10,571 Premiums receivable................... 21,375 154,521 (111,054) Reinsurance premiums payable.......... 761 37,958 30,524 Accrued investment income............. 10,691 10,729 (2,580) Accounts payable and accrued liabilities.......................... 15,570 2,839 11,188 ----------- ----------- ---------- Total adjustments................... (156,619) (248,719) (71,844) ----------- ----------- ---------- Net cash provided by operating activities......................... 436,870 428,242 422,469 ----------- ----------- ---------- Cash flow used in investing activities: Proceeds from sale of fixed maturities and short-term investments........... 13,709,343 10,332,277 4,283,613 Proceeds from redemption of fixed maturities and short-term investments.......................... 530,415 108,220 119,706 Proceeds from sale of equity securities........................... 850,748 1,164,483 591,366 Purchases of fixed maturities and short-term investments............... (14,313,067) (10,078,481) (5,059,795) Purchases of equity securities........ (964,214) (999,384) (374,565) Deferred gains on forward contracts... (12,295) 7,049 418 Investments in affiliates............. (1,126) (43,184) (19,131) Purchase of GCR Holdings Limited...... -- (660,137) -- Cash acquired in purchase of Mid Ocean Limited.............................. 137,483 -- -- Other investments..................... 1,836 154 (13,736) Other assets.......................... (8,537) (24,185) (20,208) ----------- ----------- ---------- Net cash used in investing activities......................... (69,414) (193,188) (492,332) ----------- ----------- ---------- Cash flows used in financing activities: Issuance of restricted shares......... 514 387 695 Proceeds from exercise of share options.............................. 7,538 6,280 6,049 Repurchase of treasury shares......... (351,225) (140,372) (282,435) Dividends paid........................ (150,294) (115,372) (86,145) Proceeds from loans................... 655,000 530,000 11,000 Repayment of loans.................... (495,000) (400,000) -- Minority interest..................... 20,066 25,888 -- ----------- ----------- ---------- Net cash used in financing activities......................... (313,401) (93,189) (350,836) ----------- ----------- ---------- Increase (decrease) in cash and cash equivalents............................ 49,055 141,865 (420,699) Cash and cash equivalents--beginning of year................................... 394,599 252,734 673,433 ----------- ----------- ---------- Cash and cash equivalents--end of year.. $ 443,654 $ 394,599 $ 252,734 =========== =========== ========== Taxes paid.............................. $ 9,207 $ 2,622 $ 1,571 =========== =========== ========== Interest paid........................... $ 11,443 $ 5,824 $ -- =========== =========== ==========
38 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended November 30, 1998, 1997 and 1996 (Expressed in U.S. dollars) 1. Organization XL Capital Ltd. ("XL" or the "Company") is a holding company organized under the laws of the Cayman Islands. XL was incorporated on March 16, 1998 as the successor to EXEL Limited, a Cayman Islands corporation organized in 1986 ("EXEL"), in connection with EXEL's merger with Mid Ocean Limited, a Cayman Islands corporation ("Mid Ocean"). In the merger, which was completed on August 7, 1998, all of the shares of EXEL and Mid Ocean were exchanged for shares in the Company pursuant to two schemes of arrangement approved by the Grand Court of the Cayman Islands in accordance with Section 85 of the Companies Law (1995 Revision) of the Cayman Islands. The Company operated under the name "EXEL Limited" from completion of the merger until February 1, 1999, when its current name was approved by the requisite vote of the Company's shareholders. References herein to "XL" or the "Company" also shall include EXEL unless the context otherwise requires. Through its subsidiaries, the Company is a leading provider of insurance and reinsurance, including coverages relating to certain financial risks, to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. XL Insurance Ltd, an insurance company organized under the laws of Bermuda ("XLI"), and its subsidiaries are the Company's principal insurance subsidiaries. XLI was formed in 1986 in response to a shortage of high excess liability coverage for Fortune 500 companies in the United States. In 1990, XLI formed XL Europe Insurance, an insurance company organized under the laws of the Republic of Ireland ("XLE"), to serve European clients. In 1998, XLI acquired Folksamerica General Insurance Company (renamed X.L. Insurance Company of America, Inc.), an insurance company domiciled in the State of New York and possessing property and casualty insurance licenses in approximately 20 states and reinsurance licenses in approximately 14 states, and formed X.L. Risk Solutions, Inc., an insurance company domiciled in the State of Connecticut. XLI also has a representative office in Australia. The Company's reinsurance operations are conducted primarily through XL Mid Ocean Reinsurance Ltd, an insurance company organized under the laws of Bermuda ("XLMORe"), and its subsidiaries. On August 7, 1998, XLMORe was formed through the merger of X.L. Global Reinsurance Company, Ltd. ("XLGRe") and Mid Ocean Reinsurance Company Ltd. ("MORe"). XLGRe was formed in November 1997 through the merger of X.L. Reinsurance Company, Ltd. ("XLRe") and Global Capital Reinsurance Company Limited ("GCRe") following EXEL's acquisition of GCR Holdings Limited, a Cayman Islands holding company, on June 12, 1997. XLRe commenced operations on December 1, 1995 to write specialty reinsurance business. MORe and GCRe were organized in 1992 and 1993, respectively, initially to write property catastrophe reinsurance following severe hurricanes which struck the southeastern United States in the late 1980's and early 1990's. Each of XLRe, MORe and GCRe was organized as an insurance company under the laws of Bermuda. XLMORe maintains branches in London, Singapore and a European contact office in Munich. The Company's operations at Lloyd's are conducted through The Brockbank Group plc, a company organized under the laws of England, and its subsidiaries (together, "Brockbank"). Brockbank is a leading Lloyd's managing agency which manages five Lloyd's syndicates, two of which are dedicated corporate syndicates ("corporate syndicates") whose capital is provided solely by the Company and its subsidiaries. Mid Ocean acquired 51% of Brockbank in December 1995 and the remaining 49% in August 1997. The two corporate syndicates, which commenced operations with effect from January 1, 1996, underwrite property, marine and energy, aviation, satellite, professional indemnity, U.K. motor and other specialty lines of insurance and reinsurance to a global client base. In 1998, the aggregate premium limit of the two corporate syndicates was approximately $340 million, and the total capacity under management by Brockbank was approximately $900 million. As a managing agency, Brockbank receives fees and commissions in respect of the underwriting services it provides to syndicates. 39 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In October 1998, the Company sold its 21% interest in Venton Holdings Limited, a Bermuda holding company for the Venton managing agency group at Lloyd's (together, the "Venton Group"). Prior to the sale, subsidiaries of the Company provided reinsurance coverage to the Venton Group, which writes principally professional indemnity, directors' and officers' liability and fiduciary liability insurance coverages. The Company participates in several joint ventures of strategic importance. In general, the Company has pursued a strategy of entering into joint ventures with organizations which possess expertise in lines of business that the Company wishes to enter. The Company's principal joint ventures are in the areas of financial guaranty insurance, life insurance for high net worth individuals, Latin American reinsurance, political risk insurance and currency overlay and related risk management. In November 1998, the Company entered into a joint venture with Financial Security Assurance Holdings Ltd., a New York corporation ("FSA"), to write certain types of financial guaranty insurance and reinsurance. FSA, through its subsidiaries, is primarily engaged in the business of providing financial guaranty insurance on asset-backed and municipal obligations. Under the terms of the joint venture, each of the Company and FSA formed a Bermuda insurance company in which it was the majority shareholder and made a minority investment in the company formed by its co-venturer. The Company formed and maintains majority ownership of XL Financial Assurance Ltd. ("XLFA"). FSA formed and maintains a majority ownership of Financial Security Assurance International Ltd. ("FSAI"). Each of XLFA and FSAI has a capitalization of approximately $100 million. As part of the joint venture, the Company and FSA exchanged approximately $80 million of each other's stock, following which the Company owned approximately 6% of the issued and outstanding common stock of FSA. In June 1998, the Company formed Reeve Court Insurance Ltd., an insurance company organized under the laws of Bermuda, as a joint venture with such company's management for the purpose of providing life insurance to high net worth individuals. Reeve Court has a total capitalization of approximately $100 million. In October 1997, the Company and Risk Capital Holdings, Inc., a Delaware corporation ("RCHI") which holds all of the outstanding shares of Risk Capital Reinsurance Company, a Nebraska corporation ("RCRe"), organized LARC Holdings, Ltd., a Bermuda corporation ("LARC") which holds all of the shares of Latin American Reinsurance Company, Ltd., a Bermuda insurance company ("LARe"). LARe has approximately $100 million in shareholders' equity and provides multi-line reinsurance to the Latin American reinsurance market, concentrating on short- tail, multi-peril property reinsurance and, to a lesser extent, casualty, marine, aviation and other lines of reinsurance on both a treaty and facultative basis. XLMORe owns approximately 75% of the outstanding shares of LARC. The Company indirectly owns approximately 28% of RCHI. In March 1997, XLI became a founding shareholder along with RCHI and another insurance company of Sovereign Risk Insurance Ltd. ("Sovereign"), a Bermuda- based managing general agency formed to write selected political risk insurance coverages. The Company owns 40.5% of Sovereign. In 1996, the Company acquired approximately 28% of Pareto Partners ("Pareto"), a firm which specializes in foreign currency overlay management and related services. At December 31, 1998, Pareto had approximately $26 billion of assets under management. The Company works closely with Pareto to develop new products and ventures, including the F/XL foreign currency protection product offered by XLI. 2. Operations (a) Insurance The Company, through its subsidiaries XLI, XLE, XLIA and XLRS, is a leading insurer and provides third party general liability insurance, directors and officers liability insurance, professional liability insurance, employment practices liability insurance and other liability insurance including, property insurance, and other 40 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) insurance covers, including political risk insurance and financial products. The liability insurance is written on an excess basis and the loss experience is characterized as low frequency and high severity. Property is written on a pro rata as well as an excess basis. Policies written on a pro rata basis can attach at much lower levels. As a result, loss experience can be higher frequency and lower severity. The insurance subsidiaries have a quota share reinsurance policy with several U.S. reinsurers, of which one is RCRe, covering general liability risks only. Under the terms of this reinsurance, the Company will cede either 20% or 25% of each risk depending upon the underlying limit written. The maximum amount recoverable from the reinsurers will be the ceded percentage of the original policy limit on a per occurrence basis, with an annual aggregate of 225% of the total premium ceded. No single reinsurer participates in excess of 20% of the quota share. All the reinsurers are rated, of which the lowest as rated by S&P is BBB. Effective September 1, 1997, the insurance subsidiaries entered into an excess of loss casualty catastrophe reinsurance contract covering all general liability risks. Under the terms of this policy, the Company is reinsured for $80 million ultimate net loss each occurrence excess of a per occurrence retention, subject to an annual aggregate retention of $110 million. The maximum amount recoverable from the reinsurers will be an annual aggregate of $250 million. For the year ended November 30, 1998, 97.75% of this reinsurance has been placed with twenty three reinsurers, all of which are rated. With the exception of two reinsurers, the lowest as rated by S&P is A-. The other two reinsurers are rated BBB and BB by S&P, representing 3.5% participation on this program. Employment practices liability coverage is reinsured on a quota share basis one third of the first $75 million to a U.S. insurer and cedes the remaining excess layer of $25 million to a Bermuda based insurer. Both reinsurers are rated, of which the lowest as rated by A.M. Best is A. The Company cedes 25% of all property risks to a quota share reinsurance treaty purchased from several property reinsurers. GCR and MORe were both participants of this program. All property reinsurers are rated, of which the lowest as rated by S& P is A-. XL Risk Solutions and CIGNA Risk Solutions are a coordinated initiative between XLI and CIGNA Property & Casualty ("CIGNA"). The product provides combined capacity for traditional casualty and property coverages provided by XLI or CIGNA. Available capacity by line of coverage is $60 million to $200 million depending upon the lines selected. Attachment levels may, in certain situations, be provided below traditional stated levels subject to the underwriting requirements. A quota share arrangement exists between XLI and CIGNA based on pre agreed percentages by line of coverage for blended covers written through XL Risk Solutions. These percentages vary from 12.5% to 90%, but do not exceed XLI's normal capacity on individual lines of cover. XLI may underwrite an account 100% without CIGNA participation. Sovereign issues subscription policies with XLI and the other insurance company each assuming 50% of each policy written. The Company reinsures 10% of all risks assumed through Sovereign to RCRe. XLI also offers insurance and reinsurance solutions for complex financial risks. These include financial insurance and reinsurance, credit enhancement, swaps and other collateralized transactions for up to $100 million in limits. While each of these are unique and are tailored for the specific needs of the insured, they are typically multi-year policies. Due to the nature of these types of policies, premium volume as well as profit margin can vary significantly from period to period. The Company has no formal reinsurance coverage for these risks, but may cede a portion of some policies to third parties from time to time. 41 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (b) Reinsurance The Company, through XLMORe, is a leading reinsurer writing property catastrophe, property excess of loss, property pro rata, marine and energy, aviation and satellite and various other reinsurance to insurers on a worldwide basis. XLMORe maintains branch offices in London and Singapore as well as a European contact office in Munich, Germany. The London branch underwrites marine and energy and aviation risks on a worldwide basis. The Singapore branch underwrites general reinsurance, treaty and facultative business. A significant portion of XLMORe's business underwritten consists of large aggregate exposures to man-made and natural disasters and generally loss experience is characterized as low frequency and high severity. This may result in volatility in the Company's financial results. 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. In August 1998, XLMORe placed $200 million of retrocessional property catastrophe cover in a combination reinsurance and capital market swap transaction. The transaction was offered in two tranches and covered the upper layers, with a remote probability of attachment, of XLMORe's hurricane and earthquake exposure in the United States and its territories and possessions in the Caribbean. The risk securitization structure provides retrocessional cover in financial swap form, with claim recovery triggered by catastrophe losses actually incurred by XLMORe, rather than by a catastrophe index or industry size event. LARe provides multi-line reinsurance to the Latin American market, emphasizing short-tail, multi-peril property reinsurance and, to a limited extent, casualty, marine, aviation and other lines of reinsurance. (c) Lloyd's The Company's wholly owned subsidiary, Brockbank, is a leading Lloyd's managing agency which manages five syndicates, two of which are dedicated corporate syndicates whose capital is solely provided by the Company. These corporate syndicates write property, marine and energy, aviation and satellite, motor, professional indemnity and other specialty lines, primarily of insurance but also reinsurance. 3. Significant Accounting Policies (a) Basis of Preparation These consolidated financial statements include the accounts of the Company and all of its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America. All material intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The comparative consolidated financial statements are those of EXEL, the Company's predecessor, as previously discussed in note 1. Certain amounts in the financial statements for prior years have been reclassified to conform with the 1998 presentation. All share amounts have been adjusted for the one-for-one stock dividend paid to shareholders of record July 26, 1996. Premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums assumed are estimated based upon information received from ceding companies and any subsequent 42 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) differences arising on such estimates are recorded in the period they are determined. Premiums are earned on a monthly pro-rata basis over the period the coverage is provided. Unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of policies in force. Premiums written under the multi-year alternate rating methodology may be subject to a mandatory reinstatement premium in the event of a loss. An asset is accrued to reflect the obligation of the insured's reinstatement premium and the premium is earned in accordance with the "with or without" method; that is, the pricing of the premium is evaluated in terms of a no loss situation and the resultant premium is earned over the remaining term of the policy. The balance of the reinstatement premium is earned to the extent of the loss reaching the full policy limit; that is, in the event of a full limit loss the balance of the reinstatement premium together with any unearned premium of the underlying cover would be fully earned. Premiums written and unearned premiums are presented after deductions for reinsurance ceded to other insurance companies. Acquisition costs which vary with and are primarily related to the acquisition of policies, primarily commissions paid to insurance brokers, are deferred and amortized over the period the premiums are earned. Future earned premiums and the anticipated losses and other costs related to those premiums are also considered in determining the level of acquisition costs to be deferred. (c) Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance premiums ceded and the commissions recorded thereon are expensed and earned on a monthly pro-rata basis over the period the reinsurance coverage is provided. For those reinsurance policies that provide coverage to the Company over the term of the underlying business, the premiums ceded and commissions recorded thereon are expensed and earned on a monthly pro-rata basis over the estimated term of those policies. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. (d) Investments Investments are available for sale and are carried at fair value. The fair value of investments is based upon quoted market values where available or by reference to broker or underwriter bid indications. The net unrealized appreciation or depreciation on investments is included as a separate component of shareholders' equity. Short-term investments comprise investments with a maturity equal to or greater than 90 days but less than one year. All investment transactions are recorded on a trade date basis. Realized gains and losses on sales of investments are determined on the basis of average cost or amortized cost. Investment income is recognized when earned and includes interest and dividend income together with the amortization of premium and discount on fixed maturities and short-term investments. Financial futures and forward currency contracts are marked to market, with the corresponding realized or unrealized gain or loss included in income, except in the instance of forward foreign currency contracts that are used to hedge currency risks on specific investments. Gains and losses from these contracts are deferred and included in shareholders' equity until the corresponding asset is sold. (e) Foreign Currency Translation The functional and reporting currency of the Company and its subsidiaries is U.S. dollars. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet 43 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) date with the resulting foreign exchange gains and losses recognized in income, unless the foreign currency exposure is directly hedged as discussed in note 3 (d). Revenue and expense transactions are translated at the average exchange rates prevailing during the year. (f) Investments in Affiliates The Company accounts for its investments in affiliates on the equity basis. (g) Other Investments The Company accounts for its other investments on a cost basis as it has no significant influence over these entities. Assets are written down to their realizable value where there is a permanent decrease in value. Income is recorded when received. (h) Amortization of Intangible Assets Intangible assets recorded in connection with the Company's business combinations are amortized on a straight-line basis over the expected life of the related operations acquired. The Company evaluates the recoverability of its intangible assets whenever changes in circumstances warrant. If it is determine that an impairment exists, the excess of the unamortized balance over the fair value of the intangible asset will be charged to earnings. (i) Losses and Loss Expenses Unpaid losses and loss expenses includes reserves for unpaid reported losses and loss expenses and for losses incurred but not reported. The reserve for unpaid reported losses and loss expenses has been established by management in consultation with independent legal counsel and ceding companies, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. The Company recognizes as a component of loss reserves, the loss experience accounts of insurers for policies written under the applicable multi-year alternate rating methodology. Such experience accounts are a percentage of premiums net of related losses paid. Interest is earned on liable amounts and charged to investment income. In the event the insured cancels the policy, the return of the experience account is treated as a commutation if previously notified of a loss, or as a return premium if there has been no loss notification. The reserve for losses incurred but not reported has been estimated by management in consultation with independent actuaries and is based on loss development patterns determined by reference to the Company's underwriting practices, the policy form and the experience of the relevant insurance industries. Management believes that the reserves for unpaid losses and loss expenses are sufficient to pay any claims that may penetrate the minimum attachment point. However, there can be no assurance that losses will not exceed the Company's total reserves. The methodology of estimating the reserve is periodically reviewed to ensure that the assumptions made continue to be appropriate and any adjustments resulting therefrom are reflected in income of the year in which the adjustments are made. (j) Statements of Cash Flows For purposes of the statements of cash flows, cash equivalents include fixed interest deposits placed with a maturity of under 90 days when purchased. 44 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (k) Earnings per Ordinary Share and Ordinary Share Equivalent The Company has adopted Statement of Financial Accounting Standards ("SAFS") No. 128, "Earnings per Share". SFAS No. 128 replaced primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average number of ordinary shares outstanding for each period. Diluted earnings per share reflects the potential dilution that could occur if the securities to issue ordinary shares were exercised into ordinary shares. Prior years earnings per share amounts have been restated to reflect this. 4. Investments Net investment income is derived from the following sources (U.S. dollars in thousands):
Year ended November 30, -------------------------- 1998 1997 1996 -------- -------- -------- Fixed maturities, short-term investments and cash and cash equivalents............................... $285,797 $220,859 $200,711 Equity securities................................... 13,248 14,516 11,752 -------- -------- -------- Total investment income........................... 299,045 235,375 212,463 Investment expenses............................... 19,670 18,823 13,865 -------- -------- -------- Net investment income............................. $279,375 $216,552 $198,598 ======== ======== ========
The following represents an analysis of realized and the change in unrealized appreciation (depreciation) on investments (U.S. dollars in thousands):
Year ended November 30, ------------------------------- 1998 1997 1996 --------- --------- --------- Net realized gains (losses): Fixed maturities and short-term investments: Gross realized gains........................ $ 420,918 $ 177,331 $ 103,830 Gross realized losses....................... (379,974) (168,048) (53,463) --------- --------- --------- Net realized gains........................ 40,944 9,283 50,367 Equity securities: Gross realized gains........................ 605,525 370,949 288,272 Gross realized losses....................... (468,811) (44,293) (132,427) --------- --------- --------- Net realized gains........................ 136,714 326,656 155,845 Net realized gain on sale of investment in affiliate.................................. 14,137 -- -- --------- --------- --------- Net realized gains on investments......... 191,795 335,939 206,212 --------- --------- --------- Change in unrealized appreciation (depreciation): Fixed maturities and short-term investments. (38,762) 19,391 (58,654) Equity securities........................... 24,127 (108,961) 31,616 Deferred gains on forward contracts......... (12,295) 7,049 418 Investment portfolio of affiliates.......... (1,561) 14,535 (239) --------- --------- --------- Net change in unrealized appreciation (depreciation) on investments................ (28,491) (67,986) (26,859) --------- --------- --------- Total net realized and change in unrealized appreciation (depreciation) on investments.............................. $ 163,304 $ 267,953 $ 179,353 ========= ========= =========
45 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The cost (amortized cost for fixed maturities and short-term investments), market value and related unrealized gains (losses) of investments are as follows (U.S. dollars in thousands):
Cost or Gross Gross Amortized Unrealized Unrealized Market November 30, 1998 Cost Gains Losses Value - - ----------------- ---------- ---------- ---------- ---------- Fixed maturities: U.S. Government and Government agency.......................... $1,564,084 $ 18,592 $ (1,823) $1,580,853 Corporate bonds.................. 3,231,757 65,620 (68,023) 3,229,354 Non-U.S. Sovereign Government bonds........................... 401,405 16,721 (15,752) 402,374 ---------- -------- -------- ---------- Total fixed maturities......... $5,197,246 $100,933 $(85,598) $5,212,581 ========== ======== ======== ========== Short-term investments: U.S. Government and Government agency.......................... $ 38,187 $ 224 $ -- $ 38,411 Corporate bonds.................. 66,329 62 (313) 66,078 Non-U.S. Sovereign Government bonds........................... 16,661 255 (191) 16,725 ---------- -------- -------- ---------- Total short-term investments... $ 121,177 $ 541 $ (504) $ 121,214 ========== ======== ======== ========== Total equity securities............ $ 995,873 $208,390 $ 75,662 $1,128,601 ========== ======== ======== ========== November 30, 1997 - - ----------------- Fixed maturities: U.S. Government and Government agency.......................... $1,055,581 $ 7,318 $ (612) $1,062,287 Corporate bonds.................. 1,545,473 52,504 (8,095) 1,589,882 Non-U.S. Sovereign Government bonds........................... 543,588 12,112 (10,997) 544,703 ---------- -------- -------- ---------- Total fixed maturities......... $3,144,642 $ 71,934 $(19,704) $3,196,872 ========== ======== ======== ========== Short-term investments: U.S. Government and Government agency.......................... $ 9,941 $ 4 $ -- $ 9,945 Corporate bonds.................. 197,770 209 (56) 197,923 Non-U.S. Sovereign Government bonds........................... 12,427 -- (326) 12,101 ---------- -------- -------- ---------- Total short-term investments... $ 220,138 $ 213 $ (382) $ 219,969 ========== ======== ======== ========== Total equity securities........ $ 729,888 $154,177 $(46,238) $ 837,827 ========== ======== ======== ==========
The contractual maturities of fixed maturity securities as of November 30, 1998 and 1997 are shown below (U.S. dollars in thousands). Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
November 30, 1998 November 30, 1997 --------------------- --------------------- Amortized Market Amortized Market Cost Value Cost Value ---------- ---------- ---------- ---------- Due after 1 through 5 years......... $2,006,607 $2,005,998 $ 966,598 $ 967,571 Due after 5 through 10 years........ 1,104,581 1,111,435 785,625 799,996 Due after 10 through 15 years....... 331,643 344,149 237,296 236,691 Due after 15 years.................. 948,102 936,709 776,202 808,729 Mortgage-backed investments......... 806,313 814,290 378,921 383,885 ---------- ---------- ---------- ---------- $5,197,246 $5,212,581 $3,144,642 $3,196,872 ========== ========== ========== ==========
46 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Investment in Affiliates The Company owned 27.9% of the issued shares of RCHI as at November 30, 1998 and 1997, respectively. Outstanding share warrants if exercised would dilute the Company's ownership to 22.1% as at November 30, 1998. RCHI commenced operations on November 6, 1995. The Company owns 28% of Pareto Partners, a partnership engaged in the business of providing investment advisory and discretionary management services. On November 3, 1998, XL and FSA formed Financial Security Assurance International Ltd. ("FSAI") under the laws of Bermuda. FSAI was capitalized with $100 million, of which FSA and XL contributed 80% and 20% respectively. FSAI will focus on financial guaranty insurance and reinsurance opportunities. As of November 30, 1998, no contracts were written. The Company owned 29.1% of the issued voting shares and 24.8% of the total issued shares of Mid Ocean as at November 30, 1997. The Company accounted for its share of Mid Ocean's earnings to July 31, 1998 on an equity basis. Subsequent to this date, Mid Ocean was acquired by the Company (as previously discussed in note1) and has been consolidated as a wholly owned subsidiary of XL. In June 1997, XL acquired 21% of Venton from the Trident Partnership L.P., of which XL is a 10.7% limited partner. Venton manages three syndicates at Lloyd's of London which underwrite non-marine, marine and all main classes of business, respectively. On October 23, 1998, XL sold its investment in Venton to an unrelated third party for $ 41.4 million cash, realizing a net gain of $14.1 million. 6. Intangible Assets Intangible assets comprises of goodwill arising primarily from the purchase of Mid Ocean. The purchase price amounted to $ 2.2 billion of which $900 million represented the fair value of its net assets not already owned by the Company with the balance of $1.3 billion representing goodwill which is being amortized over 40 years. The balance of the goodwill mostly relates to the GCR acquisition. This component of goodwill is being amortized over 20 years. 7. Losses and Loss Expenses Unpaid losses and loss expenses comprise (U.S. dollars in thousands):
Year ended November 30, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Reserve for reported losses and loss expenses.................................. $1,368,129 $ 862,999 $ 803,893 Reserve for losses incurred but not reported.................................. 1,753,610 1,479,255 1,295,203 ---------- ---------- ---------- Unpaid losses and loss expenses............ $3,121,739 $2,342,254 $2,099,096 ========== ========== ========== Losses and loss expenses incurred comprise (U.S. dollars in thousands): Loss and loss expense payments............. $ 366,475 $ 267,226 $ 302,642 Change in unpaid losses and loss expenses.. 182,426 206,220 158,670 Reinsurance recoveries..................... (158,418) (108,121) (55,955) ---------- ---------- ---------- Losses and loss expenses incurred.......... $ 390,483 $ 365,325 $ 405,357 ========== ========== ==========
47 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reconciliation of unpaid losses and loss expenses (U.S. dollars in thousands):
Year ended November 30, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Unpaid losses and loss expenses at beginning of period.................................. $2,342,254 $2,099,096 $1,920,500 Losses and loss expenses incurred in respect of losses occurring in: Current year.............................. 713,059 735,313 436,334 Prior years............................... (164,158) (260,407) 14,465 ---------- ---------- ---------- Total (Net of reinsurance 1998: $390,483--1997: $365,325--1996: $405,357............................... 548,901 474,906 450,799 ---------- ---------- ---------- Interest incurred on experience reserves.. 1,798 886 1,752 Loss reserves acquired.................... 595,261 34,593 28,687 Losses and loss expenses paid in respect of losses occurring in: Current Year.............................. 167,409 34,055 3,177 Prior years............................... 199,066 233,172 299,465 ---------- ---------- ---------- Total....................................... 366,475 267,227 302,642 ---------- ---------- ---------- Unpaid losses and loss expenses at end of period..................................... $3,121,739 $2,342,254 $2,099,096 ========== ========== ==========
The 1998 current year losses reflects the inclusion of the operations of Mid Ocean acquired on August 7, 1998. The results include four months of XLMORe and three months of Brockbank. These operations incurred $169 million in gross losses for the reported period. These losses were largely attributable to Hurricane Georges and the SwissAir airline disaster. In addition, losses for Brockbank attach at the primary layers and therefore are more frequent in nature. These losses are also significantly reinsured. Prior year incurred losses in 1998 were effected in part, by the release of insurance reserves established for the Company's professional lines. These reserves were reduced in accordance with actuarial estimates. In addition, reserves were released on specialty cover policies for the years 1995 through 1997 due to the absence of losses that would affect the Company's layers. These policies were for a three-year period, written on a claims-made basis and expired in 1998. The high level of the 1997 current year incurred losses was due to the fact that three new 1997 casualty indemnity reserves totaling $145 million were established. Historically, such losses have not emerged this quickly. Should actual loss activity prove to be different, these reserves will be adjusted accordingly. The 1997 losses were offset by the release of $260 million in reserves that related to prior years in accordance with actuarial estimates. 8. Commitments and Contingencies (a) Letters of Credit In February 1998, subsidiaries of the Company established a $500 million letter of credit facility with a syndicate of commercial banks led by Mellon Bank N.A. Letters of credit issued under this facility are collateralized by pledged securities in XLI's fixed maturity investment portfolio. Letters of credit totalling approximately $80.6 million and $155.8 million were outstanding as at November 30, 1998 and 1997, respectively. Mid Ocean had a $325 million letter of credit facility with Citibank N.A., London Branch. Letters of credit issued under this facility are collateralized by pledged securities in Mid Ocean's investment portfolio. This 48 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) facility remains in place following the merger with Mid Ocean. Letters of credit totaling approximately $223.0 million were outstanding as at November 30, 1998. This amount includes $169.5 million in respect of the Lloyd's corporate syndicates which has been issued in lieu of paid in capital. (b) Financial Instruments with Off-Balance Sheet Risk The Company invests in derivative instruments, such as foreign currency forward contracts, and futures for purposes other than trading. These derivative instruments are used for foreign currency exposure management and to obtain exposure to specific financial markets. (i) Foreign Currency Exposure Management The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of its non-U.S. dollar fixed maturities and its non-U.S. dollar equity investments on an overlay basis. The fair value of the Company's non-U.S. dollar denominated investments as at November 30, 1998 and 1997 was $535.3 million and $566.1 million, respectively. These contracts are not designated as specific hedges for financial reporting purposes and, therefore, realized and unrealized gains and losses recognized on them are recorded as a component of net realized gains and losses in the period in which they occur. These contracts generally have maturities of three months or less. In addition, where the Company's investment managers are of the opinion that potential gains exist in a particular currency, then a forward contract will not be entered into. At November 30, 1998, forward foreign exchange contracts with notional principal amounts totalling $322.3 million were outstanding. The fair value of these contracts as at November 30, 1998, was $308.4 million with unrealized losses of $13.9 million. Gains of $3.8 million were realized during the year. In addition, the Company also enters into foreign exchange contracts to buy and sell foreign currencies in the course of trading its non-U.S. dollar investments. These contracts are not designated as specific hedges for financial reporting purposes, and generally have maturities of two weeks or less. As such, any realized or unrealized gains or losses are recorded in income in the period in which they occur. At November 30, 1998, the Company had a $2.4 million of such contracts outstanding, and had recognized a total of $0.4 million in realized and unrealized losses for the year. The Company attempts to hedge directly the foreign currency exposure of a portion of its non-U.S. dollar fixed maturity investments using forward foreign exchange contracts that generally have maturities of three months or less, and which are rolled over to provide continuing coverage for as long as the investments are held. Where an investment is sold, the related foreign exchange sale contract is closed by entering into an offsetting purchase contract. At November 30, 1998, the Company had, as hedges, foreign contracts for the sale of $17.5. million and the purchase of $0.1 million of foreign currencies at fixed rates, primarily New Zealand dollars (73% of net contract value), Danish Kroner (14%) and Swedish Kroner (13%). The market value of non-U.S. dollar fixed maturities held by the Company as at November 30, 1998 was $19.0 million. Unrealized foreign exchange gains or losses on foreign exchange contracts hedging non-U.S. Dollar fixed maturity investments are deferred and included in shareholders' equity. As at November 30, 1998, unrealized deferred gains amounted to $0.1 million, and were offset by corresponding decreases in the U.S. dollar value of the investments. Realized gains and losses on the maturity of these contracts are also deferred and included in shareholders' equity until the corresponding investment is sold. As at November 30, 1998, realized deferred losses amounted to $2.0 million. The Company is exposed to credit risk in the event of non-performance by the other parties to the forward contracts, however the Company does not anticipate non-performance. The difference between the notional principal amounts and the associated market value is the Company's maximum credit exposure. 49 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (ii) Financial Market Exposure The Company also invests in a synthetic equity portfolio of S&P Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at November 30, 1998, the portfolio held $138.3 million in exposure to S&P 500 Index futures together with fixed maturities, short-term investments and cash amounting to $ 139.5 million. The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the year ended November 30, 1998, net realized gains from index futures totaled $25.8 million. Derivative investments are also utilized to add value to the portfolio where market inefficiencies are believed to exist. At November 30, 1998, bond and stock index futures outstanding were $333.4 million, with underlying investments having a market value of $ 2.1 billion. All managers are prohibited by the Company's investment guidelines from leveraging their positions. (c) Concentrations of Credit Risk The Company's investment portfolio is managed by external managers in accordance with guidelines that have been tailored to meet specific investment strategies, including standards of diversification which limit the allowable holdings of any single issue. The Company did not have an aggregate investment in a single entity, other than the U.S. government, in excess of 10% of shareholders' equity at November 30, 1998. (d) Other Investments The Company has committed to invest in several limited partnerships as part of its overall corporate strategy. The primary purpose of these partnerships is to invest capital provided by the partners in various insurance and reinsurance ventures. The Company had invested $33.3 million and $27.2 million as at November 30, 1998 and 1997, respectively, with commitments to invest a further $138.7 million over the next ten years. The Company received income from its investments of $3.6 million and $4.3 million for the years ended November 30, 1998 and 1997, respectively. The Company continually reviews the performance of the partnerships to ensure there is no decrease in the values of its investments. The Company is a limited partner and, as such, does not actively participate in the management of the partnerships. (e) Properties The Company rents space for its principal executive offices under leases which expire up to June, 2009. Total rent expense for the years ended November 30, 1998, 1997 and 1996 were approximately $3.7 million, $2.1 million and $1.8 million, respectively. Future minimum rental commitments under existing leases are expected to be approximately $4.0 million annually. In 1997 the Company acquired commercial real estate in Hamilton, Bermuda for the purpose of securing long-term office space to meet its anticipated needs. The Company is in the process of developing this property and constructing its worldwide headquarters. The total cost of the development, including the land, is expected to be approximately $110.0 million, of which $23.7 million has been spent to date. It is estimated that the development will be completed sometime in 2001. Upon completion of the headquarters project, it is expected that the Company's rental commitments will be reduced. 9. Credit Agreements In 1997, subsidiaries of the Company obtained two unsecured revolving lines of credit of $250 million each, one for 364 days (short-term) and the other for 5 years (long-term), from a syndicate of nine major international banks led by Mellon Bank, N.A. During the year, a total of $505.0 million was borrowed at a weighted average rate of 5.667%. Total interest expense and facility costs amounted to $9.5 million and $7.18 million for the years ended November 30, 1998 and 1997, respectively. As at November 30, 1998, the outstanding balance was $190.0 million drawn under the long-term facility and is repayable within the next twelve months. 50 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On June 27, 1996, the Company borrowed $11.0 million from the Bank of Bermuda (New York) Limited in order to fund its investment in Pareto Partners, Inc., an investment management company. The loan is repayable in four years. During the year the weighted average interest rate charged on the loan was 6.02%. Total interest expense amounted to $0.7 million and $0.7 million for the years ended November 30, 1998 and 1997 respectively. Mid Ocean had obtained multi-currency committed lines of credit provided by a syndicate of nine major international banks led by Chase Manhattan Bank, N.A. which provides for unsecured borrowing up to an aggregate amount of $200 million subject to certain conditions. The Mid Ocean facility is split evenly between a 364-day and a 5-year facility. These facilities remained in place following the merger with Mid Ocean. In August 1998, $50 million was borrowed from this facility and lent to XL in connection with the merger with Mid Ocean. This was repaid in November 1998. During this period the weighted average interest rate charged on the loan was 5.760% and the total interest expense amounted to $0.7 million. In 1998, XLA obtained an unsecured revolving line of credit of $100 million for 364 days from Mellon Bank, N.A. During the year the full amount of this facility was borrowed at a weighted average rate of 5.898%. Total interest expense and facility costs amounted to $1.3 million for the year ended November 30, 1998. As at November 30, 1998, the outstanding balance was $100.0 million and is repayable within the next twelve months. This line of credit was replaced in December 1998 with a $150 million commercial paper funding facility provided by the same bank. XLI guarantees the indebtedness of XLA under this facility. The credit agreements for all facilities contains various financial and non- financial covenants. The Company and its subsidiaries were in compliance with all covenants as at November 30, 1998. 10. Share Capital (a) Authorized and Issued The authorized share capital is 999,990,000 ordinary shares, par value $0.01 per share, divided into Class A and Class B ordinary shares. Holders of Class A shares are entitled to one vote for each share held while Class B shares are not entitled to vote. In all other respects, Class A and B shares rank pari passu. The following table is a summary of shares issued and outstanding (in thousands):
Year ended November 30, ----------------------------- 1998 1997 1996 --------- -------- -------- Balance--beginning of year....................... 84,407.6 87,170.6 94,550.8 Exercise of options.............................. 307.2 342.5 600.9 Issuance of restricted shares.................... 140.2 284.2 224.0 Repurchase of shares............................. (3,243.2) (3,389.7) (8,205.1) Issuance of Class A shares....................... 27,076.3 -- -- Issuance of Class B shares....................... 3,115.9 -- -- --------- -------- -------- Balance--end of year............................. 111,804.0 84,407.6 87,170.6 ========= ======== ========
The issuances of Class A shares were in exchange for Mid Ocean shares (26.0 million shares) and FSA shares (1.1 million shares). The issuance of Class B shares was in exchange for the Mid Ocean Class B and Class C shares. (b) Share Repurchases The Board of Directors has authorized the repurchase of the Company's ordinary shares through several buy back programs. During 1998 the Company repurchased 3.2 million shares at an aggregate cost of $255.2 51 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) million. On March 13, 1998, the Board of Directors discontinued its existing share repurchase program and authorized a program for $500 million of the Company's ordinary shares. In August 1998, $300 million of share repurchases related to the merger with Mid Ocean. In addition, the Company had purchased a further 732,000 shares at a cost of $51.2 million during the year. (c) Stock Plans The Company's executive stock plan, the "1991 Performance Incentive Program", provides for grants of non qualified or incentive stock options, restricted stock awards and stock appreciation rights ("SARs"). The plan is administered by the Company and Compensation Committee of the Board of Directors. Stock options may be granted with or without SARs. Grant prices are established at the fair market value of the Company's common stock at the date of grant. Options and SARs have a life of 10 years and vest annually over three years from date of grant. Restricted stock awards issued under the plan vest over a five year period from the date of grant. These shares contained certain restrictions, for said period, relating to among other things, forfeiture in the event of termination of employment and transferability. As the shares are issued, deferred compensation equivalent to the difference between the issue price and the estimated fair market value on the date of the grant is charged to shareholders' equity and subsequently amortized over the five-year restriction period. Restricted stock issued under the plan totaled 131,936 shares, 274,300 shares and 120,500 shares in 1998, 1997 and 1996, respectively. The Company also has stock plans in place for its non-employee directors. The "Stock and Option Plan", issues non-qualified options to the directors-- 4,000 shares at the commencement of their directorship and 2,000 shares each year thereafter. On December 3, 1997, 5,000 options were granted to each director. All options vest immediately on grant date. Effective April 11, 1997, all options granted to Non-Employee Directors are granted under the 1991 Performance Incentive Program. Under this plan, directors may also may make an irrevocable election preceding the beginning of each fiscal year to defer cash compensation that would otherwise be payable as his or her annual retainer in increments of $5,000. The deferred payments are credited in the form of share units calculated by dividing 110% of the deferred payment by the market value of the Company's stock at the beginning of the fiscal year. Directors also may elect to receive their annual retainer in the form of shares with a value equal to the amount of their annual fee. Shares issued under the plan totaled 2,737, 3,048 and 4,048 in 1998, 1997 and 1996, respectively. A second stock plan, intended to replace the directors' "Retirement Plan for Non-Employee Directors", provides for the issuance of share units equal to the amount that would have been credited to the Retirement Plan, divided by the market price of the Company's stock on December 1 of each year. These units receive dividends in the form of additional units equal to the cash value divided by the market price on the payment date. During 1996 the directors could elect to convert to this plan. Stock units totaling 5,531, 6,716 and 14,960 were provided for in 1998, 1997 and 1996 respectively. (d) SFAS 123 pro forma disclosure The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation". Had the Company adopted the accounting provisions of SFAS No. 123, compensation costs would have been determined based on the fair value of the stock option 52 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) awards granted in 1998, 1997 and 1996, and net income and earnings per share would have been reduced to the pro-forma amounts indicated below (U.S. dollars in thousands, except per share amounts):
Year Ended November 30, 1998 -------------------------- 1998 1997 1996 -------- -------- -------- Net income--as reported............................. $587,663 $676,961 $494,313 Net income--proforma................................ $569,516 $672,145 $492,722 Basic earnings per share--as reported............... $ 6.32 $ 7.95 $ 5.45 Basic earnings per share--proforma.................. $ 6.13 $ 7.90 $ 5.43 Diluted earnings per share--as reported............. $ 6.20 $ 7.84 $ 5.41 Diluted earnings per share--proforma................ $ 6.01 $ 7.78 $ 5.40
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1998 1997 1996 -------- -------- -------- Dividend yield.................................... 2.35% 2.64% 2.66% Risk free interest rate........................... 5.32% 5.37% 5.96% Expected volatility............................... 23.57% 18.49% 19.28% Expected lives.................................... 10 years 10 years 10 years
The fair value of options granted was $40.7 million, $9.9 million and $4.3 million for the years ended November 30, 1998, 1997 and 1996, respectively. Total stock based compensation recognized in net income was $4.4 million in 1998, $3.2 million in 1997 and $1.3 million in 1996. (e) Options Following is a summary of stock options and related activity:
1998 1997 1996 ------------------- ------------------- ------------------- Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding--beginning of year................ 2,772,697 $28.04 2,112,148 $21.69 2,228,582 $16.37 Granted................. 1,090,700 $66.53 1,006,990 $37.53 487,400 $31.60 Granted--Mid Ocean conversion............. 791,573 $72.44 -- -- -- -- Exercised............... (307,215) $29.78 (346,241) $18.07 (600,938) $ 9.21 Canceled................ (4,666) $36.92 (200) $18.75 (2,896) $19.39 --------- --------- --------- Outstanding--end of year................... 4,343,089 $45.67 2,772,697 $28.04 2,112,148 $21.69 Options exercisable..... 2,461,042 1,335,798 1,180,482 ========= ========= ========= Options available for grant.................. 2,707,180* 3,943,380* 2,775,670* ========= ========= =========
- - -------- *Available for grant includes shares which may be granted on either stock options or restricted stock. (f) Voting The Company's Articles of Association restrict the voting power of any person to less than 10% of total voting power. 53 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (g) Share Rights Plan Rights to purchase Class A Ordinary Shares were distributed as a dividend at the rate of one Right for each outstanding Class A Ordinary Share held of record as of the close of business on October 31, 1998. Each Right will entitle holders of XL Class A Ordinary Shares to buy one ordinary share at an exercise price of $350.00. The Rights would be exercisable, and would detach from the Class A Ordinary Shares, only if a person or group were to acquire 20 percent or more of XL's outstanding Class A Ordinary Shares, or were to announce a tender or exchange offer that, if consumated, would result in a person or group beneficially owning 20 percent or more of XL's Class A Ordinary Shares. Upon a person or group without prior approval of the Board acquiring 20 percent or more of XL's Class A Ordinary Shares, each Right would entitle the holder (other than such an acquiring person or group) to purchase XL Class A Ordinary Shares (or, in certain circumstances, Class A Ordinary Shares of the acquiring person) with a value of twice the Rights exercise price upon payment of the Rights exercise price. XL will be entitled to redeem the Rights at $0.01 per Right at any time until the close of business on the tenth day after the Rights become exercisable. The Rights will expire at the close of business on September 30, 2008, and do not initially have a fair value. The Company has initially reserved 119,073,878 Class A Ordinary Shares being authorized and unissued for issuance upon exercise of the Rights. 11. Contributed Surplus Under the laws of the Cayman Islands, the use of XL's contributed surplus is restricted to the issuance of fully paid shares (i.e., stock dividend or stock split) and the payment of any premium on the redemption of ordinary shares. 12. Premiums Premiums comprise (U.S. dollars in thousands):
Year ended November 30, ------------------------------- 1998 1997 1996 --------- --------- --------- Gross premiums written-- direct..................... $ 505,263 $ 418,372 $ 584,585 Gross premiums written-- assumed.................... 301,598 22,918 144,861 Reinsurance premiums ceded.. (134,817) (124,664) (132,344) --------- --------- --------- Net premiums written.... 672,044 316,626 597,102 Change in unearned and prepaid premiums........... 13,156 224,027 (79,210) --------- --------- --------- Net premiums earned..... $ 685,200 $ 540,653 $ 517,892 ========= ========= =========
13. Reinsurance The Company is liable with respect to reinsurance ceded to the extent that any reinsurance company fails to meet its obligation to the Company. The Company regularly monitors the financial condition of its reinsurers and believes there to be no material unrecoverable reinsurance. 14. Dividends In 1998, four regular quarterly dividends were paid, three of $0.40 per share to shareholders of record at February 6, April 16 and July 15, and one of $0.44 per share to shareholders of record at September 28. In 1997, four regular quarterly dividends were paid, three of $0.32 per share to shareholders of record at February 6, April 22 and July 11, and one of $0.40 per share to shareholders of record at September 25. In 1996, four regular quarterly dividends were paid, one of $0.20 per share to shareholders of record at February 2, and three of $0.25 per share to shareholders of record at April 15, July 12 and October 11. 54 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Taxation Under current Cayman Islands law, XL will not be obliged to pay any taxes in the Cayman Islands on its income or gains until May 2006 pursuant to the provisions of the Tax Concessions Law, as amended. Bermuda presently imposes no income, withholding or capital gains taxes, and XL and its Bermuda subsidiaries are exempted until March 2016 from any such future taxes pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and Amended Act 1987. X.L. Investments (Barbados), Inc. qualifies as an exempted company under the provisions of the International Business Companies Act 1991-24 and as such is subject to a maximum tax rate in Barbados of 2.50%. XLE has been approved to carry on business in the International Services Centre in Dublin. Under Section 39 of the Finance Act 1990, XLE is entitled to benefit from a 10% tax rate on profits (including investment income) until the year 2005. Brockbank and XLMORe's London branch office are subject to United Kingdom corporation taxes. Profits of XLMORe's Singapore branch office are subject to Singapore corporation taxes. The German subsidiary of XLMORe is subject to taxation in Germany. The Company's U.S. subsidiaries are subject to Federal, State and local corporate income taxes and other taxes applicable to U.S. corporations. The Company has no material deferred taxes. 16. Statutory Financial Data The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The Company relies primarily on cash dividends from XLI and XLMORe. The payment of such dividends is restricted by applicable law including Bermuda, the United States, the Republic of Ireland and United Kingdom insurance law and regulations, and those promulgated by the Society of Lloyd's. Bermuda Under The Insurance Act, 1978, (as amended by the Insurance Act Amendment 1995) amendments thereto and related regulations of Bermuda (the "Act"), XLI and XLMORe are required to prepare statutory financial statements and to file in Bermuda a statutory financial return. The Act also requires these companies to maintain certain measures of solvency and liquidity during the year. Other subsidiaries of the Company based in Bermuda, including XLFA, LARe and Reeve Court, are also subject to regulation under the Act. XLI's and XLMORe's statutory capital and surplus, statutory net income and the minimum statutory capital and surplus required by the Act were as follows (U.S. dollars in thousands):
Year ended November 30, --------------------------------------------------------- XLI XLMORe ---------------------------- ---------------------------- 1998 1997 1996 1998 1997 1996 ---------- -------- -------- ---------- -------- -------- Statutory net income.... $ 309,244 $189,281 $367,322 $ 108,290 $ 57,995 $ 21,398 ========== ======== ======== ========== ======== ======== Statutory capital and surplus................ $1,255,284 $882,366 $872,586 $1,966,200 $512,637 $271,398 ========== ======== ======== ========== ======== ======== Minimum statutory capital and surplus required by the Act.... $ 307,205 $310,240 $302,089 $ 100,000 $100,000 $100,000 ========== ======== ======== ========== ======== ========
55 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The primary difference between statutory net income and statutory capital and surplus for the Company's subsidiaries as shown above, and net income and shareholder's equity presented in accordance with generally accepted accounting principles are deferred acquisition costs. Under the Act, XLI and XLMORe are classified as a Class 4 insurer and reinsurer, respectively. Therefore they are restricted to the payment of dividends in any one financial year of 25% of the prior year's statutory capital and surplus, unless their directors attest that such dividends will not cause the company to fail to meet its relevant margins. XLI and XLMORe have not been affected by this. XLI could legally have paid dividends in the amount of approximately $1.8 billion, $1.5 billion and $1.1 billion at November 30, 1998, 1997 and 1996, respectively. XLMORe could legally have paid dividends in the amount of approximately $1.3 billion, $403.4 million and $169.5 million at November 30, 1998, 1997 and 1996, respectively. Republic of Ireland XLE is permitted to cover risks throughout the European Community (subject to certain restrictions) pursuant to the "Third Directive" relating to non- life insurances. Its operations, however, are largely restricted to the Republic of Ireland and are subject to regulation under Irish regulatory authority. The principal legislation and regulations governing the insurance activities of Irish insurance companies are the Companies Act of 1963 to 1990 and a range of Irish Insurance Acts from 1909 through 1995 (the "Irish Acts"). In addition, there is a comprehensive network of regulations and statutory provisions empowering the making of regulations of which the most relevant are the European Communities (Non-Life Insurance) Framework Regulations, 1994, the European Communities (Insurance Undertakings Accounts) Regulations, 1996 and a range of other European Communities Regulations and administrative rules (the "Irish Regulations"). XLE's insurance activities are subject to extensive regulation in the Republic of Ireland, principally under the Irish Acts and Irish Regulations, which impose on insurers headquartered in the Republic of Ireland minimum solvency and reserve standards and auditing and reporting requirements and grant to the Minister for Enterprise, Trade and Employment (the "Irish Minister") wide powers to supervise, investigate and intervene in the affairs of such insurers. The Irish Minister's powers and functions are exercised through the Department of Enterprise, Trade and Employment. United States The Company's U.S. insurance subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business. Brockbank, via Lloyd's, is a licensed insurer in the states of Illinois, Kentucky and the U.S. Virgin Islands ("USVI"). It is also an eligible surplus lines writer in all states other than Kentucky and USVI, and an accredited reinsurer in every state other than Michigan. Brockbank Insurance Services, Inc., is a California licensed surplus and special lines broker. The insurance laws of each state of the United States and of many foreign countries regulate the sale of insurance within their jurisdictions by alien insurers, such as XLI and XLMORe. The Company believes it is not in violation of the insurance laws of any state in the U.S. or any foreign country. From time to time, various proposals for federal legislation within the United States have been circulated which could require the Company to, among other things, register as a surplus lines insurer. The Company believes that generally it could meet and comply with the requirements to be registered as a surplus lines insurer and such compliance would not have a material impact on the ability of the Company to conduct its business. There can be no assurance, however, that the activities of the Company will not be challenged in the future or that the Company will be able to successfully defend against such challenges or that legislation will not be enacted that will affect the Company's ability to conduct its business. 56 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) United Kingdom The United Kingdom Financial Services Authority ("UK FSA") regulates reinsurance entities that are "effecting and carrying on" insurance business in the United Kingdom. XLMORe, through its London branch, "effects and carries on" business in the United Kingdom and is therefore regulated by the UK FSA. Lloyd's As a result of the Company's ownership of Brockbank, the Company and Brockbank are subject to the regulatory jurisdiction of the Council of Lloyd's (the "Council"). Unlike other financial markets in the UK, Lloyd's is not subject to direct UK government regulation through The Financial Services Act of 1986 but, instead, is self regulating by virtue of The Lloyd's Act of 1982 through bye-laws, regulations and codes of conduct written by the Council, which governs the market. Under the Council, there are two boards, the Market Board and the Regulatory Board. The former is led by working members of the Council and is responsible for strategy and the provision of services such as premium and claims handling, accounting and policy signing. The Regulatory Board is responsible for the regulation of the market, compliance and the protection of policyholders and capital providers. Under the regulations, the approval of the Council has to be obtained before any person can be a "major shareholder" or "controller" of a corporate Name or a managing agency. The Company has been approved as both a "major shareholder" and a "controller" of its corporate Names (the "CCVs") and managing agencies. A person would be viewed by Lloyd's as a "major shareholder" of the CCVs if such person owns 15% or more of the Company's outstanding capital stock and as a "controller" if it owns 30% or more of the Company's outstanding capital stock. Therefore, any person that becomes the owner of 15% or more of the Company's stock may be required to deliver a declaration and undertaking to Lloyd's, in the form prescribed by Lloyd's, unless Lloyd's exempts such person from this requirement. As a "controller", the Company is required to give certain undertakings, directed principally towards ensuring that there is no direct interference in the conduct of the business of the relevant managing agency, but there are no provisions in The Lloyd's Act of 1982, the bye-laws or the regulations which provide for any liabilities of the CCVs or the Brockbank group as a whole to be met by the Company. In addition, a managing agency is required to comply with various capital and solvency requirements, and to submit to regular monitoring and compliance procedures. The CCVs, as corporate members of Lloyd's, are each required to commit a specified amount approximately equal to 50% of their underwriting capacity on the syndicates to support its underwriting on those syndicates. The Lloyd's Act of 1982 generally restricts certain direct or indirect equity cross-ownership between a Lloyd's broker and a Lloyd's managing agent. Other Regulation The Company is subject to regulation in Australia, Singapore and Germany as a result of its representative offices and branches in such jurisdictions. 57 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. Unaudited Quarterly Financial Data The unaudited quarterly financial data for 1998 and 1997 follows (U.S. dollars in thousands, except per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- 1998 Net premiums earned.................... $139,882 $137,787 $155,514 $252,017 Net investment income.................. 57,528 60,452 70,983 90,412 Realized gains (losses)................ 62,951 74,541 (2,837) 57,140 Equity in net income (loss) of affiliates............................ 15,207 19,728 14,604 (1,559) Fee and other income................... -- 4,145 2,132 7,021 -------- -------- -------- -------- Total revenues......................... $275,568 $296,653 $240,396 $405,031 ======== ======== ======== ======== Income before income tax expense....... $157,191 $171,832 $ 86,621 $178,208 ======== ======== ======== ======== Net income............................. $155,410 $170,562 $ 85,830 $175,861 ======== ======== ======== ======== Net income per share and share equivalent--basic..................... $ 1.84 $ 2.02 $ 0.94 $ 1.58 ======== ======== ======== ======== Net income per share and share equivalent--diluted................... $ 1.81 $ 1.98 $ 0.91 $ 1.56 ======== ======== ======== ======== 1997 Net premiums earned.................... $119,857 $129,817 $138,034 $152,965 Net investment income.................. 51,557 54,160 56,109 54,726 Realized gains (losses)................ 32,613 126,313 116,400 60,613 Equity in net income of affiliates..... 13,155 15,739 16,219 20,769 -------- -------- -------- -------- Total revenues......................... $217,162 $326,029 $326,762 $289,073 ======== ======== ======== ======== Income before income tax expense....... $110,711 $211,580 $207,438 $152,055 ======== ======== ======== ======== Net income............................. $108,118 $211,580 $206,560 $150,703 ======== ======== ======== ======== Net income per share and share equivalent--basic..................... $ 1.24 $ 2.49 $ 2.45 $ 1.79 ======== ======== ======== ======== Net income per share and share equivalent--diluted................... $ 1.23 $ 2.46 $ 2.41 $ 1.75 ======== ======== ======== ========
18. Accounting Standards The Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 15, 1997. This statement established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographical areas and major customers. Under SFAS No. 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company has not yet assessed the affect of the adoption of this accounting standard on its consolidated financial statement disclosures. FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", effective for fiscal years beginning after December 15, 1997. This Statement revises employers' disclosures about pensions and other postretirement benefit plans. This standard is expected to have a minimal impact on the Company's consolidated financial disclosures. 58 XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) FASB also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The Company has not yet assessed the affect of the adoption of this accounting standard on its consolidated financial statement disclosures. SFAS No. 131 and No. 133 are not expected to have a significant impact on the Company's overall results but will affect the Company's financial statements and disclosures. 19. Unaudited Subsequent Events On December 2, 1998, the Company announced that it has signed a definitive agreement to acquire all of the outstanding shares of Intercargo Corporation ("Intercargo") for $12 per share, or approximately $88 million. Intercargo, through its subsidiaries, underwrites specialty insurance products for companies engaged in international trade, including U.S. customs bonds and marine cargo insurance. At September 30, 1998, Intercargo had total assets of $165 million and shareholders' equity of $81 million. The transaction is subject to approval by Intercargo's shareholders, regulatory approvals and other customary closing conditions. There can be no assurance that the transaction will be completed or that the terms of the transaction will not be modified prior to completion. On February 16, 1999 the Company announced that it had signed a definitive merger agreement with NAC Re Corporation ("NAC Re"). Under the terms of the agreement, shareholders of NAC Re will receive 0.915 Class A XL shares for each NAC Re share in a tax-free exchange of shares that will be accounted for as a pooling of interests under U.S. generally accepted accounting principles ("GAAP"). The transaction is subject to the approval of the NAC Re stockholders, expiration of the applicable waiting period under the Hart- Scott-Rodino Antitrust Improvements Act, receipt of insurance, regulatory approvals and other customary closing conditions. There can be no assurance that the transaction will be completed or that the terms of the transaction will not be modified prior to completion. 59 XL CAPITAL LTD PRO FORMA FINANCIAL INFORMATION On March 16, 1998, the combination of EXEL and Mid Ocean was announced. The shareholders of the two companies approved the two schemes of arrangement on August 3, 1998 and the Grand Court of Cayman approved the arrangements on August 7, 1998. The Company is the holding company for the new organization, and the reinsurance operations of both companies were combined on August 7, 1998. The transaction, detailed in the joint proxy statement filed with the Securities and Exchange Commission on July 2, 1998, resulted in XL issuing 1.0215 shares for each Mid Ocean share (other than Mid Ocean shares held by EXEL and its subsidiaries), subject to the cash election rights of the two companies' shareholders described therein. Prior to this transaction, EXEL owned approximately 25% of Mid Ocean Class A shares. As a result of the combination, the Company assumed assets of $2.6 billion, of which invested assets were $1.8 billion, and liabilities if $1.2 billion, including loss reserves of $595 million. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (U.S. dollars in thousands, except per share amounts)
Pro Forma Pro Forma 1998 1997 ---------- ---------- Net premiums earned...................................... $1,055,935 $1,033,121 Net investment income.................................... 362,930 319,981 Net realized gains....................................... 225,534 335,538 Equity in affiliate income............................... (1,897) 3,748 Fee and other income..................................... 28,006 24,710 ---------- ---------- Total revenues....................................... 1,670,508 1,717,098 ---------- ---------- Losses and loss expenses................................. 569,130 587,414 Acquisition costs and administration expenses............ 307,448 234,949 Interest expense......................................... 23,123 24,576 Amortization of intangible assets........................ 45,000 37,192 ---------- ---------- Total expenses....................................... 944,701 884,131 ---------- ---------- Income before minority interest and income tax expense... 725,807 832,967 Minority interest and income tax......................... 12,703 18,500 ---------- ---------- Net income........................................... $ 713,104 $ 814,467 ---------- ---------- Net income per share Basic.................................................. $ 6.42 $ 7.29 Diluted................................................ $ 6.31 $ 7.20 Weighted average shares outstanding (000's) Basic.................................................. 111,155 111,734 Diluted................................................ 112,964 113,133
This unaudited condensed pro forma financial information should be read in conjunction with the following explanatory notes. 60 XL CAPITAL LTD NOTES TO THE UNAUDITED PROFORMA COMBINED CONDENSED FINANCIAL INFORMATION 1. Accounting for the Arrangements (a) The combination of EXEL and Mid Ocean was accounted for under purchase accounting rules, in accordance with generally accepted accounting practice, whereby the total purchase cost is allocated to the assets and liabilities acquired based on their relative values at the date of acquisition, and the excess of that total purchase cost over the fair values is recorded as goodwill. The fair values ascribed to the individual assets and liabilities are based upon management studies and appraisals. (b) Included in the pro forma income statements for the year ended November 30, 1998 and 1997 is the financial information of Mid Ocean for the nine months ended July 31, 1998 and the year ended October 31, 1997, respectively. No adjustments have been made to take account of these differing period ends as, in the opinion of management, any such adjustments would not be material. 2. Allocation of Purchase Price Consideration: The allocation of the purchase price is as follows (U.S. dollars in thousands): Fair value of assets of Mid Ocean at date of acquisition............. 1,360,760 Equity value of Mid Ocean assets already held........................ (377,214) --------- Fair value of share of net assets acquired by EXEL................... 983,546 Goodwill relating to acquisition..................................... 1,253,920 --------- 2,237,466 --------- The consideration for the arrangements was as follows: Issue of New EXEL shares............................................. 2,109,804 Issue of New EXEL options............................................ 26,800 Mid Ocean shares purchased for cash.................................. 85,607 Cost of acquisition.................................................. 15,255 --------- 2,237,466 ---------
61 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of XL Capital Ltd: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of XL Capital Ltd and its subsidiaries at November 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1998, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York December 23, 1998 62 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in nor any disagreements with accountants on accounting and financial disclosure within the twenty-four months ending November 30, 1998. PART III Item 10. Directors and Executive Officers of the Registrant This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference. Item 11. Executive Compensation This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements and Exhibits. 1. Financial Statements Included in Part II--See Item 8 of this report. 2. Financial Statement Schedules Included in Part IV of this report:
Schedule Number Page -------- ---- --Auditor's Report on Financial Statement Schedules included in Form 10-K..................................... 66 --Consolidated Summary of Investments--Other than Investments in Related Parties, as of November 30, 1998... I 67 --Condensed Financial Information of Registrant, as of November 30, 1996 and 1995, and for the years ended November 30, 1998, 1997 and 1996.......................... II 68 --Reinsurance, for the years ended November 30, 1998, 1997 and 1996.................................................. IV 71 --Supplementary Information Concerning Property/Casualty Insurance Operations for the years ended November 30, 1998, 1997 and 1996....................................... VI 72
63 Other Schedules have been omitted as they are not applicable to the Company. 3. Exhibits 3.1 Memorandum of Association, incorporated by reference to Annex G to the Joint Proxy Statement of EXEL Limited and Mid Ocean Limited dated July 2, 1998. 3.2 Articles of Association, incorporated by reference to Annex G to the Joint Proxy Statement of EXEL Limited and Mid Ocean Limited dated July 2, 1998. 4.1 Rights Agreement, dated as of September 11, 1998 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, incorporated by reference to the Company's Current Report on Form 8-K dated October 21, 1998. 10.1 Money Accumulation Savings Program, incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.2 1991 Performance Incentive Program, incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.3 1991 Management Incentive Plan, incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (No. 33-40533). 10.4 First Amendment to the 1991 Performance Incentive Program, incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.5 Retirement Plan for Non-employee Directors of XL Capital Ltd, as amended, incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.6.1 XL Capital Ltd Directors Stock and Option Plan, as amended, incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.6.2 Fourth Amendment to EXEL Limited Directors Stock and Option Plan. 10.7 XL Capital Ltd Stock Plan for Nonemployee Directors, incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. 10.8 (Intentionally omitted) 10.9.1 Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan 10.9.2 Amendment to Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan 10.10 Mid Ocean Ltd. Stock & Deferred Compensation Plan for Nonemployee Directors 10.11.1 Mark E. Brockbank Employment Agreement 10.11.2 Henry C.V. Keeling Employment Agreement 10.11.4 Robert J. Newhouse, Jr. Employment Agreement 10.11.5 Michael A. Butt Employment Agreement 10.12.1 Amendment to Brockbank Service Agreement 10.12.2 Amendment to Keeling Service Agreement 10.12.3 Amendment to Newhouse Service Agreement 10.12.4 Amendment to Butt Service Agreement 10.13 Robert J. Newhouse Consulting Agreement 10.14.1 Credit Agreement (5-Year) between Mid Ocean Limited and The Chase Manhattan Bank 10.14.2 Amendment No. 1 to Credit Agreement (5-Year) between Mid Ocean Limited and The Chase Manhattan Bank 10.14.3 Credit Agreement (364-Day) between Mid Ocean Limited and The Chase Manhattan Bank 10.14.4 Amendment No. 1 to Credit Agreement (364-Day) between Mid Ocean Limited and The Chase Manhattan Bank
64 10.14.5 Loan Agreement between X.L. America, Inc. and Three Rivers Funding Corporation 10.14.6 Letter of Credit Facility and Reimbursement Agreement by and among X.L. Insurance Company, Ltd. et al. and Mellon Bank, N.A. 10.14.7 First Amendment to Letter of Credit Facility and Reimbursement Agreement by and among X.L. Insurance Company, Ltd. et al. and Mellon Bank, N.A. 10.14.8 Second Amendment to Letter of Credit Facility and Reimbursement Agreement by and among X.L. Insurance Company, Ltd. et al. and Mellon Bank, N.A. 10.14.9 Short Term Revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A., incorporated by reference to Exhibit (b)(1) of Amendment No. 2 to the Schedule 14D-1 (the "GCR Schedule 14D-1") of EXEL Limited filed with respect to GCR Holdings Company Limited. 10.14.10 First Amendment to Short Term Revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.11 Second Amendment to Short Term Revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.12 Third Amendment to Short Term Revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.13 Fourth Amendment to Short Term Revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.14 Revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A., Incorporated by reference to Exhibit (b)(2) of the GCR Schedule 14D-1. 10.14.15 First Amendment to revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A. 10.14.16 Second Amendment to Revolving Credit Agreement between X.L. Insurance Company, Ltd. and Mellon Bank, N.A. 11.1 Statement regarding computation of per share earnings. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of PriceWaterhouseCoopers 27.1 Financial Data Schedule.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of fiscal 1998. 65 AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES INCLUDED IN FORM 10-K Our report on the consolidated financial statements of XL Capital Ltd is included on page 43 of this Form 10-K in connection with our audits of such financial statements. We have also audited the related financial statement schedules listed in the index on pages 59 and 60 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as whole, present fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP New York, New York February 25, 1999 66 XL CAPITAL LTD SUPPLEMENTAL SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES November 30, 1998 (U.S. dollars in thousands)
Amount at which shown in Cost or the Amortized Market Balance Type of Investment Cost(1) Value Sheet - - ------------------ ----------- ---------- ---------- Fixed Maturities: Bonds and notes: U.S. government and government agencies and authorities............................... $1, 564,084 $1,580,853 $1,580,853 Non-U.S. sovereign governments............. 401,405 402,374 402,374 All other corporate........................ 3,231,757 3,229,354 3,229,354 ----------- ---------- ---------- Total fixed maturities................... $ 5,197,246 $5,212,581 $5,212,581 ----------- ---------- ---------- Equity Securities: Public utilities/transportation............ $ 29,191 $ 35,799 $ 35,799 Banks, trust and insurance companies....... 65,872 82,944 82,944 Industrial, miscellaneous and all others... 900,810 1,009,858 1,009,858 ----------- ---------- ---------- Total equity securities.................. $ 995,873 $1,128,601 $1,128,601 ----------- ---------- ---------- Short-term investments......................... $ 121,177 $ 121,214 $ 121,214 ----------- ---------- ---------- Total investments.............................. $ 6,314,296 $6,462,396 $6,462,396 =========== ========== ==========
- - -------- (1) Investments in fixed maturities and short-term investments are shown at amortized cost. 67 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS--PARENT COMPANY ONLY For the Years Ended November 30, 1998 and 1997 (U.S. dollars in thousands)
1998 1997 ---------- ---------- ASSETS ------ Portfolio Investments: Fixed maturities at fair value (amortized cost: 1998--$214,923; 1997--$NIL)......................... $ 216,629 $ -- Short-term investments at fair value (amortized cost: 1998--$9,575; 1997--$NIL)........................... 9,719 -- ---------- ---------- Total portfolio investments........................ 226,348 -- Investments in subsidiaries............................ 5,316,554 2,123,993 Investment in affiliate (cost: 1998--$NIL; 1997-- $188,137)............................................. -- 358,423 Investments in limited partnership..................... 18,252 19,259 Accrued investment income.............................. 1,367 -- Other assets........................................... 3,288 3,256 ---------- ---------- Total assets....................................... $5,565,809 $2,504,931 ========== ========== LIABILITIES ----------- Amount due to subsidiaries............................. $ 629,943 $ 24,683 Accounts payable and accrued liabilities............... 117,986 1,118 ---------- ---------- Total liabilities.................................. $ 747,929 $ 25,801 ========== ========== SHAREHOLDERS' EQUITY -------------------- Ordinary shares........................................ $ 1,118 $ 844 Contributed surplus.................................... 2,289,456 290,085 Net unrealized appreciation on investments............. 159,953 188,444 Deferred compensation.................................. (18,104) (11,362) Retained earnings...................................... 2,385,457 2,011,119 ---------- ---------- Total shareholders' equity......................... $4,817,880 $2,479,130 ---------- ---------- Total liabilities and shareholders' equity......... $5,565,809 $2,504,931 ========== ==========
See accompanying notes to Consolidated Financial Statements 68 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued) STATEMENT OF INCOME--PARENT COMPANY ONLY For the Years Ended November 30, 1998, 1997 and 1996 (U.S. dollars in thousands)
1998 1997 1996 -------- -------- -------- Net investment income............................... $ 2,568 $ 112 $ 568 Net realized gains.................................. 458 -- -- Equity in net income of subsidiaries (Dividends were $177,900, $186,548 and $302,000 in 1998, 1997 and 1996, respectively)................................ 562,147 617,376 439,361 Equity in net income of affiliate................... 49,878 62,135 59,374 Income from limited partnership..................... 3,599 4,342 -- -------- -------- -------- Total revenues...................................... 618,650 683,965 499,303 Administration expenses............................. 30,987 7,004 4,990 -------- -------- -------- Net income.......................................... $587,663 $676,961 $494,313 ======== ======== ========
See accompanying notes to Consolidated Financial Statements 69 XL CAPITAL LTD SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued) STATEMENT OF CASH FLOWS--PARENT COMPANY ONLY For the Years Ended November 30, 1998, 1997 and 1996 (U.S. dollars in thousands)
1998 1997 1996 --------- --------- --------- Cash flows provided by operating activities: Net income.................................. $ 587,663 $ 676,961 $ 494,313 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gains from sale of shares in affiliate................................ (458) -- -- Equity in net income of subsidiaries net of dividends............................. (574,879) (438,135) (136,106) Equity in net income of affiliate net of dividends................................ (31,410) (34,849) (44,592) Accrued investment income................. (1,367) -- -- Amount due from subsidiaries.............. 605,260 39,091 65,669 Accounts payable and accrued liabilities.. 116,868 478 (1,466) Amortization of intangible assets......... 10,494 -- -- Amortization of deferred compensation..... 4,361 2,163 1,287 Amortization of discounts on fixed maturities............................... 335 -- -- --------- --------- --------- Total adjustments....................... 129,204 (431,252) (115,208) --------- --------- --------- Net cash provided by operating activities............................. 716,867 245,709 379,105 --------- --------- --------- Cash flows provided by (used in) investing activities: Proceeds from sale of fixed maturities and short-term investments..................... 198,893 -- -- Proceeds from redemption of fixed maturities and short-term investments................. 49,325 -- -- Purchases of fixed maturities and short-term investments................................ (472,593) -- -- Other assets................................ (32) (8) (3,081) Investment in affiliate..................... -- -- (1,620) Investment in limited partnership........... 1,007 3,376 (12,568) --------- --------- --------- Net cash provided (used in) by investing activities............................. (223,400) 3,368 (17,269) --------- --------- --------- Cash flows used in financing activities: Issuance of restricted shares............... 514 387 695 Proceeds from exercise of options........... 7,538 6,280 6,048 Dividends paid.............................. (150,294) (115,372) (86,145) Repurchase of treasury shares............... (351,225) (140,372) (282,434) --------- --------- --------- Net cash used in financing activities... (493,467) (249,077) (361,836) --------- --------- --------- Net change in cash and cash equivalents. -- -- -- --------- --------- --------- Cash and cash equivalents--beginning of year.. -- -- -- --------- --------- --------- Cash and cash equivalents--end of year........ $ -- $ -- $ -- ========= ========= =========
See accompanying notes to Consolidated Financial Statements 70 XL CAPITALIZED LTD SCHEDULE IV--REINSURANCE For the Years Ended November 30, 1998, 1997 and 1996 (U.S. dollars in thousands)
Assumed Ceded to from Gross Other other Net Amount Companies Companies Amount -------- --------- --------- -------- 1998...................................... $505,263 $134,817 $301,598 $672,044 -------- -------- -------- -------- 1997...................................... $418,370 $124,662 $ 22,918 $316,626 -------- -------- -------- -------- 1996...................................... $584,585 $132,344 $144,861 $597,102 -------- -------- -------- --------
71 XL CAPITAL LTD SCHEDULE VI SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS For the Years Ended November 30, 1998, 1997 and 1996 (U.S. dollars in thousands)
Losses and Loss Expenses Incurred Net Reserves Reserves Related to Paid Amortization Premiums Deferred for Losses for Net Net ------------------ Losses of Deferred Written Acquisition and Loss Unearned Earned Investment Current Prior and Loss Acquisition Prior Costs Expenses Premiums Premiums Income Year (1) Year (2) Expenses Costs Year (2) ----------- ---------- ---------- -------- ---------- -------- --------- -------- ------------ -------- 1997............ $97,951 $3,121,739 $1,010,907 $685,200 $279,375 $715,059 $(164,158) $366,475 $88,596 $672,044 ------- ---------- ---------- -------- -------- -------- --------- -------- ------- -------- 1997............ $22,272 $2,342,254 $ 566,911 $540,653 $216,552 $735,313 $(260,407) $267,227 $46,108 $316,626 ------- ---------- ---------- -------- -------- -------- --------- -------- ------- -------- 1996............ $30,383 $2,099,096 $ 679,535 $517,892 $198,598 $436,334 $ 14,465 $302,642 $35,556 $597,102 ------- ---------- ---------- -------- -------- -------- --------- -------- ------- --------
72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. XL Capital Ltd /s/ Brian M. O'Hara By___________________________________ Brian M. O'Hara President and Chief Executive Officer February 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ Brian M. O'Hara President, Chief Executive February 25, 1999 ____________________________________ Officer and Director Brian M. O'Hara (Principal Executive Officer) /s/ Robert R. Lusardi Executive Vice President and February 25, 1999 ____________________________________ Chief Financial Officer Robert R. Lusardi (Principal Financial Officer and Principal Accounting Officer) /s/ Michael P. Esposito, Jr. Director and Chairman of the February 25, 1999 ____________________________________ Board of Directors Michael P. Esposito, Jr. /s/ Michael A. Butt Director February 25, 1999 ____________________________________ Michael A. Butt /s/ Robert Clements Director February 25, 1999 ____________________________________ Robert Clements /s/ Sir Brian Corby Director February 25, 1999 ____________________________________ Sir Brian Corby /s/ Robert R. Glauber Director February 25, 1999 ____________________________________ Robert R. Glauber /s/ Robert V. Hatcher, Jr. Director February 25, 1999 ____________________________________ Robert V. Hatcher, Jr.
73
Signature Title Date --------- ----- ---- /s/ Ian R. Heap Director February 25, 1999 ____________________________________ Ian R. Heap /s/ Paul Jeanbart Director February 25, 1999 ____________________________________ Paul Jeanbart /s/ John Loudon Director February 25, 1999 ____________________________________ John Loudon /s/ Robert J. Newhouse, Jr. Director February 25, 1999 ____________________________________ Robert J. Newhouse, Jr. /s/ Robert S. Parker Director February 25, 1999 ____________________________________ Robert S. Parker /s/ Cyril Rance Director February 25, 1999 ____________________________________ Cyril Rance /s/ Alan Z. Senter Director February 25, 1999 ____________________________________ Alan Z. Senter /s/ John T. Thornton Director February 25, 1999 ____________________________________ John T. Thornton /s/ Ellen E. Thrower Director February 25, 1999 ____________________________________ Ellen E. Thrower /s/ John Weiser Director February 25, 1999 ____________________________________ John Weiser
74 EX-10.6.2 2 4TH AMENDMENT TO XL LTD DIRECTORS STOCK PLAN Exhibit 10.6.2 FOURTH AMENDMENT TO EXEL LIMITED DIRECTORS STOCK & OPTION PLAN The EXEL Limited Directors Stock & Option Plan (the "Plan") is hereby amended, effective as of December 1, 1998, as follows: 1. Section 1 of the Plan is hereby amended by deleting "non- employees directors" therefrom and replacing it with "Directors." 2. Section 2(d) of the Plan is hereby amended to read as follows: "'Director' means a non-employee member of the Board and any other member of the Board who is designated by the Board as eligible to participate in this Plan." 3. Section 6(d) of the Plan is hereby amended to read as follows: "(d) (A) In the case of units credited to a Director's account prior to December 1, 1998, if any dividends are payable on Shares during the deferral period, dividend equivalents equal to the dividend that would have been payable on the units credited to a Director's account if such units had constituted Shares shall be paid to the Director in cash at the time the corresponding dividends are paid on Shares. (B) In the case of units credited to a Director's account after December 1, 1998, as of each date on which a cash dividend is paid on Shares, there shall be credited to each account that number of units (including fractional units) determined by -2- (i) multiplying the amount of such dividend (per Share) by the number of units in such account; and (ii) dividing the total so determined by the Fair Market Value of a Share on the date of payment of such cash dividend. The additions to a Director's account pursuant to this Section 6(d)(B) shall continue until the Director's account is fully paid." 4. Section 6(e) of the Plan is hereby amended to read as follows: "(e) (A) In the case of units credited to a Director's account prior to December 1, 1998, the amount to which a Director is entitled hereunder that is represented by Share units shall be distributed to the Director, whether or not the Director's service continues, in the form of one Share for each Share unit in accordance with the following schedule: Percentage of Unit Time of Distribution ------- -------------------- 20 1st anniversary of Date Unit Credited 20 2nd anniversary of Date Unit Credited 20 3rd anniversary of Date Unit Credited 20 4th anniversary of Date Unit Credited 20 5th anniversary of Date Unit Credited (B) In the case of units credited to a Director's account after December 1, 1998, the account of a Director shall be distributed (in the form of one Share for each Share unit) either (x) in a lump sum at the time of termination of the Director's service on the Board or (y) in up to five annual installments commencing at the time of termination of the director's service on the Board, as elected by the Director. Each Director's distribution election must be made in writing within the later of (A) 60 days after December 1, 1998 or (B) 60 days after the Director first becomes eligible to participate in the Plan; provided, however, that a Director may -------- ------- made a new distribution election with respect to the entire portion of his or her account subject to this Section 6(e)(B) so long as such election is made at least one year in advance of the Director's termina- -3- tion of service on the Board. In the case of an account distributed in installments, the amount of Shares distributed in each installment shall be equal to the number of Share units in the Director's account subject to such installment distribution at the time of the distribution divided by the number of installments remaining to be paid." 5. The following paragraph (g) is hereby added to Section 6 of the Plan. "(g) Each Director may make an election in writing on or prior to each October 31 to receive the Director's annual retainer fees payable in the following Fiscal Year in the form of Shares instead of cash. Any Shares elected shall be payable at the time cash retainer fees are otherwise payable, and the number of Shares distributed shall be equal to the amount of the annual retainer fee otherwise payable on such payment date divided by the Fair Market Value of a Share on such date. Notwithstanding the foregoing, a Director who is first elected or appointed to the Board may make an election under this Section 6(g) within 60 days of such election or appointment in respect of annual retainer fees payable after the date of the election. Any election made under this Section 6(g) shall remain in effect unless and until a new election is made in accordance with the provisions of this Section 6(g)." 6. The following paragraph (h) is hereby added to Section 6 of the Plan. "(h) Adjustments. In the event that any dividend in Shares, ----------- recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other such change, affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of Shares, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the Directors and preserve the value of the Directors' Share units, -4- there shall automatically be substituted for each Share unit a new unit representing the number and kind of Shares, other securities or other consideration into which each outstanding Share shall be changed. The substituted units shall be subject to the same terms and conditions as the original Share units." EX-10.9.1 3 MID OCEAN LTD LONG TERM INCENTIVE PLAN Exhibit 10.9.1 MID OCEAN LIMITED - - -------------------------------------------------------------------------------- 1993 LONG TERM INCENTIVE AND SHARE AWARD PLAN - - -------------------------------------------------------------------------------- MID OCEAN LIMITED - - -------------------------------------------------------------------------------- 1993 LONG TERM INCENTIVE AND SHARE AWARD PLAN - - --------------------------------------------------------------------------------
Section Page - - ------- ---- 1. Purposes......................................... 1 2. Definitions...................................... 1 3. Administration................................... 7 (a) Authority of the Committee................ 7 (b) Manner of Exercise of Committee Authority................................. 10 (c) Limitation of Liability................... 10 4. Shares Subject to the Plan....................... 11 5. Specific Terms of Awards......................... 14 (a) General................................... 14 (b) Options................................... 15 (c) SARs...................................... 16 (d) Restricted Shares......................... 18 (e) Restricted Share Units.................... 20 (f) Performance Shares and Performance Units..................................... 22 (g) Dividend Equivalents...................... 25 (h) Other Share-Based Awards.................. 25 6. Certain Provisions Applicable to Awards.......... 26 (a) Stand-Alone, Additional, Tandem and Substitute Awards......................... 26 (b) Terms of Awards........................... 27 (c) Form of Payment Under Awards.............. 28 (d) Nontransferability........................ 28 7. Director's Options............................... 29 (a) Annual Grant.............................. 29 (b) Exercisability............................ 29 (c) Time and Method of Exercise............... 29 (d) Nontransferability........................ 30 (e) Adjustments............................... 30
-i-
Section Page - - ------- ---- (f) Administration...................................... 31 8. Director's Replacement Options............................. 32 9. General Provisions......................................... 32 (a) Compliance with Legal and Exchange Requirements........................................ 32 (b) No Right to Continued Employment or Service............................................. 33 (c) Taxes............................................... 34 (d) Changes to the Plan and Awards...................... 35 (e) No Rights to Awards; No Shareholder Rights.............................................. 36 (f) Unfunded Status of Awards........................... 36 (g) Nonexclusivity of the Plan.......................... 37 (h) Not Compensation for Benefit Plans.................. 37 (i) No Fractional Shares................................ 37 (j) Governing Law....................................... 38 (k) Effective Date; Plan Termination.................... 38 (1) Titles and Headings................................. 39
-ii- MID OCEAN LIMITED - - -------------------------------------------------------------------------------- 1993 LONG TERM INCENTIVE AND SHARE AWARD PLAN - - -------------------------------------------------------------------------------- 1. Purposes. The purposes of the 1993 Long Term Incentive and Share -------- Award Plan are to advance the interests of Mid Ocean Limited and its shareholders by providing a means to attract, retain, and motivate employees and directors of the Company upon whose judgment, initiative and efforts the continued success, growth and development of the Company is dependent. 2. Definitions. For purposes of the Plan, the following terms shall ----------- be defined as set forth below: (a) "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board or the Committee as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of shares of such entity or at least 20% of the ownership interests in such entity. (b) "Award" means any Option, SAR, Restricted Share, Restricted Share Unit, Performance Share, Performance Unit, Dividend Equivalent, or Other Share- -2- Based Award granted to an Eligible Employee under the Plan. (c) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. (d) "Beneficiary" means the person, persons, trust or trusts which have been designated by such Eligible Employee in his or her most recent written beneficiary designation filed with the Company to receive the benefits specified under this Plan upon the death of the Eligible Employee, or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits. (e) "Board" means the Board of Directors of the Company. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include successor provisions thereto and regulations thereunder. -3- (g) "Committee" means the Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan; provided, however, that the Committee shall consist of two or more -------- ------- directors of the Company, each of whom is a "disinterested person" within the meaning of Rule 16b-3 under the Exchange Act, to the extent applicable. (h) "Company" means Mid Ocean Limited, a corporation organized under the laws of the Cayman Islands, or any successor corporation. (i) "Director" means a non-employee member of the Board. (j) "Director's Option" means a NQSO granted to a Director under Section 7. (k) "Director's Replacement Option" means a NQSO granted to a Director under Section 8. (l) "Dividend Equivalent" means a right, granted under Section 5(g), to receive cash, Shares, or other property equal in value to dividends paid with respect to a specified number of Shares. Dividend Equivalents may be awarded on a free-standing basis or in connec- -4- tion with another Award, and may be paid currently or on a deferred basis. (m) "Eligible Employee" means an employee or underwriter of, or underwriting consultant to, the Company or its Subsidiaries and Affiliates, including any director who is an employee, who is responsible for or contributes to the management, growth and/or profitability of the business of the Company, its Subsidiaries or Affiliates. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include successor provisions thereto and regulations thereunder. (o) "Fair Market Value" means, with respect to Shares or other property, the fair market value of such Shares or other property determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee in good faith, the Fair Market Value of Shares as of any given date prior to the existence of a public market for the Company's Shares shall mean the Company's book value. Thereafter, unless otherwise deter- -5- mined by the Committee in good faith, the Fair Market Value of Shares shall mean the mean between the high and low selling prices per Share on the immediately preceding date (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded). (p) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (q) "NQSO" means any Option that is not an ISO. (r) "Option" means a right, granted under Section 5(b), Section 7 or Section 8, to purchase Shares. (s) "Other Share-Based Award" means a right, granted under Section 5(h), that relates to or is valued by reference to Shares. (t) "Participant" means an Eligible Employee or Director who has been granted an Award, Director's Option or Director's Replacement Option under the Plan. (u) "Performance Share" means a performance share granted under Section 5(f). -6- (v) "Performance Unit" means a performance unit granted under Section 5(f). (w) "Plan" means this 1993 Long Term Incentive and Share Award Plan. (x) "Restricted Shares" means an Award of Shares under Section 5(d) that may be subject to certain restrictions and to a risk of forfeiture. (y) "Restricted Share Unit" means a right, granted under Section 5(e), to receive Shares or cash at the end of a specified deferral period. (z) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (aa) "SAR" or "Share Appreciation Right" means the right, granted under Section 5(c), to be paid an amount measured by the difference between the exercise price of the right and the Fair Market Value of Shares on the date of exercise of the right, with payment to be made in cash, Shares, or property as specified in the Award or determined by the Committee. -7- (bb) "Shares" means ordinary shares, $.20 par value per share, of the Company. (cc) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns shares possessing 50% or more of the total combined voting power of all classes of shares in one of the other corporations in the chain. 3. Administration. -------------- (a) Authority of the Committee. Except as provided in Section 7, -------------------------- the Plan shall be administered by the Committee, and the Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan: (i) to select Eligible Employees to whom Awards may be granted; (ii) to designate Affiliates; (iii) to determine the type or types of Awards to be granted to each Eligible Employee; -8- (iv) to determine the type and number of Awards to be granted, the number of Shares to which an Award may relate, the terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price, or purchase price, and any bases for adjusting such exercise, grant or purchase price, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, exercisability, or settlement of an Award, and waiver or accelerations thereof, and waivers of performance conditions relating to an Award, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award; (v) to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, exchanged, or surrendered; -9- (vi) to determine whether, to what extent, and under what circumstances cash, Shares, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee, or at the election of the Eligible Employee; (vii) to prescribe the form of each Award Agreement, which need not be identical for each Eligible Employee; (viii) to adopt, amend, suspend, waive, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan; (ix) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award Agreement, or other instrument hereunder; and (x) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem neces- -10- sary or advisable for the administration of the Plan. (b) Manner of Exercise of Committee Authority. The Committee shall ----------------------------------------- have sole discretion in exercising its authority under the Plan. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Company, Subsidiaries, Affiliates, Eligible Employees, any person claiming any rights under the Plan from or through any Eligible Employee, and shareholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any Subsidiary or Affiliate the authority, subject to such terms as the Committee shall determine, to perform administrative functions and, with respect to Awards granted to persons not subject to Section 16 of the Exchange Act, to perform such other functions as the Committee may determine, to the extent permitted under Rule 16b-3 (if applicable) and applicable law. (c) Limitation of Liability. Each member of the Committee shall be ----------------------- entitled to, in good faith, rely or -11- act upon any report or other information furnished to him or her by any officer or other employee of the Company or any Subsidiary or Affiliate, the Company's independent certified public accountants, or other professional retained by the Company to assist in the administration of the Plan. No member of the Committee, nor any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation. 4. Shares Subject to the Plan. -------------------------- (a) Subject to adjustment as hereinafter provided, the total number of Shares reserved for issuance in connection with Awards, Director's Options and Director's Replacement Options under the Plan shall be 2,250,000. No Award, Director's Option or Director's Replacement Option may be granted if the number of Shares to which such Award, Director's Option or Director's Replacement Option relates, when added to the -12- number of Shares previously issued under the Plan, exceeds the number of Shares reserved under the preceding sentence. If any Shares subject to an Award, Director's Option or Director's Replacement Option are forfeited, cancelled, exchanged or surrendered or such Award, Director's Option or Director's Replacement Option is settled in cash or otherwise terminates without a distribution of Shares to the Participant, any Shares counted against the number of Shares reserved and available under the Plan with respect to such Award, Director's Option or Director's Replacement Option shall, to the extent of any such forfeiture, settlement, termination, cancellation, exchange or surrender, again be available for Awards, Director's Options or Director's Replacement Options under the Plan; provided, however, that in the case of forfeiture, cancellation, exchange or -------- ------- surrender of Restricted Shares or Restricted Share Units with respect to which dividends or Dividend Equivalents have been paid or accrued, such number of Shares shall not be available for Awards, Director's Options or Director's Replacement Options unless, in the case of Shares with respect to which dividends or Dividend Equivalents were accrued but unpaid, such dividends and Dividend Equivalents are also forfeited, cancelled, exchanged or surrendered. Upon the -13- exercise of any Award granted in tandem with any other Awards, such related Awards shall be cancelled to the extent of the number of Shares as to which the Award is exercised. (b) Any Shares distributed pursuant to an Award, Director's Option or Director's Replacement Option may consist, in whole or in part, of authorized and unissued Shares or treasury Shares including Shares acquired by purchase in the open market or in private transactions. (c) In the event that the Committee shall determine that any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Shares such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Eligible Employees under the Plan, then the Committee shall make such equitable changes or adjustments as it deems appropriate and, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of Shares which may thereafter be issued under the Plan, (ii) the number and kind of Shares issued or issuable in respect of outstanding Awards, -14- and (iii) the exercise price, grant price, or purchase price relating to any Award; provided, however, in each case that, with respect to ISOs, such -------- ------- adjustment shall be made in accordance with Section 424(h) of the Code, unless the Committee determines otherwise. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria and performance objectives included in, Awards in recognition of unusual or non-recurring events (including, without limitation, events described in the preceding sentence) affecting the Company or any Subsidiary or Affiliate or the financial statements of the Company or any Subsidiary or Affiliate, or in response to changes in applicable laws, regulations, or accounting principles. 5. Specific Terms of Awards. ------------------------ (a) General. Awards may be granted on the terms and conditions set ------- forth in this Section 5. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 9(d)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms regarding forfeiture of Awards or continued exercis- -15- ability of Awards in the event of termination of employment by the Eligible Employee. (b) Options. The Committee is authorized to grant Options, which ------- may be NQSOs or ISOs, to Eligible Employees on the following terms and conditions: (i) Exercise Price. The exercise price per Share -------------- purchasable under an Option shall be determined by the Committee, and the Committee may, without limitation, set an exercise price that is based upon achievement of performance criteria if deemed appropriate by the Committee. (ii) Time and Method of Exercise. The Committee shall --------------------------- determine at the date of grant or thereafter the time or times at which an Option may be exercised in whole or in part (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), the methods by which such exercise price may be paid or deemed to be paid (including, without limitation, broker-assisted exercise arrangements), the form of such payment (including, without limitation, cash, -16- Shares, notes or other property), and the methods by which Shares will be delivered or deemed to be delivered to Eligible Employees. (iii) ISOs. The terms of any ISO granted under the Plan shall comply ---- in all respects with the provisions of Section 422 of the Code, including but not limited to the requirement that no ISO shall be granted more than ten years after the effective date of the Plan. (c) SARs. The Committee is authorized to grant SARs (Share Appreciation ---- Rights) to Eligible Employees on the following terms and conditions: (i) Right to Payment. An SAR shall confer on the Eligible ---------------- Employee to whom it is granted a right to receive with respect to each Share subject thereto, upon exercise thereof, the excess of (1) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine in the case of any such right, including, in the Committee's discretion, one related to an ISO, the Fair Market Value of one Share at any time during a specified period before or after the date of exer- -17- cise) over (2) the exercise price of the SAR as determined by the Committee as of the date of grant of the SAR (or, in the case of an SAR granted in tandem with an option, shall be equal to the exercise price of the underlying Option). (ii) Other Terms. The Committee shall determine, at the time ----------- of grant or thereafter, the time or times at which an SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, method by which Shares will be delivered or deemed to be delivered to Eligible Employees, whether or not an SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. Unless the Committee determines otherwise, an SAR (1) granted in tandem with an NQSO may be granted at the time of grant of the related NQSO or at any time thereafter or (2) granted in tandem with an ISO may only be granted at the time of grant of the related ISO. -18- (d) Restricted Shares. The Committee is authorized to grant Restricted ----------------- Shares to Eligible Employees on the following terms and conditions: (i) Issuance and Restrictions. Restricted Shares shall be subject to ------------------------- such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), in such installments, or otherwise, as the Committee may determine. Except to the extent restricted under the Award Agreement relating to the Restricted Shares, an Eligible Employee granted Restricted Shares shall have all of the rights of a shareholder including, without limitation, the right to vote Restricted Shares and the right to receive dividends thereon. (ii) Forfeiture. Except as otherwise determined by the Committee, at ---------- the date of grant or thereafter, upon termination of em- -19- ployment during the applicable restriction period, Restricted Shares and any accrued but unpaid dividends or Dividend Equivalents that are at that time subject to restrictions shall be forfeited; provided, however, that -------- ------- the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Shares will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Shares. (iii) Certificates for Shares. Restricted Shares granted under the ----------------------- Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Shares are registered in the name of the Eligible Employee, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Shares, and the Company -20- shall retain physical possession of the certificate. (iv) Dividends. Dividends paid on Restricted Shares shall be either --------- paid at the dividend payment date, or deferred for payment to such date as determined by the Committee, in cash or in unrestricted Shares having a Fair Market Value equal to the amount of such dividends. Shares distributed in connection with a Share split or dividend in Shares, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Shares with respect to which such Shares or other property has been distributed. (e) Restricted Share Units. The Committee is authorized to grant ---------------------- Restricted Share Units to Eligible Employees, subject to the following terms and conditions: (i) Award and Restrictions. Delivery of Shares or cash, as the case ---------------------- may be, will occur upon expiration of the deferral period specified for Restricted Share Units by the -21- Committee (or, if permitted by the Committee, as elected by the Eligible Employee). In addition, Restricted Share Units shall be subject to such restrictions as the Committee may impose, if any (including, without limitation, the achievement of performance criteria if deemed appropriate by the Committee), at the date of grant or thereafter, which restrictions may lapse at the expiration of the deferral period or at earlier or later specified times, separately or in combination, in installments or otherwise, as the Committee may determine. (ii) Forfeiture. Except as otherwise determined by the Committee at ---------- date of grant or thereafter, upon termination of employment (as determined under criteria established by the Committee) during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award Agreement evidencing the Restricted Share Units), or upon failure to satisfy any other conditions precedent to the delivery of Shares or cash to which such Restricted Share Units relate, all Restricted Share Units that are at -22- that time subject to deferral or restriction shall be forfeited; provided, -------- however, that the Committee may provide, by rule or regulation or in any ------- Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Share Units will be waived in whole or in part in the event of termination resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Share Units. (f) Performance Shares and Performance Units. The Committee is authorized ---------------------------------------- to grant Performance Shares or Performance Units or both to Eligible Employees on the following terms and conditions: (i) Performance Period. The Committee shall determine a ------------------ performance period (the "Performance Period") of one or more years and shall determine the performance objectives for grants of Performance Shares and Performance Units. Performance objectives may vary from Eligible Employee to Eligible Employee and shall be based upon such performance criteria as the Committee may deem appropriate. Per- -23- formance Periods may overlap and Eligible Employees may participate simultaneously with respect to Performance Shares and Performance Units for which different Performance Periods are prescribed. (ii) Award Value. At the beginning of a Performance Period, the ----------- Committee shall determine for each Eligible Employee or group of Eligible Employees with respect to that Performance Period the range of number of Shares, if any, in the case of Performance Shares, and the range of dollar values, if any, in the case of Performance Units, which may be fixed or may vary in accordance with such performance or other criteria specified by the Committee, which shall be paid to an Eligible Employee as an Award if the relevant measure of Company performance for the Performance Period is met. (iii) Significant Events. If during the course of a Performance ------------------ Period there shall occur significant events as determined by the Committee which the Committee expects to have a substantial effect on a performance objective -24- during such period, the Committee may revise such objective. (iv) Forfeiture. Except as otherwise determined by the Committee, at ---------- the date of grant or thereafter, upon termination of employment during the applicable Performance Period, Performance Shares and Performance Units for which the Performance Period was prescribed shall be forfeited; provided, however, that the Committee may provide, by rule or regulation -------- ------- or in any Award Agreement, or may determine in an individual case, that restrictions or forfeiture conditions relating to Performance Shares and Performance Units will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Performance Shares and Performance Units. (v) Payment. Each Performance Share or Performance Unit may be paid ------- in whole Shares, or cash, or a combination of Shares and cash either as a lump sum payment or in annual installments, all as the Committee shall deter- -25- mine, at the time of grant of the Performance Share or Performance Unit or otherwise, commencing as soon as practicable after the end of the relevant Performance Period. (g) Dividend Equivalents. The Committee is authorized to grant Dividend -------------------- Equivalents to Eligible Employees. The Committee may provide, at the date of grant or thereafter, that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares, or other investment vehicles as the Committee may specify, provided that Dividend Equivalents (other than freestanding Dividend Equivalents) shall be subject to all conditions and restrictions of the underlying Awards to which they relate. (h) Other Share-Based Awards. The Committee is authorized, subject to ------------------------ limitations under applicable law, to grant to Eligible Employees such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, unrestricted shares awarded purely as a "bonus" and not subject to any restrictions or -26- conditions, other rights convertible or exchangeable into Shares, purchase rights for Shares, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the performance of specified Subsidiaries or Affiliates. The Committee shall determine the terms and conditions of such Awards at date of grant or thereafter. Shares delivered pursuant to an Award in the nature of a purchase right granted under this Section 5(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Shares, notes or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, shall also be authorized pursuant to this Section 5(h). 6. Certain Provisions Applicable to Awards. --------------------------------------- (a) Stand-Alone, Additional, Tandem and Substitute Awards. Awards ----------------------------------------------------- granted under the Plan may, in the discretion of the Committee, be granted to Eligible Employees either alone or in addition to, in tandem with, or in exchange or substitution for, any other Award granted under the Plan or any award granted under any other plan or agreement of the Company, any Subsidiary -27- or Affiliate, or any business entity to be acquired by the Company or a Subsidiary or Affiliate, or any other right of an Eligible Employee to receive payment from the Company or any Subsidiary or Affiliate. Awards may be granted in addition to or in tandem with such other Awards or awards, and may be granted either as of the same time as or a different time from the grant of such other Awards or awards. The per Share exercise price of any Option, grant price of any SAR, or purchase price of any other Award conferring a right to purchase Shares which is granted, in connection with the substitution of awards granted under any other plan or agreement of the Company or any Subsidiary or Affiliate or any business entity to be acquired by the Company or any Subsidiary or Affiliate, shall be determined by the Committee, in its discretion. (b) Terms of Awards. The term of each Award granted to an Eligible --------------- Employee shall be for such period as may be determined by the Committee; provided, however, that in no event shall the term of any ISO or an SAR -------- ------- granted in tandem therewith exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code). -28- (c) Form of Payment Under Awards. Subject to the terms of the Plan ---------------------------- and any applicable Award Agreement, payments to be made by the Company or a Subsidiary or Affiliate upon the grant, maturation, or exercise of an Award may be made in such forms as the Committee shall determine at the date of grant or thereafter, including, without limitation, cash, Shares, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The Committee may make rules relating to installment or deferred payments with respect to Awards, including the rate of interest to be credited with respect to such payments. (d) Nontransferability. Awards shall not be transferable by an ------------------ Eligible Employee except by will or the laws of descent and distribution (except pursuant to a Beneficiary) and shall be exercisable during the lifetime of an Eligible Employee only by such Eligible Employee or his guardian or legal representative. An Eligible Employee's rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to claims of the Eligible Employees creditors. -29- 7. Director's Options ------------------ (a) Annual Grant. On the date of each annual meeting of the Company's ------------ shareholders, beginning with the 1994 annual meeting, each Director in office immediately following the meeting shall automatically be granted a NQSO to purchase 1,500 Shares with an exercise price equal to 100 percent of the Market Value of one Share at the date of grant; provided, however, that such -------- ------- price shall be at least equal to the par value of a Share. For purposes of Section 7, Market Value shall mean the mean between the high and low selling prices per Share on the immediately preceding date (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded). (b) Exercisability. Each Option granted to a Director under paragraph -------------- (a) hereof shall become fully exercisable on the date which is six months after the date of grant, and shall expire on the tenth anniversary of the date of grant. Exercisability of a Director's Option shall not be dependent upon the Director's continuing service on the Board. (c) Time and Method of Exercise. The exercise price of a Director's --------------------------- Option shall be paid to the Com- -30- pany at the time of exercise either in cash, or in Shares already owned by the optionee and having a total Market Value equal to the exercise price, or in a combination of cash and such Shares. (d) Nontransferability. No Director's Option granted under the Plan ------------------ shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee, a Director's Option shall be exercisable only by him or her or by his or her guardian or legal representative. (e) Adjustments. In the event that subsequent to the Effective Date ----------- any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other such change, affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, then in order to maintain the proportionate interest of the Director and preserve the value of the Director's Option, (i) there shall automatically be substituted for each Share subject to an unexercised Director's Option and each Share to be issued under Section 7(a) subsequent to such event the -31- number and kind of shares or other securities into which each outstanding Share shall be changed or for which each such Share shall be exchanged, and (ii) the exercise price shall be increased or decreased proportionately so that the aggregate purchase price for the Shares subject to any unexercised Director's Option shall remain the same as immediately prior to such event. (f) Administration. To the extent the Plan relates to Director's -------------- Options or Director's Replacement Options, it is intended to operate automatically and not require administration. However, to the extent that administration is necessary with respect to such grants, the Plan shall be administered by the Secretary of the Company. Since the Director's Options and Director's Replacement Options are awarded automatically, this function will be limited to ministerial matters. The plan administrator will have no discretion with respect to the selection of Director optionees, the determination of the exercise price of Director's Options or Director's Replacement Options, the timing of such grants or number of Shares covered by the Director's Options or Director's Replacement Options. -32- 8. Director's Replacement Options. ------------------------------ On the closing date of the exchange of shares of Mid Ocean Reinsurance Company Ltd. ("Mid Ocean Reinsurance") for Shares, each Director shall be granted a Director's Replacement Option (with a tandem stock appreciation right) to purchase 1,500 Shares at a price equal to U.S. $16.67 per Share in replacement of his existing option (and tandem stock appreciation right) to purchase common stock of Mid Ocean Reinsurance (such existing option and tandem stock appreciation right is referred to herein as a "Mid Ocean Reinsurance Option"). Such a Director's Replacement Option (and tandem stock appreciation right) shall be exercisable immediately at the time of grant, shall expire on November 4, 2002, and shall otherwise have substantially the same terms as the Mid Ocean Reinsurance Option it replaces, except that the exercise price of the Director's Replacement option shall not be adjusted as a result of dividends (other than dividends paid in Shares). 9. General Provisions. ------------------ (a) Compliance with Legal and Trading Requirements. The Plan, the ---------------------------------------------- granting and exercising of Awards, Director's Options and Director's Replacement Options thereunder, and the other obligations of the Company under the Plan and any Award Agreement, shall -33- be subject to all applicable Cayman Islands and U.S. federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Shares under any Award, Director's Option or Director's Replacement Option until completion of such stock exchange or market system listing or registration or qualification of such Shares or other required action under any Cayman Islands or U.S. state or federal law, rule or regulation as the Company may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules and regulations. No provisions of the Plan shall be interpreted or construed to obligate the Company to register any Shares under Cayman Islands or U.S. federal or state law. (b) No Right to Continued Employment or Service. Neither the Plan nor ------------------------------------------- any action taken thereunder shall be construed as giving any employee or director the right to be retained in the employ or service of the Company or any of its Subsidiaries or Affiliates, nor -34- shall it interfere in any way with the right of the Company or any of its Subsidiaries or Affiliates to terminate any employee's or director's employment or service at any time. (c) Taxes. The Company or any Subsidiary or Affiliate is authorized ----- to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Shares, or any payroll or other payment to an Eligible Employee, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Eligible Employees to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of an Eligible Employee's tax obligations. (d) Changes to the Plan and Awards. The Board may amend, alter, ------------------------------ suspend, discontinue, or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of shareholders of the Company or Participants, except that any such -35- amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Company's shareholders within one year after such Board action if such shareholder approval is required by any Cayman Islands or U.S. federal law or regulation (including Rule 16b-3, if applicable) or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted; provided, however, that, -------- ------- without the consent of an affected Participant, no amendment, alteration, suspension, discontinuation, or termination of the Plan may impair the rights or, in any other manner, adversely affect the rights of such Participant under any Award, Director's Option or Director's Replacement Option theretofore granted to him or her. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate any Award theretofore granted any Award Agreement relating thereto; provided, however, -------- ------- that, without the consent of an affected Eligible Employee, no such amendment, alteration, suspension, discontinuation, or termination of any Award may impair or adversely affect the rights of such Eligible Employee under such Award. Notwithstanding the other provisions of this paragraph, Section 7, Section 8 and the other provisions of this Plan applicable to Direc- -36- tor's Options or Director's Replacement Options may not be amended more than once every six months other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. (e) No Rights to Awards; No Shareholder Rights. No Eligible Employee ------------------------------------------ or employee shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Employees and employees. No Award shall confer on any Eligible Employee any of the rights of a shareholder of the Company unless and until Shares are duly issued or transferred to the Eligible Employee in accordance with the terms of the Award. (f) Unfunded Status of Awards. The Plan is intended to constitute an ------------------------- "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, Director's Option or Director's Replacement Option, nothing contained in the Plan or any Award, Director's Option or Director's Replacement Option shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided, however, that the Committee may authorize the creation -------- ------- of trusts -37- or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, other Awards, or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. (g) Nonexclusivity of the Plan. Neither the adoption of the Plan by -------------------------- the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of options and other awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. (h) Not Compensation for Benefit Plans. No Award payable under this ---------------------------------- Plan shall be deemed salary or compensation for the purpose of computing benefits under any benefit plan or other arrangement of the Company for the benefit of its employees or directors unless the Company shall determine otherwise. -38- (i) No Fractional Shares. No fractional Shares shall be issued or -------------------- delivered pursuant to the Plan or any Award or Director's Option. In the case of Awards to Eligible Employees, the Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. In the case of Director's Options, cash shall be paid in lieu of such fractional shares. (j) Governing Law. The validity, construction, and effect of the ------------- Plan, any rules and regulations relating to the Plan, and any Award Agreement shall be determined in accordance with the laws of New York without giving effect to principles of conflict of laws. (k) Effective Date; Plan Termination. The Plan shall become effective -------------------------------- as of _______________________, (the "Effective Date") upon approval by the affirmative votes of the holders of a majority of voting securities of the Company. The Plan shall terminate as to future awards on the date which is ten (10) years after the Effective Date, or, if earlier, at such time as no Shares remain available for issuance pursuant to Sec- -39- tion 4 and the Company has no further obligations with respect to any Award, Director's Option or Director's Replacement Option granted under the Plan. (l) Titles and Headings. The titles and headings of the sections in ------------------- the Plan are for convenience of reference only. the text of the Plan, rather than such titles or headings, shall control. EX-10.9.2 4 AMENDMENT TO MID OCEAN LONG TERM INCENTIVE PLAN Exhibit 10.9.2 AMENDMENT TO MID OCEAN LIMITED 1993 LONG TERM INCENTIVE AND SHARE AWARD PLAN The Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan (the "Plan") is hereby amended, effective as of December 4, 1996, as follows; provided, however, that this amendment shall be contingent upon approval by the - - -------- ------- affirmative votes of the holders of a majority of voting securities of Mid Ocean Limited at a meeting duly held during calendar year 1997. 1. Section 2(g) of the Plan is hereby amended to read as follows: "'Committee' shall mean the entire Board or the Compensation Committee of the Board, or such other committee of the Board as may be designated by the Board to administer the Plan." 2. Section 2(m) of the Plan is hereby amended to read as follows: "'Eligible Employee' means any employee or underwriter of, or underwriting consultant to, the Company or its Subsidiaries or Affiliates and any member of the Board (whether or not an employee of the Company) who, in the judgment of the Committee, is responsible for or contributes to the management, growth and/or profitability of the business of the Company, its Subsidiaries or Affiliates." 3. The third sentence of Section 4(a) of the Plan is amended by deleting the proviso at the end thereof. -2- 4. Section 6(d) of the Plan is amended by adding the following at the beginning thereof: "Except as otherwise determined by the Committee and set forth in the applicable Award Agreement," 5. Section 7(a) of the Plan is hereby amended by adding the following sentence at the end thereof: "Notwithstanding the foregoing, effective as of December 4, 1996, no additional Directors Options will be granted under this Section 7(a)." 6. Section 7(d) of the Plan is amended to read as follows: "Nontransferability. Except as otherwise determined by the ------------------ Committee and set forth in the applicable Award Agreement, no Director's Option granted under the Plan shall be transferable other than by will or the laws of descent and distribution, and during the lifetime of the optionee, a Director's Option shall be exercisable only by him or her or by his or her guardian or legal representative." 7. Section 9(d) of the Plan is amended by deleting the last sentence thereof. EX-10.10 5 MID OCEAN LTD STOCK COMPENSATION PLAN EXHIBIT 10.10 MID OCEAN LIMITED STOCK & DEFERRED COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS SECTION 1. Introduction. ------------ The Mid Ocean Limited Stock & Deferred Compensation Plan for Nonemployee Directors (the "Plan") provides an opportunity for nonemployee directors of Mid Ocean Limited to defer their annual retainer fees and have them deemed invested in Shares. It also provides for the payment of annual retainer fees of Directors in the form of Shares. The Plan is intended to encourage qualified individuals to accept nominations as directors of Mid Ocean Limited and to strengthen the mutuality of interest between the nonemployee directors and Mid Ocean Limited's other shareholders. SECTION 2. Definitions. ----------- For purposes of the Plan, the following terms shall be defined as set forth below. (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include successor provisions thereto and regulations thereunder. (c) "Company" means Mid Ocean Limited, a corporation organized under the laws of the Cayman Islands, or any successor corporation. (d) "Director" means a member of the Board who is not employed by the Company or any of its subsidiaries. (e) "Fair Market Value" means, with respect to Shares on any day, the following: (i) if the Shares are at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Shares on the day preceding the date in question on the stock exchange which is the primary market for the Shares, as such is officially quoted on such exchange, and if there is no reported sale of Shares on such exchange on such date, then the Fair Market Value shall be the closing -2- selling price on the exchange on the last preceding date for which such quotation exists; and (ii) if the Shares are not at the time listed or admitted to trading on any stock exchange but are traded in the over-the-counter market, the Fair Market Value shall be the closing selling price per share of Shares on the day preceding the date in question, as such price is reported by the National Association of Securities Dealers through the NASDAQ National Market System or any successor system, and if there is no reported closing selling price for Shares on such date, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of Fair Market Value. (f) "Plan" means this Stock & Deferred Compensation Plan for Nonemployee Directors. (g) "Plan Benefits" means the benefits described in Sections 5 and 6 hereof. (h) "Plan Year" means the calendar year. (i) "Shares" means Class A Ordinary Shares, $0.20 par value per share, of the Company. SECTION 3. Administration. -------------- The Plan shall be administered by the Board. The Board shall have full authority to construe and interpret the Plan, and any action of the Board with respect to the Plan shall be final, conclusive, and binding on all persons. SECTION 4. Annual Retainer Paid In Shares. ------------------------------ After the Effective Date of this Plan, each Director's annual retainer fee shall, subject to any deferral election made pursuant to Section 5 below, be paid in the form of Shares on a quarterly basis, in arrears. The number of Shares paid on each quarterly payment date shall be the number of Shares having an aggregate Fair Market Value (on the payment date) equal to one fourth of the Director's annual retainer fee. Fractional Share certificates will not be issued, and cash will be paid in lieu of fractional Shares at the time of termination of the Director's service on the Board. Shares distributed shall be vested in full on the payment date. -3- SECTION 5. Share Unit Accounts. ------------------- The Company shall maintain a Share unit account (an "Account") for each Director. Share units will be credited to each such Account as follows: (a) Each Director may make an irrevocable election on or before the December 31 immediately preceding the beginning of a Plan Year by written notice to the Company, to defer payment of all of the compensation otherwise payable as his or her annual retainer fee for service as a Director for the Plan Year. Notwithstanding the foregoing, a Director may make such an election within 70 days after first becoming eligible to participate in the Plan, with respect to compensation payable after the effective date of the election. All compensation which a Director elects to defer pursuant to this Section 5(a) shall be credited in the form of Share units to the Director's Account. The number of units (including fractional units) so credited will be equal to the number of Shares (including fractional Shares) having an aggregate Fair Market Value (on the date the compensation would otherwise have been paid) equal to the amount by which the Director's compensation was reduced pursuant to the deferral election. Deferrals of compensation hereunder shall continue until the Director notifies the Company in writing, on or prior to the December 31 immediately preceding the commencement of any Plan Year, that the Director wishes his or her compensation for such Plan Year and succeeding periods to be paid on a current basis. (b) As of each date on which a cash dividend is paid on Shares, there shall be credited to each Account that number of Share units (including fractional units) determined by (i) multiplying the amount of such dividend (per share) by the number of Share units in such Account; and (ii) dividing the total so determined by the Fair Market Value of a Share on the date of payment of such cash dividend. The additions to a Director's Account pursuant to this Section 5(b) shall continue until the Director's Plan Benefit is fully paid. -4- SECTION 6. Plan Benefits. ------------- (a) Form. The Plan Benefit of a Director shall consist of Shares ---- equal in number to the Share units in the Director's Account. Any fractional Share unit shall be paid in cash. (b) Distribution. ------------ (i) The Plan Benefit of a Director shall be distributed in a lump sum at the time of termination of the Director's service on the Board. (ii) In the case of the death of a Director, the Director's Plan Benefit shall be distributed, within a reasonable time as determined by the Company, after the Director's death to the Director's beneficiary or beneficiaries, as specified by the Director on a form furnished by and filed with the Secretary of the Company. If no beneficiary has been designated by the Director or if no beneficiary survives the Director, the undistributed balance of his or her Plan Benefit shall be distributed to the Director's surviving spouse as beneficiary if such spouse is still living or, if not living, in equal shares to the then living children of the Director as beneficiaries or, if none, to the Director's estate as beneficiary. SECTION 7. General. ------- (a) Nontransferability. Except as provided in Section 6(b)(ii), no ------------------ payment of any Plan Benefit of a Director shall be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor's process, whether voluntarily or involuntarily or by operation of law. Any act in violation of this subsection shall be void. (b) Compliance with Legal and Trading Requirements. The Plan shall ---------------------------------------------- be subject to all applicable laws, rules and regulations, including, but not limited to, federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. (c) Taxes. The Company is authorized to withhold from any payment ----- made under this Plan any amounts of withholding and other taxes due in connection therewith, and to take such other action as the Company may deem advisable to enable the Company and a Director to satisfy obligations for the payment of any withholding taxes and other tax obligations relating thereto. -5- (d) Amendment. The Board may amend, alter, suspend, discontinue, or --------- terminate the Plan without the consent of shareholders of the Company or individual Directors; provided, however, that, without the consent of an affected Director, no amendment, alteration, suspension, discontinuation, or termination of the Plan may impair the rights or, in any other manner, adversely affect the rights of such Director hereunder. (e) Unfunded Status of Awards. This Plan (other than Section 4 ------------------------- hereof) is intended to constitute an "unfunded" plan of deferred compensation. With respect to any payments not yet made to a Director, nothing contained in the Plan shall give any such Director any rights that are greater than those of a general creditor of the Company; provided, however, that the Company may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, or other property pursuant to any award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Company otherwise determines with the consent of each affected Director. (f) Nonexclusivity of the Plan. The adoption of the Plan by the -------------------------- Board shall not be construed as creating any limitations on the power of the Board to adopt such other compensation arrangements as it may deem desirable, including, without limitation, the granting of options on Shares and other awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. (g) Adjustments. In the event that subsequent to the Effective Date ----------- any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other such change, affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of Shares, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the Directors and preserve the value of the Directors' Share units, there shall automatically be substituted for each Share unit a new unit representing the number and kind of Shares, other securities or other consideration into which each outstanding Share shall be changed or for which each such Share shall be exchanged. The substituted units shall be subject to the same terms and conditions as the original Share units. (h) No Right to Remain on the Board. Neither the Plan nor the ------------------------------- crediting of Share units under the Plan shall be deemed to give any individual a right to remain a director of the Company or create any obligation on the part of the Board to nominate any Director for reelection by the shareholders of the Company. -6- (i) Governing Law. The validity, construction, and effect of the --------- --- Plan shall be determined in accordance with the laws of the State of New York without giving effect to principles of conflict of laws. (j) Effective Date. The Plan shall become effective as of January 1, -------------- 1997 (the "Effective Date"). (k) Titles and Headings. The titles and headings of the Sections in ------------------- the Plan are for convenience of reference only. In the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. EX-10.11.1 6 MARK E. BROCKBANK EMPLOYMENT AGREEMENT Exhibit 10.11.1 EMPLOYMENT AGREEMENT MARK E. BROCKBANK INDEX ----- 1. Service Agreement, dated 1st January, 1995. 2. Addendum to Service Agreement, dated 9th March, 1995 3. Letter to amend the Service Agreement, dated 29th September, 1995. 4. Letter to amend the Contract of Employment, dated 13th December, 1995 (operation of notice and restriction period). 5. Letter referring to restrictions on use of name and non-competition clause, dated 13th December, 1995. 1ST JANUARY 1995 (1) THE BROCKBANK GROUP PLC (2) ME BROCKBANK ________________________ SERVICE AGREEMENT ________________________ The Brockbank Group Plc Fitzwilliam House 10 St. Mary Axe LONDON EC3A 8BS I hereby relinquish my five year rolling Service Agreement dated 28th September 1988 and accept the attached Service Agreement as a replacement with immediate effect. Signed ________________________________________ ME BROCKBANK Dated 9th March 1995. THIS AGREEMENT is made on 1st January 1995 BETWEEN - - -------------- ------- (1) THE BROCKBANK GROUP PLC (registered in England under number 1844295) whose registered office is at Fitzwilliam House, 10 St. Mary Axe., London EC3A 8BS ("the Company"); and (2) ME BROCKBANK of 48 Gloucester Square, London W23TQ ("the Executive") 1. APPOINTMENT 1.1 The Company hereby appoints the Executive and the Executive hereby agrees to serve the Company as Chief Executive Officer and as a director of such Group Company as the Company shall from time to time nominate and notify in writing to the Executive upon the terms and conditions hereinafter contained. 1.2 The Company shall employ the Executive and the Executive shall serve the Company and any applicable Group Company (subject to the provisions of Clause 12) as from the Commencement Date unless and until either party shall give to the other not less than twelve months' written notice. 1.3 The Executive's written period of continuous employment with the Company began on 01 October 1980. 2. DUTIES 2.1 The Executive shall perform such duties as are consistent with his position and exercise such powers in relation to the business of the Company and any Group Company as from time to time may be assigned to or vested in him by the Board. Such duties may relate to the Company or any Group Company and will be performed by the Executive subject to such restrictions consistent as aforesaid as the Board may from time to time impose. 2.2 During the term of his engagement hereunder the Executive (unless prevented by ill-health or accident or during any permitted holiday absences) shall devote to his duties hereunder substantially his full time attention and abilities for the proper discharge of his duties. 2.3 The Executive shall in all respects conform to and comply with the directions and regulations from time to time given or made by the Board and shall well and faithfully serve the Company and the Group Companies and shall use his best endeavours to promote and develop the respective interests thereof. -2- 2.4 The Executive shall comply with all regulatory requirements of Lloyd's applicable to him and all Group Companies to the extent consistent with his responsibilities from time to time in force. 2.5 The Company shall be under no duty to provide the Executive with any work during any notice period hereunder and, during such period, may require the Executive to perform his duties from his home address. 3. REMUNERATION 3.1 The Company shall pay to the Executive during the term of his engagement a salary at the rate of (Pounds)300,000 per annum or such higher rate as may from time to time be agreed or determined by the Board and notified to the Executive in writing. Such salary shall be paid in equal monthly installments in arrears on the 26th day of each month and shall be subject to review (with no obligation to award an increase in salary) annually by the Board. 3.2 Payments to be made to the Executive pursuant to the provisions of Clause 3.1 shall be deemed to accrue from day to day and the Executive shall be entitled to a rateable proportion of his salary for any broken -3- period in the event of the engagement commencing or terminating during any month. 3.3 The Executive shall be entitled to receive his full salary during permitted holiday periods and also in respect of any period for which he is prevented by illness, accident or other incapacity from properly performing his duties hereunder, provided that where the absence is due to illness, accident or other incapacity the Executive shall if required by the Board furnish evidence thereof satisfactory to the Board and the Executive shall give credit to the Company for the amount of any sums he shall be entitled to claim by way of social security benefits and any scheme for the time being in force of which the Executive is a member by virtue of his engagement by the Company is consequence of such illness accident or other incapacity. 3.4 In the event that the Executive shall be required to perform any duties or exercise any powers in relation to any Group Company in accordance with the provisions of Clause 2.1 such proportion as the Board may determine having regard to the nature and extent of such duties of the Executive's remuneration may be -4- paid by the Group Company or Group Companies shall be accepted by the Executive pro tanto in satisfaction of the obligation of the Company to remunerate him under the provisions of Clause 3.1. 4. EXPENSES The Company shall reimburse the Executive all reasonable out of pocket expenses properly incurred by him in the performance of his duties hereunder including traveling, subsistence and entertainment expenses and he shall provide the Company with vouchers or other evidence of such expenses. 5. MOTOR CAR/CAR ALLOWANCE 5.1 Subject to and in accordance with the "Company's Car Scheme" from time to time in force, the Company shall provide the Executive with the use of a motor car or monthly car allowance solely at the Company's discretion. The full policy document is held by the Group Personnel Manager. 6. RETIREMENT, PENSION AND INSURANCE BENEFITS 6.1 In any event and without prior notice this Agreement shall terminate on the last day of the month in which the Executive attains the age of 65 years. -5- 6.2 The Executive shall during the duration of this Agreement be entitled to: 6.2.1 Remain a member of the Company's contributory pension scheme (Brockbank Group Pension Scheme established by an interim deed dated 30th June 1980) subject to and in accordance with the rules of that scheme, full particulars of which have been supplied to the Executive. There is a contracting out certificate in force in respect of the Executive's employment; or 6.2.2 Receive equivalent payments to a personal pension plan. 6.3 The Company shall pay premiums on behalf of the Executive for private medical health insurance for himself, his spouse and minor children in accordance with the rules from time to time of the Company in which the Executive is entitled to be a participant or such other private health insurance scheme as the Company shall adopt. 6.4 The Company will provide a death insurance benefit equal to the four times your annual salary, subject to Inland Revenue Limits, and; the company will provide permanent health insurance. -6- 7. HOLIDAY ENTITLEMENT 7.1 The Executive shall be entitled to 25 working days holiday in each calendar year (as well as the customary public and statutory holidays) to be taken at such time or times as may be agreed with the Board. 7.2 On the termination of the Executive's appointment his holiday entitlement for the calendar year in which such termination takes place shall be in direct proportion to the length of service in that year and he shall be paid his salary in lieu of any such holiday entitlement not taken as at the date of termination. 8. PLACE OR WORK 8.1 The Executive's normal place of work (excluding business traveling) shall be at Fitzwilliam House, 10 St. Mary Axe, London EC3A 8BS or at such other place within the United Kingdom as the Company may from time to time determine. 8.2 The Executive shall undertake such travel both within and outside the United Kingdom as may be necessary for the proper performance of his duties. -7- 9. AUTHORITY/REPRESENTATIONS 9.1 The Executive shall not within the prior consent of the Board (as evidenced by a resolution of the Board); 9.1.1 incur any capital expenditure in excess of such sum as may be authorised from time to time; or 9.1.2 enter into on behalf of the Company or any company in the Group any commitment, contract or arrangement outside the normal course of business or the scope of his normal duties or of an unusual or onerous or long term nature. 9.2 The Executive shall not at any time make any untrue statement in relation to the Company or any Group Company and in particular shall not after the termination of his employment hereunder wrongfully represent himself as being employed by or connected with the Company or any Group Company. 10. BUSINESS INTERESTS AND CONFIDENTIALITY 10.1 During the continuance of his appointment hereunder the Executive shall not, without the prior written consent of the Board, directly or indirectly engage or be concerned or interested in any other business -8- of a similar nature to which would or might compete with the business for the time being carried on by the Company or any Group Company either alone or jointly with or as a director, manager, agent or servant of any other person firm company or organisation, provided that nothing in this clause shall preclude the Executive from holding or being interested in investments representing not more than 5 percent of the issued investments of any class of a company any part of whose share or loan capital is quoted or dealt in on The Stock Exchange or the Unlisted Securities Market. 10.2 The Executive shall not either during the continuance of his appointment hereunder (except in the proper performance of his duties) nor at any time after the termination hereof make use of or divulge or communicate to any person, firm, company or organisation any of the trade secrets or other confidential information of the Company or any Group Company or of any of the respective Names or Syndicates represented or managed by the Company and the Group Companies which may heretofore or hereafter have been entrusted to him or have come to his knowledge at any time while -9- in the service of the Company or any Group Company (whether under this Agreement or otherwise). 11. DIRECTORSHIP 11.1 The Executive shall not prior to the termination of this Agreement resign or be subject to retirement by rotation as a director of any Group Company (unless the Articles of Association of the relevant Group Company as amended from time to time so provide) save as herein otherwise provided. 11.2 If the Executive shall cease for any reason whatsoever to be a director of any Group Company this Agreement shall (unless the parties otherwise agree in writing) thereupon automatically terminate but if such cessation is caused by any act or omission of either party without the consent, concurrence or complicity of the other such act or omission shall be deemed a breach of this Agreement and determination hereunder shall be without prejudice to any claim for damages in respect of such breach provided that the Executive shall be treated as the party in breach if he is removed from office in circumstances which justify termination under Clause 12. -10- 11.3 Upon the termination of this Agreement for whatsoever reason the Executive shall at the request of the Company resign forthwith without claim for compensation from all offices held by him in any Group Company or from any position which he occupies as a trustee in relation to the business of the Company or any Group Company and in the event of his failing so to do within seven days after the making of such request the Company is hereby irrevocably authorised to appoint its secretary for the time being as the agent of the Executive in his name and on his behalf to give notice of such resignation and to do all other things requisite to give effect thereto. 12. TERMINATION ON THE HAPPENING OF CERTAIN EVENTS 12.1 The Company shall have the right to terminate this Agreement without liability for compensation or damages: 12.1.1 by not less than 3 months' notice in writing given at any time while the Executive is incapacitated by illness or accident or otherwise from properly performing his duties hereunder and shall have been so incapacitated for a period or periods in the aggregate -11- exceeding 180 days in any period of 12 consecutive months; or 12.1.2 forthwith by notice in writing in the Executive shall: 12.1.2.1 become bankrupt or make any arrangement or composition with his creditors or take advantage of any statute for the time being in force affording relief for insolvent debtors; or 12.1.2.2 be convicted or any criminal offence other than an offence under the Road Traffic Acts not involving a sentence of imprisonment; or 12.1.2.3 commit any material breach of any term of this Agreement which is incapable of remedy to the satisfaction of the Company within 28 days of being requested so to do by the Company; or 12.1.2.4 be guilty of material misconduct or material default in the course of his employment or commit any serious breach or (after warning) any repeated or continued breach of any of his duties and obligations as employee; or -12- 12.1.2.5 wilfully neglect to perform or prove to be incapable of performing his duties hereunder (otherwise than as a result of illness, accident or other such incapacity); or 12.1.2.6 refuse or neglect to comply with any lawful orders or directions given to him by the Company; or 12.1.2.7 be guilty of conduct (whether or not connected with his employment) tending to bring himself or the Company into disrepute; or 12.1.2.8 be disqualified from being a director of the Company or any company under any legislation; or 12.1.2.9 become of unsound mind or has a receiver appointed under the Mental Health Acts; or 12.1.2.10 be precluded by the direction or regulation of the Council or Committee of Lloyd's or an authorised officer of Lloyd's from acting (otherwise than by an order of Administrative Suspension) as a director of a Lloyd's underwriting agent; or 12.1.2.11 commit a disciplinary offence for which he is censured in Lloyd's disciplinary proceedings which cen- -13- sure materially affects his ability to perform his duties hereunder; or 12.1.3 forthwith without notice if the Executive shall die. 12.2 The Executive shall have no claim against the Company arising out of the termination of this Agreement or his appointment hereunder if: 12.2.1 such termination is by reason of reconstruction or amalgamation, whether by winding up the Company or otherwise, and the Executive shall be offered employment with any company, concern or undertaking resulting from such reconstruction or amalgamation of a similar nature to his appointment hereunder on terms no less favourable to him than those contained in this Agreement; or 12.2.2 the Executive shall refuse or fail to agree to accept employment on terms no less favourable to him than those contained in this Agreement by a company concern or undertaking which has acquired or agreed directly or indirectly the whole or substantially the whole of the undertaking and assets of the Company or the whole or not less than 90 per cent of the issued equity share capital of the Company and the Company shall terminate this Agreement within one month after such refusal or failure to agree. 13. OTHER TERMS AND CONDITIONS APPLICABLE ON TERMINATION Upon the termination of the Executive's appointment howsoever occasioned he shall forthwith deliver to the Company (without retaining copies of the same) all correspondence, drawings, specifications, accounts, documents and papers of any description relating to the affairs and business of the Company or any Group Company whether or not the same were prepared by him or were originally supplied by the Company or a Group Company and all other property of the Company or any Group Company within his possession or under his control. 14. GRIEVANCE PROCEDURE If the Executive is dissatisfied with any disciplinary decision or if he has any grievance relating to this appointment hereunder he should follow the procedure set out in the Staff Handbook. 15. SURVIVAL OF COVENANTS Notwithstanding the termination of this Agreement it shall remain in full force and effect to the extent that the obligations of the Executive which are expressed to operate thereafter or are of a continuing nature are con- -15- cerned and may be enforced against the Executive accordingly. 16. INCORPORATION OF SCHEDULES The provisions of the First Schedule hereto form part of this Agreement and are incorporated herein. 17. GOVERNING LAW This Agreement shall be governed by the Laws of England and Wales and the parties hereto submit to the exclusive jurisdiction of the courts of England and Wales. 18. DEFINITIONS In this Agreement the following expressions shall, unless the context otherwise requires, have the following meanings: 18.1 "Commencement Date" 1st January 1995 18.2 "Board" the Board of Directors of the Company (or any director or committee of directors duly authorised by the Board); 18.3 "working days" weekdays but excluding Saturdays, bank or other public holidays; 18.4 "calendar year" a year commencing 1st January; -16- 18.5 "Group Company" any company which is for the time being a subsidiary of the Company or a holding company of the Company or any subsidiary of such holding company within the meaning of section 736 Companies Act 1985 (as amended); 18.6 "Lloyd's" the Society and Corporation of Lloyd's created and governed by the Lloyd's Acts 1971-1982; and 18.7 "Names" and "Syndicates" the meanings ascribed to such expressions in paragraph 1 of the First Schedule hereto. 19. NOTICES Any notice to be given hereunder shall be in writing and may be served in the case of the Executive by being delivered personally to him or left for his or sent by registered post addressed to him at his usual or last known address or in the case of the Company by being delivered at or sent by registered post or recorded delivery addressed to its registered office for the time being. 20. PRIOR AGREEMENTS This Agreement: 20.1 shall take effect in substitution for all previous agreements and arrangements whether written oral or -17- implied between the Company or any Group Company and the Executive relating to the service of the Executive all of which agreements and arrangements shall be deemed to have been terminated by mutual consent as from the Commencement Date; 20.2 contains the whole of the terms agreed in respect of the Executive's employment as from the Commencement Date; and 20.3 shall only be capable of being varied by a supplemental agreement or memorandum in writing signed by or on behalf of the parties hereto. EXECUTED AS A DEED by the Company ) in the presence of: ) Director_____________________________ Secretary____________________________ SIGNED AS A DEED and DELIVERED ) by the EXECUTIVE in the presence of ) -18- THE FIRST SCHEDULE ------------------ RESTRICTIVE COVENANTS --------------------- 1. DEFINITIONS In the Schedule unless the context otherwise required the following expressions shall have the following meanings: 1.1 "Brockbank" Brockbank Group plc and any of its subsidiaries; 1.2 "Brockbank Syndicates" any Syndicates from time to time managed by Brockbank; 1.3 "the Business" the business of a Managing Agency as Lloyd's or corporate syndicate at Lloyd's and its ancillary activities or any part thereof carried on by any Group Company as at the Termination Date and the period of 12 months prior thereto within England and Wales and the business of any Group Company at the Termination Date to which the Executive has rendered services or by which he has been engaged at any time during the period of 12 months prior to the Termination Date; 1.4 "directly or indirectly" (without prejudice to the generality of the expression) whether as principal or agent either alone or jointly or in partnership with any other person firm company or (except as the holder of securi- ies listed dealt in or traded on a recognised Stock Exchange, not xceeding 3% in nominal value of the securities of that class) as a shareholder in any other company being concerned or interested in any other person firm or company and whether as a director principal partner consultant employee or otherwise; 1.5 "Senior Executive" a person who is or was at any time while the Executive was employed by the Company or engaged by any Group Company: 1.5.1 engaged or employed as an employee, director or consultant of that company; and 1.5.2 engaged in a capacity in which he obtained Information; and 1.5.3 entitled to emoluments (including commission if any) exceeding the annual rate of (Pounds)50,000; and 1.5.4 so engaged at any time during the period of 12 months prior to the Termination Date; 1.6 "Council" the Council of Lloyd's which includes its delegates and persons by whom it acts; 1.7 "Information" information or knowledge of a confidential nature concerning and relating to the goodwill of the -2- Business including (without prejudice to the generality of the foregoing) information and know-how as to proposed policy wordings or proposed insurance policies to be offered by Brockbank but which are not available at Lloyd's during the Restriction Period, suppliers, Lloyd's Brokers, Members' Agents, business policy and expansion or forward planning programmes which the Executive shall have acquired before the Termination Date; 1.8 "Lloyd's Adviser" a person who is listed on the register of Lloyd's Advisers maintained under the Lloyd's Advisers Byelaw (No. 19 of 1993); 1.9 "Lloyd's Broker" a partnership or body corporate permitted by the Council to broke insurance business at Lloyd's; 1.10 "Members' Agent" an underwriting agent which is listed as a members' agent on the register of underwriting agents maintained under the Underwriting Agents Byelaw (No. 4 of 1984); 1.11 "Names" underwriting members of Lloyd's; 1.12 "the Restriction Period" the period of 12 months from the Termination Date; -3- 1.13 "Syndicate" shall have the same meaning as contained in the Underwriting Agents Byelaw (No. 4 of 1984); and 1.14 "Termination Date" the date which actually terminates the Executive's employment hereunder. 2. The parties hereto agree and acknowledge that it is reasonable and necessary for the protection of goodwill and trade connections of the Business that the Executive should be restrained in the terms of the covenants contained herein from making available or using for the benefit of himself or a competitor or potential competitor Information which he has obtained and is likely to obtain in the course of his employment as an Executive of the Company. 3. The Executive accordingly covenants with the Company that in view of the circumstances referred to in paragraph 2 of this Schedule, he will not (other than for and on behalf of the Company or any Group Company) without the prior written consent of the Board (such consent to be withheld only so far as may be reasonably necessary to protect the legitimate interests of the Company and any Group Company) directly or indirectly: 3.1 at any time during the Restriction Period: -4- 3.1.1 be engaged or concerned or interested or participate in a business the same as or in competition with the Business in the City of London; 3.1.2 in relation to a business which may in any way be in competition with the Business, canvass, solicit or entice the custom of or approach or cause to be canvassed, solicited, enticed or approached or deal with or supply any services to any person who at the date hereof or at any time during the period of two years prior to the Termination Date has been a Members' Agent or Lloyd's Adviser providing as agent for and on behalf of its Names capacity of at least (Pounds)5 million to one or more of the Brockbank Syndicates; or 3.1.3 in relation to a business which may in any way be in competition with the Business, offer employment to or employ or offer to conclude any contract for services with any Senior Executive or procure or facilitate the making of such an offer by any person, firm or company who shall be in competition with the Business within such Restriction Period; or 3.1.4 solicit or entice any Senior Executive to leave his employment with the Company or any Group Company; -5- 3.1.5 knowingly assist any competitor of the Company or any Group Company or any of its subsidiaries to a material extent in carrying on or developing any business which may in any way be the same as or similar to or in competition with the Business; 3.2 at any time solicit or entice or endeavour to solicit or entice any person to breach his contract of employment or contract for services with the Company or any Group Company or procure or facilitate such by any person firm or company; 3.3 except as required by law at any time do or say anything likely or calculated to lead any person, firm or company to withdraw from or cease to continue offering to the Company or any Group Company any rights then enjoyed by it or in any other way to cease to do business or reduce the amount of business it transacts with any member of the Company or any Group Company; 3.4 at any time: 3.4.1 disclose to any person (except as required by law) or use to the detriment of the Company or any Group Company any Information which he has acquired before the Termination Date; -6- 3.4.2 falsely represent himself as being connected with or interested in the Company or any Group Company or in the Business; 3.4.3 at any time carry on a business under the name "Brockbank" or any similar or other name likely to confuse or mislead any part of the public. 4. The Executive hereby acknowledges and agrees with the Company that: 4.1 each of the sub-clauses contained in paragraph 3 of this Schedule constitutes an entirely separate severable and independent covenant and restriction on him; 4.2 the duration, extent and application of each of the restrictions contained in paragraph 3 are no greater than is necessary for the protection of the goodwill and trade connections of the Business; and 4.3 in the event that any restriction on him contained in paragraph 3 of this Schedule shall be found void but would be valid if some part thereof were deleted such restriction shall apply with any such deletion as may be necessary to make it valid and effective. -7- ADDENDUM TO SERVICE AGREEMENT BETWEEN M.E. BROCKBANK AND THE BROCKBANK GROUP plc DATED 1 JANUARY 1995 Sub-Clause 3(b) You will be entitled to 15% of all net retained profit commission received by the managing agencies within the Group for the 1992, 1993 and 1994 years of account only. This arrangement ceases with effect from the 1995 year of account in accordance with the terms of the buy-out agreement dated 30 December 1994. (Net retained profit commission is defined as profit commission received less introducers profit commissions payable). Signed on behalf of the Company Director Signed by Executive 9 March 1995 BROCKBANK The Brockbank Group plc Fitzwilliam House 10 St. Mary Axe, London EC3A 8BS Telephone 0171-3902101 Fax 0171-3902102 Attn: M.E. Brockbank 29th September 1995 Dear Mark, You are invited to accept the amendments, set out below, to your Service Agreement dated 1st January 1995. On agreeing to and accepting these changes your Service Agreement, together with this statement and the Company Handbook, will form your terms and conditions of employment. The words defined in your service agreement shall have the same meaning when used in this statement. 1. The period of time for which any restrictive covenants in your service agreement are expressed to apply after the Termination Date shall be reduced by the amount of time, if any, which you are placed on "gardening leave" prior to the Termination Date under your service agreement. 2. With regard to the restrictive covenants contained in the first schedule to your service agreement, the Company confirms that insofar as the Board refuse consent pursuant to paragraph 3 of that Schedule or give such consent on a qualified basis which effectively prohibits you from working during the Restriction Period, the Company shall pay you monthly in arrears during the Restriction Period an amount equal to your monthly salary pursuant to clause 3.1 of your service agreement immediately prior to the Termination Date. Provided always that: a) The Company shall have no obligation to pay you pursuant to this letter if your employment with the Company shall have been terminated pursuant to clause 12.1.2 of your service agreement; b) you continue to observe the obligations in your service agreement which survive the Termination Date; and c) you shall not be entitled to any other benefits during any such Restriction Period including but not limited to pension and insurance benefits. The remainder of your terms and conditions of employment are unaltered. To confirm your agreement to these amendments please sign, date and return to me the enclosed copy of this letter. Yours sincerely, KJ ALLEN I accept the amendments to the Service Agreement set out in this statement. Signed: _________________________________ Dated: _________________________________ Brockbank Underwriting Limited 10 St. Mary Axe London EC3A 8BS Registered in England and Wales no. 3108265 To: Mark Brockbank Esq. 13th December, 1995 Dear Mark, Your Contract of Employment --------------------------- This letter is to record the amendments which we have agreed shall be made to your contract of employment with effect from Completion (as defined in the Subscription and Shareholders' Agreement of today's date between The Brockbank Group plc, Mid Ocean Limited, Mid Ocean Reinsurance Company Limited and Baltusrol Holdings Ltd.). Rather than your contract being terminable on 12 months' notice by either party expiring at any time, your contract is not terminable on 12 months' notice by either party, such notice not to expire before the third anniversary of Completion. In addition, the "Restriction Period" referred to in your written contract shall be a period of 2 years. In all other respects your current contract of employment (as amended prior to the date hereof) shall continue in full force and effect. Please confirm your agreement to the above by signing below. Yours sincerely, __________________________ for and on behalf of Brockbank Underwriting Limited Agreed _________________________ Mark Brockbank 13th December, 1995 To: Mid-Ocean Reinsurance Company Ltd. Brockbank Holdings Limited Brockbank Underwriting Limited From: Mark Brockbank 13th December, 1995 Dear Sirs, Use of Names ------------ I refer to the Subscription and Shareholders' Agreement between Brockbank Group Plc ("Brockbank Group"), Mid-Ocean Limited, Mid-Ocean Reinsurance Company Ltd. and Balrusrol dated today (the "Shareholders Agreement") and the Agreement for the Sale and Purchase dated yesterday of the business and assets of Brockbank Group between Brockbank Group and Brockbank Underwriting Limited (the "Hivedown Agreement"). I hereby undertake that for the period of 5 (five) years from the date of completion of the Shareholders Agreement I shall not carry on any business which competes or is likely to compete with the business of Brockbank Underwriting or any holding company or subsidiary of Brockbank Underwriting (the "Restricted Business") under or by reference to the name (and/or trade mark) "Brockbank" and shall not directly or indirectly assist or be involved in any business which conducts the Restricted Business. I further agree for such period not to licence or purport to license the "Brockbank" name to any person in connection with any Restricted Business. I recognise that this restriction is reasonable in connection with the transactions contemplated by the agreements referred to above and that any use of the name Brockbank which would breach or infringe the undertaking given by me above would not be legitimate or bona fide. This document is intended to create a legally binding undertaking and shall be construed in accordance with English law. I intend this document to be a deed and execute and deliver it as a deed. Signed as a Deed by Mark Brockbank ______________________________________ in the presence of:_____________________________________ EX-10.11.2 7 HENRY C.V. KEELING EMPLOYMENT AGREEMENT Exhibit 10.11.2 MID OCEAN R e i n s u r a n c e EMPLOYMENT AGREEMENT HENRY C.V. KEELING EMPLOYMENT AGREEMENT -------------------- (amended and restated as of August 19, 1996) AGREEMENT, made and entered into this 19th day of August, 1996 by and between Mid Ocean Reinsurance Company Ltd., a Bermuda corporation (the "Company"), and Henry C. V. Keeling (the "Executive"). WHEREAS, on November 1, 1995, the Company and the Executive entered into an employment agreement (the "Prior Agreement") pursuant to which the Company agreed to employ the Executive, and the Executive agreed to serve, as resident Senior Vice President and Chief Underwriting Officer, subject to the terms and conditions of such Prior Agreement; and WHEREAS, the Company desires to amend and restate the Prior Agreement as set forth herein; and WHEREAS, the Executive wishes to continue such employment under the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company and the Executive (the "Parties") agree as follows: -2- 1. EMPLOYMENT. ---------- The Company hereby employs the Executive, and the Executive hereby accepts employment with the Company, for the term of this Agreement as set forth in Section 2, below, in the position with duties and responsibilities set forth in Section 3, below, and upon such other terms and conditions as are hereinafter stated. 2. TERM OF EMPLOYMENT. ------------------ The term of employment under this Agreement shall commence on August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue through the close of business on the third anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 9, below. Thereafter such term shall automatically be renewed for successive one-year periods unless the Company gives notice in writing to the Executive or the Executive gives notice in writing to the Company at least 60 days prior to the then scheduled expiration date that the term is not to so renew. 3. POSITIONS, DUTIES AND RESPONSIBILITIES. -------------------------------------- (a) GENERAL. The Executive shall be employed as Resident Chief ------- Underwriting Officer and Executive Vice President for the Company, with such duties and responsi- -3- bilities, including but not limited to underwriting, as may be assigned to him by the President and Chief Executive Officer or his successor. In carrying out his duties and responsibilities, the Executive shall report to the President and Chief Executive Officer. During the term of this Agreement, the Executive shall devote his full business time to the business and affairs of the Company, including any corporation, partnership or other venture in which the Company owns, directly or indirectly, 50 percent or more of the stock or, in the case of any entity or venture other than a corporation, 50 percent or more of the equity interest (an "AFFILIATE"), and shall use his best efforts, skills and abilities to promote the Company's interests. (b) PERFORMANCE OF SERVICES. The Executive shall be stationed in ----------------------- Bermuda and his services under this Agreement shall be generally performed in Bermuda unless the Executive and the Company's Board of Directors (the "BOARD") mutually agree in writing to the performance of such duties in another location outside the United States. (c) PERMITTED ACTIVITIES. Anything herein to the contrary -------------------- notwithstanding, nothing shall preclude the Executive from (i) serving on the boards of directors of a -4- reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in charitable activities and community affairs and (iii) managing his personal investments and affairs, provided such activities do not materially interfere with the proper performance of his duties and responsibilities as resident chief Underwriting Officer for the Company. 4. BASE SALARY. ----------- The Executive shall be paid a Base Salary by the Company at an annual rate of US$325,000, payable in accordance with the Company's regular pay practices. Such Base Salary shall be subject to annual review and may be increased at the discretion of the Executive Committee of the Board. 5. ANNUAL BONUS. ------------ In addition to the Base Salary provided for in Section 4, above, the Executive may be awarded such annual bonuses as may be determined by the Executive Committee of the Board, based on whatever incentive programs have been adopted by the Company for senior executives of the Company, and Parent (as defined below) as well as the performance of the Executive and the performance of the Com- -5- pany. Any bonus shall be paid in cash in a lump sum promptly following determination thereof. In any event, each annual bonus shall be at least $50,000. 6. STOCK OPTION. ------------ The Executive will be awarded Stock Options ("OPTIONS") under the 1993 Long-Term Incentive and Share Award Plan (the "PLAN") of the Company's parent, Mid Ocean Limited, a Cayman Islands corporation (the "PARENT") periodically as appropriate on the terms set forth in the Plan. 7. EMPLOYEE BENEFIT PROGRAMS. ------------------------- During the term of the Executive's employment under this Agreement, the Executive shall be entitled to participate in all employee benefit programs of the Company and Parent as are in effect from time TO time and in which senior executives of the Company and Parent an eligible to participate. 8. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. -------------------------------------------------- (a) EXPENSE REIMBURSEMENT. During the term of the Executive's --------------------- employment under this Agreement, the Executive shall be entitled to receive reimbursement by the Company or Parent for all reasonable out-of-pocket travel ex- -6- penses, entertainment expenses and other expenses incurred by him in performing services under this Agreement, provided that the Executive submits reasonable documentation with respect to such expenses. This shall include, without limitation, reimbursement of any such costs for air fare (which the Executive shall be entitled to on a first-class basis), hotel accommodations and meals. (b) FRINGE BENEFITS. During the term of the Executive's employment --------------- under this Agreement, the Executive shall be entitled to participate in any of the Company's and Parent's executive fringe benefits in accordance with the terms and conditions of such arrangements as are in effect from time to time for the Company's and Parent's senior executives. In all events, the Executive shall be entitled during the period he is employed to the following: (i) a living allowance of up to US$8,000 per month (to be prorated for partial months) while the services are generally performed in Bermuda, (ii) use of an automobile in Bermuda, -7- (iii) reimbursement of the cost (including initiation fees and annual dues) of membership in two clubs in Bermuda, (iv) reimbursement by the Company for the reasonable cost of financial and tax planning, such reimbursement not to exceed US$10,000 per year; and (v) air fare for up to three round-trip first-class non- business trips per year between London and Bermuda by the Executive and such members of his family as may accompany him (the benefit under this Section 8(b)(iv) being in addition to any reimbursement of air fare described in Section 8(a)). 9. TERMINATION OF EMPLOYMENT. ------------------------- (a) TERMINATION DUE TO DEATH. ------------------------ In the event the Executive dies during the term of employment, the Executive's spouse or, if she does not survive him, the estate or other legal representative of the Executive shall be entitled to receive the Executive's Base Salary as provided in Section 4, above, at the rate in effect immediately prior to termination, through the -8- end of the month in which the Executive dies. In addition to the above, the estate or other legal representative of the Executive shall be entitled to: (i) any annual bonus awarded but not yet paid under Section 5, above, (ii) a pro rata bonus for the year of death, if the Executive Committee of the Board so determines, (iii) the rights under any options as provided in Section 6, above, in accordance with the terms thereof, and (iv) any other rights and benefits available under employee compensation or benefit programs of the Company, or their equivalent, as provided in Section 7, above, and under business expense reimbursement and fringe benefit programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs. (b) TERMINATION DUE TO DISABILITY. ----------------------------- -9- In the event the Executive's employment with the Company is terminated due to his disability, as determined under the Company's long- term disability plan, the Executive shall be entitled to: (i) the Base Salary as provided in Section 4, above, through the end of the month in which the Executive's employment terminates due to disability, (ii) any annual bonus awarded but not yet paid under Section 5, above, (iii) the rights under the Options as provided in Section 6, above, in accordance with the terms thereof, (iv) any other rights and benefits available under employee benefit programs of the Company, or their equivalent, as provided in Section 7, above, including, without limitation, the terms of any long-term disability plan, and under the business expense reimbursement and fringe benefit programs as described in Section 8, above, determined in accordance -10- with the applicable terms and provisions of such programs. (c) TERMINATION FOR CAUSE. --------------------- (i) The employment of the Executive under this Agreement may be terminated by the Company for Cause. For this purpose, "Cause" shall mean: (A) conviction of the Executive of a felony involving moral turpitude, or (B) the Executive, in carrying out his duties for the Company under this Agreement, has been guilty of (I) gross neglect or (II) gross misconduct. (ii) In the event of a termination for Cause under Section 9(c)(i), above, the Executive shall be entitled only to: (A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment for Cause, through the date on which termination for Cause occurs, -11- (B) the rights, if any, under the Options as provided in Section 6, above, determined in accordance with the terms thereof, and (C) any other rights and benefits, if any, available under employee benefit programs of the Company, or their equivalent, as provided in Section 7, above, and under the business expense reimbursement and fringe benefit programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs. (d) TERMINATION WITHOUT-CAUSE. ------------------------- (i) Anything in this Agreement to the contrary notwithstanding, the Executive's employment may be terminated without Cause as provided in this Section 9(d). A termination due to disability, as described in Section 9(b), above, or a termination for Cause, as described in Section 9(c), above, shall not be deemed a termination without Cause under this Section 9(d). -12- (ii) In the event the Executive's employment is terminated without Cause (x) prior to a "CHANGE IN CONTROL" of Parent (as defined in Exhibit A hereto) or (y) following the first anniversary of a Change of Control, the Executive shall be entitled to: (A) Base Salary as provided in Section 4, above, at the rate in effect in accordance with Section 4, above, immediately prior to such termination, payable in equal monthly installments for a period of 12 months following the date of such termination, (B) any annual bonus awarded but not yet paid under Section 5, above, (C) the rights under any Options as provided in Section 6, above, in accordance with the terms thereof, (D) continued coverage under the employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 7, above, in which the Executive was participating at the time of his termination of employment for the period of salary con- -13- tinuation or, if longer, for the period provided in such programs; provided, however, that any such continued coverage shall be offset by -------- ------- comparable coverage provided to the Executive in connection with subsequent full-time employment and, to the extent the Company or Parent is unable to continue such coverage, the Company or Parent shall provide the Executive with economically equivalent benefits determined on an after-tax basis, and (E) any other rights and benefits available under employee benefit programs of the Company or Parent, or their equivalent, as provided in Section 7, above and under the business expense reimbursement and fringe benefit programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs. (iii) In the event the Executives employment is terminated by the Company without Cause within the 12 month period following a Change in Control (the "POST-CHANGE Period"), or the -14- Executive terminates his employment with the Company for "GOOD REASON" (as defined in Exhibit B hereto) during the Post-Change Period, the Executive shall be entitled to: (A) Base Salary as provided in Section 4, above, at the rate in effect in accordance with Section 4, above, immediately prior to such termination, payable in equal monthly installments for a period of 24 months following the date of such termination, (B) an amount equal to two times the largest annual bonus awarded to the Executive in the three year period prior to the year in which a Change of Control occurs, paid in equal monthly installments for the period of Base Salary continuation, (C) an amount equal to the annual bonus that would have been awarded to Executive in respect of the year in which the Change in Control occurs, multiplied by a fraction, the numerator of which is the number of months or fraction thereof in which the Executive was employed by the Company in such year, and the denominator of which is 12. -15- (D) the rights under any Options as provided in Section 6, above, in accordance with the terms thereof, (E) continued coverage under the employee benefit programs of the Company or Parent, or their equivalent, as provided in Section 7, above, in which the Executive was participating at the time of his termination of employment for the period of Base Salary continuation or, if longer, for the period provided in such programs; provided, however, that any such -------- ------- continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent full-time employment and, to the extent the Company or Parent is unable to continue such coverage, the Company or Parent shall provide the Executive with economically equivalent benefits determined on an after-tax basis, and (F) any other rights and benefits available under employee benefit programs of the Company or Parent, or their equivalent, as provided in Section 7, above, and under the business expense reimbursement and fringe benefit programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs. -16- (iv) If, at any time during the term of the Executive employment hereunder, the Executive fails to be appointed (or re-appointed, as appropriate) as resident Chief Underwriting Officer for the Company, the Executive shall have the right to terminate his employment and such termination, if prior to a Change in Control, shall be deemed a termination by the Company without Cause under Section 9(d)(ii), above, or, if following a Change in Control, shall be deemed a termination by the Company without Cause under Section 9(d)(iii), above, provided the Executive shall have given the Company written notice of his decision and shall not within 10 business days thereafter have been reinstated to the relevant position. (e) VOLUNTARY TERMINATION BY THE EXECUTIVE. -------------------------------------- The Executive may voluntarily terminate his employment prior to the expiration of the term of this Agreement. Such termination shall constitute a voluntary termination and, except as provided in Section 9(d)(iii) above, in such event the Executive shall be limited to the same rights and benefits as applicable to a termination by -17- the Company or Parent for Cause as provided in Section 9(c), above. A voluntary termination under this Section 9(e) shall not be deemed a breach of this Agreement. A termination of the Executive's employment due to disability as described in Section 9(b), above, termination by the Executive which the Executive is entitled to treat as a termination by the Company or Parent pursuant to Section 9(d), above, or a termination by Executive under Section 9(d)(iii), above, shall not be deemed a voluntary termination within the meaning of this Section 9(c). 10. NO MITIGATION: NO OFFSET. ------------------------ In the event of any termination of employment under Section 9 above, the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. 11. NON-COMPETITION AND NONSOLICITATION. ----------------------------------- -18- (a) NONCOMPETITION. During the term of his employment and for a -------------- period of 12 months thereafter, the Executive shall not engage in any activities in Bermuda if such activities involve business that is competitive with that being conducted by the Company or Parent. For purposes of this Section 11, the Company or Parent shall be deemed to include any entity that was an Affiliate of the Company or Parent during the period of the Executive's employment as well as the time in question. (b) NONSOLICITATION. During the term of the Executive's employment --------------- under this Agreement, and for a period of 12 months following termination of employment, the Executive was not encourage any other employee of the Company or Parent to leave the employ of the Company or Parent. 12. CONFIDENTIAL INFORMATION. ------------------------ The Executive covenants that he shall not, without the prior written consent of the Board or a person authorized by the Board, disclose to any person, other than an employee of the Company or Parent or other person to whom disclosure is necessary to the performance by the Executive of his duties in the employ of the Company or Parent, any confidential proprietary information about the -19- Company Parent or an Affiliate or their respective businesses, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application. 13. WITHHOLDING. ----------- Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company or Parent hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company or Parent may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company or Parent may, in its sole discretion, accept any other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 14. ENTIRE AGREEMENT. ---------------- -20- This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company and the Executive with respect thereto. 15. ASSIGNABILITY; BINDING NATURE. ----------------------------- This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to competition and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or tranferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Com- -21- pany, as contained in this Agreement, either contractually or as a matter of law. 16. INDEMNIFICATION. --------------- The Executive shall be provided indemnification by the Company to the maximum extent permitted under the laws of Bermuda and the Memorandum of Association and By-Laws of the Company. In addition, he shall be covered by a directors and officers' liability policy with coverage for him to the extent of US$50,000,000. 17. SETTLEMENT OF DISPUTES. ---------------------- Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executive's employment with the Company shall be resolved by arbitration held in New York City in accordance with the rules of the American Arbitration Association. All costs associated with any arbitration, including all legal expenses, for both Parties shall be borne by the Company. 18. AMENDMENT OR, WAIVER. -------------------- No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision of this Agree- -22- ment to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company, as the case may be. 19. NOTICES. ------- Any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of: If to the Company: Mid Ocean Reinsurance Company Ltd. Richmond House, 12 Par-la-Ville Road Hamilton, HM EX Bermuda If to the Parent: Mid Ocean Limited Richmond House, 12 Par-la-Ville Road Hamilton, HM EX Bermuda -23- If to the Executive: Henry C.V. Keeling Bredon House 3 Nantucket Lane Smiths Parish FL 05 Bermuda 20. SEVERABILITY. ------------ In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 21. SURVIVORSHIP. ------------ The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. REFERENCES. ---------- In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative. -24- 23. GOVERNING LAW. ------------- This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws. 24. HEADINGS. -------- The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control of affect the meaning or construction of any provision of this Agreement. 25. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts. -25- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. Mid Ocean Reinsurance Company Ltd. By: _____________________________ Mid Ocean Limited By: _____________________________ _____________________________ Henry C. V. Keeling EXHIBIT A --------- CHANGE IN CONTROL ----------------- A "Change in Control" shall be deemed to have occurred if: (i) on or after the date hereof, any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative), or any group (within the meaning of Section 13(d)(3) of the United States Securities Exchange Act of 1934, as amended), becomes the beneficial owner, directly or indirectly, of securities of the Parent representing, or acquires the right to control or direct, or to acquire through the conversion or exchange of securities or the exercise of warrants or other rights to acquire securities ("Beneficial Owner"), 20% or more of the combined voting power of the Parent's then outstanding securities ("Significant Owner") -2- (excluding any person who or group which, together with all affiliates and associates of such person or group, would on the date of this Agreement but for this clause be a Significant Owner as long as such person or group does not subsequently become the Beneficial Owner of any additional securities of the Parent in my manner other than a change in the aggregate number of the outstanding securities of the Parent, and other than pursuant to any purchase or acquisition permitted by the first full paragraph of the second page of that Standstill Agreement dated June 2, 1995 between Parent and EXEL Limited) and, for the purposes hereto "voting power" means the right to vote for the election of directors; or (ii) at any time subsequent to the execution of this contract there shall be elected or appointed to the Parents Board of Directors (the "Parent Board") any director or directors whose appointment or election by the Parent's shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors at the date -3- hereof or whose election or appointment or nomination for election was previously so approved. The determination to be made pursuant to clause (i) above shall be made on the basis that (x) all securities beneficially owned by the person or group or over which control or direction is exercised by the person or group which are convertible or exchangeable into securities carrying voting rights have been converted or exchanged and all options, warrants, exchange rights or other rights which may be exercised to acquire securities beneficially owned by the person or group or over which control or direction is exercised by the person or group have been exercised, and (y) no such convertible or exchangeable securities have been converted or exchanged by any other person and no such options, warrants, exchange rights or other rights have been exercised by any other person. EXHIBIT B --------- GOOD REASON For purposes of this Agreement, "Good Reason" shall mean any of the following (without Executive's express prior written consent)" (i) (A) The assignment to Executive of duties materially inconsistent with Executive's position (including duties, responsibilities, status, titles or offices as set forth in Section 2 hereof); or (B) any elimination or reduction of Executive's duties or responsibilities except in connection with the termination of Executive's employment for Cause, disability or as a result of Executive's death or by Executive other than for Good Reason; (ii) The (A) reduction in Executive's Base Salary from the level in effect immediately prior to, or (B) Payment of an annual bonus in an amount less than the most recent annual bonus paid prior to the Change in Control; (iii) The figure by the Company or Parent to obtain the specific assumption of this Agreement by any successor or assign of Parent -2- or the Company or any person acquiring substantially all of the Company's or Parents assets; (iv) Any material breach by the Company or Parent of any provision of this Agreement or any agreements entered into pursuant thereto; (v) Requiring Executive to be based at any office or location other than those described in Section 2(a) hereof except for travel reasonably required in the performance of the Executives responsibilities; or (vi) During the twelve month period following a Change in Control, (A) the failure to continue in effect any compensation plan in which Executive participates at the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with substantially similar benefits) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executive's participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of -3- his participation relative to other participants, as existed at the time of the Change in Control; or (B) the failure to continue to provide Executive with benefits at least as favorable in the aggregate as those enjoyed by him under any of the Company's or Parent's pension, life insurance, medical, health and accident, disability, defferred compensation or savings plans in which he was participating at the time of the Change of Control, the taking of any action which would directly or indirectly materially reduce any of such benefits or deprive Executive of any fringe benefit enjoyed by him at the time of the Change of Control, or the failure to provide him with the number of paid vacation days to which he was entitled on the basis of the Company's practice with respect to him as in effect at the time of the Change of Control. EX-10.11.4 8 ROBERT J. NEWHOUSE, JR. EMPLOYMENT AGREEMENT Exhibit 10.11.4 EMPLOYMENT AGREEMENT -------------------- ROBERT J. NEWHOUSE, JR. ----------------------- SERVICE AGREEMENT ----------------- (amended and restated as of August 19, 1996) AGREEMENT, made and entered into this 19/th/ day of August, 1996 by and between Mid Ocean Reinsurance Company Ltd., a Bermuda corporation (the "COMPANY"), Mid Ocean Limited, a Cayman Islands corporation (the "PARENT"), and Robert J. Newhouse, Jr. (the "EXECUTIVE"). WHEREAS, on November 1, 1992, the Company and the Executive entered into a Service Agreement (the "1992 AGREEMENT") pursuant to which the Company agreed to have the Executive serve, and the Executive agreed to serve, as Chairman of its Board of Directors (the "BOARD") and a member of its Executive Committee, subject to the terms and condition of the 1992 Agreement; and WHEREAS, on June 23, 1993, the Company, Parent and the Executive agreed to amend the 1992 Agreement (as amended, the "PRIOR AGREEMENT") to provide, among other things, that Executive would serve as Chairman of Parent's Board of Directors (the "PARENT BOARD"), subject to the terms and conditions of the Prior Agreement; -3- WHEREAS, the Company, Parent and Executive desire to amend and restate the Prior Agreement as set forth herein; WHEREAS, the Executive wishes to continue to serve as Chairman of the Board and the Parent Board and a member of the Executive Committees of the Board and the Parent Board under the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, the Executive and the Parent (the "PARTIES") agree as follows: 1. TERM OF SERVICE. ---------------- The term of service under this Agreement shall commence on August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue through the close of business on the third anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 8, below. Thereafter such term shall automatically be renewed for successive one-year periods unless the Company and Parent give notice in writing to the Executive or the Executive gives notice in writing to the Company and Parent at least six months prior to the then scheduled expiration date that the term is not to so renew. -4- 2. POSITIONS, DUTIES AND RESPONSIBILITIES. -------------------------------------- (A) GENERAL. It is the intention of the Parties that the ------- Executive shall serve throughout his term of service hereunder as Chairman of the Board and a member of the Executive Committee of the Board with the duties, responsibilities and authorities normally associated with those positions. It is understood that the Executive will not become a resident of Bermuda. The amount of time the Executive will spend in Bermuda and Europe shall be in the discretion of the Executive, except for the amount of time necessary for him to attend meetings of the Board and of committees of the Board of which he is a member. The Executive's services under this Agreement shall be performed outside the United States. (B) ADDITIONAL DUTIES. In addition to the positions, duties and ----------------- responsibilities of the Executive with respect to his positions at the Company as set forth in the preceding paragraph (a), the Executive shall also serve throughout his term of service hereunder as Chairman of the Parent Board and a member of the Executive Committee of the Parent Board, with the duties, responsibilities and authorities normally associated with those positions. It is understood that the Executive will not become a resident of the Cayman Islands. -5- (C) PERMITTED ACTIVITIES. Anything herein to the contrary -------------------- notwithstanding, nothing shall preclude the Executive from (i) serving on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in charitable, community and other business affairs and (iii) managing his personal investments and affairs, provided such activities do not materially interfere with the proper performance of his duties and responsibilities as the Company's Chairman of the Board and Parent's Chairman of the Board. 3. BASE FEE. -------- The Executive shall be paid a Base Fee by the Company at an annual rate of US$325,000, payable in accordance with the Company's regular pay practices. Such Base Fee shall be subject to review for Increase at the discretion of the Executive Committee of the Parent Board. 4. ANNUAL BONUS. ------------ In addition to the Base Fee provided for in Section 3, above, the Executive may be awarded such annual bonuses as may be determined by the Executive Committee of the Parent Board, based on whatever incentive programs have been adopted -6- by the Company or Parent for senior executives of the Company or Parent, as well as the performance of the Executive and the performance of the Company or Parent. Any bonus shall be paid in cash in a lump sum promptly following determination thereof. 5. SHARE PURCHASE OPTION. --------------------- Concurrently with the execution of the 1992 Agreement, the Company and the Executive entered into a Share Purchase Option in the form attached thereto as Exhibit A (the "OPTION"), granting to the Executive the right to purchase those shares of Outstanding Stock (as defined in such Exhibit A) as described herein. 6. EMPLOYEE BENEFIT PROGRAMS. ------------------------- During the term, of the Executive's service under this Agreement, the Executive shall be entitled to participate in all employee benefit programs of the Company or Parent as are in effect from time to time and in which senior executives of the Company or Parent are eligible to participate except that he shall not be entitled to participate in any pension plan. To the extent the Executive is not eligible to participate in any such program (other than the pension plan) he shall be provided with the after-tax economic equivalent of the benefits provided under the program in which he is unable to par- -7- ticipate. In addition, if necessary, the Executive shall be provided interim coverage until such time as the Company or Parent has adopted a program of employee benefit coverages. Coverage may, in the discretion of the Company or Parent, be provided through purchase of separate insurance contracts, through self-insurance or, to the extent the Executive is permitted to continue to maintain on a contributory basis the benefits he presently receives from Marsh & McLennan Companies, Inc., by reimbursing the Executive for the cost thereof on a basis that keeps the Executive whole after taxes. 7. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. ----------------------------------------- (A) EXPENSE REIMBURSEMENT. During the term of the Executive's service --------------------- under this Agreement, the Executive shall be entitled to receive reimbursement by the Company or Parent for all reasonable out-of-pocket travel expenses, entertainment expenses and other expenses incurred by him in performing services under this Agreement, provided that the Executive submits reasonable documentation with respect to such expenses. This shall include, without limitation, reimbursements of any such costs for air fare (which the Executive shall be entitled to on a first-class basis), hotel accommodations and meals. -8- (B) FRINGE BENEFITS. During the term of the Executive's service under --------------- this Agreement, the Executive shall be entitled to participate in any of the Company's or Parent's executive fringe benefits in accordance with the terms and conditions of such arrangements as are in effect from time to time for the Company's or Parent's senior executives. In all events, the Executive shall be entitled during the term of his service to the following: (i) reimbursement of the cost (including initiation fees and annual dues) of membership in one club in Bermuda, (ii) air fare for up to 12 round-trip first-class non-business trips per year by the Executive or members of his family between New York, New York, Newark, New Jersey or Nantucket, Massachusetts and Bermuda and for up to four round-trip first-class non-business trips by the Executive or his wife between New York, Newark, Nantucket or Bermuda and London, England (the benefit under this Section 7(b)(ii) being in addition to any reimbursement of airfare described in Section 7(a), above), and (iii) reimbursement by the Company for the reasonable cost of financial and tax planning, such reimbursement not to exceed US$10,000 per year. -9- 8. TERMINATION OF SERVICE. ---------------------- (A) TERMINATION DUE TO DEATH. In the event the Executive dies ------------------------- during the term of his service under this Agreement, the Executive's spouse, if she survives him, shall be entitled to receive the Executive's Base Fee as provided in Section 3, above, at the rate in effect immediately prior to termination, through the end of the month in which the Executive dies and thereafter shall be entitled to receive payments at the rate of US$162,500 per year (or, if greater, one half the Base Fee at the rate in effect at the time of his death) for a period of three years from the date of his death. In the event the Executive's spouse dies during such three-year period, such payments shall thereafter be made to the beneficiary designated by the Executive or, in the absence of such designation, to the estate or other legal representative of the Executive. In the event that the Executive's spouse does not survive him, the estate or other legal representative of the Executive shall be entitled to receive the Base Fee as provided in Section 3, above, at the rate in effect at the time of his death, through the end of the month in which the Executive dies. In addition to the above, the estate or other legal representative of the Executive shall be entitled to: -10- (i) any annual bonus awarded but not yet paid under Section 4, above, (ii) a pro rata bonus for the year of death, if the Executive Committee of the Board so determines, (iii) the rights under the Option as provided in Section 5, above, in accordance with the terms thereof except to the extent the Option has been transferred, and (iv) any other rights and benefits available to him under employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 6, above, and under business expense reimbursement and fringe benefit programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs. (B) TERMINATION DUE TO DISABILITY. In the event the Executive's ----------------------------- service with the Company or Parent is terminated due to his disability, as determined under the Company's or Parent's long-term disability plan, the Executive shall be entitled to: (i) the Base Fee as provided in Section 3, above, through the end of the month in which the Executive's service terminates due to disability. -11- (ii) any annual bonus awarded but not yet paid under Section 4, above, (iii) the rights under the Option as provided in Section 5, above, in accordance with the terms thereof except to the extent the Option has been transferred, and (iv) any other rights and benefits available to him under employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 6, above, including, without limitation, the terms of any Long Term Disability Plan, and under the business expense reimbursement and fringe benefit programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs. (C) TERMINATION FOR CAUSE. --------------------- (i) The service of the Executive under this Agreement may be terminated by Parent or the Company for Cause. For this purpose "CAUSE" shall mean: (A) conviction of the Executive of a felony involving moral turpitude, or (B) the Executive, in carrying out his duties for the Company or Parent under this Agreement has -12- been guilty of (I) gross neglect or (III) gross misconduct; provided, however, that any act, or failure to act, by the Executive shall not constitute Cause for purposes of this Section 8(c)(i)(B) if such act, or failure to act, was committed, or omitted, by the Executive in good faith and in a manner he reasonably believed to be in the best interests of the Company or Parent. (ii) In the event of a termination for Cause under Section 8(c)(i), above, the Executive shall be entitled only to: (A) the Base Fee as provided in Section 3, above, at the rate in effect at the time of his termination of service for Cause, through the date on which termination for Cause occurs, (B) the rights, if any, under the Option as provided in Section 5, above, determined in accordance with the terms thereof except to the extent the Option has been transferred, and (C) other rights and benefits, if any, available to him under employee benefit programs of the Company and Parent, or their equivalent, as provided -13- in Section 6, above, and under business expense reimbursement and fringe benefit programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs. (D) TERMINATION WITHOUT CAUSE. ------------------------- (i) Anything in this Agreement to the contrary notwithstanding, the Executive's service may be terminated without Cause as provided in this Section 8(d). A termination due to disability, as described in Section 8(b), above, or a termination for Cause, as described in Section 8(c), above, shall not be deemed a termination without Cause under this Section 8(d). (ii) In the event the Executive's service is terminated without Cause (X) prior to a "Change in Control" of Parent (as defined in Exhibit A hereto) or (y) following the first anniversary of a Change in Control, the Executive shall be entitled to: (A) the Base Fee as provided in Section 3, above, at the rate in effect in accordance with Section 3, above, immediately prior to such termination, payable in equal monthly installments for a period of 24 months following the date of such termination, -14- (B) any annual bonus awarded but not yet paid under Section 4, above, (C) the rights under the Option as provided in Section 5, above, in accordance with the terms thereof except to the extent the Option has been transferred, (D) continued coverage under the employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 6, above, in which the Executive was participating at the time of his termination of service for the period of Base Fee continuation; provided, however, that any such continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent employment or other service and, to the extent the Company or Parent is unable to continue such coverage, the Company shall provide the Executive with economically equivalent benefits determined on an after-tax basis, and (E) other rights and benefits available to him under employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 6, above, and under business expense reimbursement -15- and fringe benefit programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs. (iii) In the event the Executive's service hereunder is terminated by the Company or Parent without Cause within the 12 month period following a Change in Control (the "POST-CHANGE PERIOD") or the Executive terminates his employment for "GOOD REASON" (as defined in Exhibit B hereto) during the Post-Change Period, the Executive shall be entitled to: (A) the Base Fee as provided in Section 3, above, at the rate in effect in accordance with Section 3, above, immediately prior to such termination, payable in equal monthly installments for a period of 24 months following the date of such termination, (B) an amount equal to two times the largest bonus awarded to the Executive in the three-year period prior to the year in which a Change in Control occurs, paid in equal monthly installments for the period of Base Fee continuation, (C) an amount equal to the annual bonus that would have been awarded to the Executive in respect -16- of the year in which the Change in Control occurs, multiplied by a fraction, the numerator of which is the number of months or fraction thereof in which the Executive was employed by the Company and Parent in such year, and the denominator of which is 12, (D) the rights under the Option as provided in Section 5, above, in accordance with the terms thereof except to the extent the Option has been transferred, (E) continued coverage under the employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 6, above, in which the Executive was participating at the time of his termination of service for the period of Base Fee continuation; provided, however, that any such continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent employment or other service and, to the extent the Company or Parent is unable to continue such coverage, the Company or Parent shall provide the Executive with economically equivalent benefits determined on an after-tax basis, and -17- (F) other rights and benefits available to him under employee benefit programs of the Company or Parent, or their equivalent, as provided in Section 6, above, and under business expense reimbursement and fringe benefit programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs. (iv) If, at any time during the term of the Executive's service hereunder, the Executive fails to be elected (or re-elected, as appropriate) as Chairman of the Board and the Parent Board, or is otherwise removed from the Board and the Parent Board involuntarily, or fails to be appointed (or reappointed, as appropriate) to the Executive Committee of the Board and the Parent Board, the Executive shall have the right to terminate his service, and, if prior to a Change in Control, such termination shall be deemed a termination by the Company and Parent without Cause under Section 8(d)(ii), above, or, if following a Change in Control, such termination shall be deemed a termination without Cause under Section 8(d)(iii), above, provided the Executive, in either case, shall have given the Company and Parent written notice of his decision and shall not within 10 business days thereafter have been reinstated to the relevant positions. -18- (E) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may -------------------------------------- voluntarily terminate his service prior to the expiration of the term of his service under this Agreement. Such termination shall constitute a voluntary termination and, except as provided in Section 8(d)(iii), in such event the Executive shall be limited to the same rights and benefits as applicable to a termination by the Company for Cause as provided in Section 8(c), above. A voluntary termination under this Section 8(e) shall not be deemed a breach of this Agreement. A termination of the Executive's service due to disability as described in Section 8(b), above, a termination by the Executive which the Executive is entitled to treat as & termination by the Company pursuant to Section 8(d)[ or 8(e)], above, or a termination by the Executive under Section 8(d)(iii), above, shall not be deemed a voluntary termination within the meaning of this Section 8(e). 9. NO-MITIGATION; NO OFFSET. ------------------------ In the event of any termination of service under Section 8, above, the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. -19- 10. NONCOMPETITION AND NONSOLICITATION. ---------------------------------- (A) NONCOMETITION. During the term of his service and, except in ------------- the case of a termination of the term of his service pursuant to Section 8(d) or (e), above, for a period of 12 months thereafter, the Executive shall not, directly or indirectly, whether as an employee, consultant, partner, principal, agent, distributor, representative or stockholder (except as a less than one percent stockholder of a publicly traded company or a less than five percent stockholder of a privately held company), engage in any activities within the United States or Bermuda if such activities involve insurance or reinsurance of United States based entities or exposures that are competitive with the businesses that (i) are then being conducted by the Company or Parent and (ii) during the period of the Executive's service were either being conducted by the Company or Parent or actively being developed by the Company or Parent. The Executive's service as a director of any company in the insurance, reinsurance or related businesses shall not be deemed engaging in any activity that is competitive within the meaning of the preceding sentence. For purposes of this Section 10, the Company or Parent shall be deemed to include any entity that was affiliated with the Company or Parent during the period of the Executive's service as well as the time in question (meaning any entity 50% of the equity in -20- which is owned by the Company or Parent during the period of the Executive's service as well as the time in question). (B) NONSOLICITATION. During the term of the Executive's service under --------------- this Agreement, and for a period of 12 months following termination of service, the Executive shall not encourage any employee of the Company or Parent to leave the employ of the Company or Parent except as may be in the interests of the Company or Parent during the course of carrying out his duties under Section 2, above. 11. CONFIDENTIAL INFORMATION. ------------------------ The Executive covenants that he shall, not, without the prior written consent of the Board or Parent Board or a person authorized by the Board or Parent Board, disclose to any person, other than an employee of the Company or Parent or other person to whom disclosure is necessary to the performance by the Executive of his duties in the service of the Company or Parent, any confidential proprietary information about the Company or Parent or their business, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such dis- -21- closure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application. 12. WITHHOLDING. ----------- Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company or Parent hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as either the Company or Parent may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, either the Company or Parent may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting in its responsibilities to withhold such taxes have been satisfied. 13. PARENT SERVICES. --------------- (A) LIABILITY. The Parent hereby agrees to be jointly and --------- severally liable together with the Company for the payment to the Executive of his Base Fee, bonus, business expense reimbursement and termination of employment provisions of this Agreement. -22- (B) RESPONSIBILITY. All of the other terms and provisions of -------------- this Agreement relating to the Executive's employment by the Company shall likewise apply mutatis mutandis to the Executive's employment by the Parent, ------- -------- including, without limitation, Sections 1, 6, 7, 8, 9, 10, 11, 12, 17 and 18, it being understood that if the Executive terminates his service under the Service Agreement he shall be required to do so with respect to both the Company and the Parent and that a termination of the Executive's services by the Company or the Parent shall be deemed a termination by both. 14. ENTIRE AGREEMENT. ---------------- This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company, Parent and the Executive with respect thereto. 15. ASSIGNABILITY; BINDING NATURE. ----------------------------- This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive -23- other than his rights to compensation and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. The Parties recognize that the Executive also may transfer his rights under the Option as therein provided. No rights or obligations of the Company or Parent under this Agreement may be assigned or transferred by the Company or Parent except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company or Parent is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company or Parent, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company or Parent and such assignee or transferee assumes the liabilities, obligations and duties of the Company or Parent, as contained in this Agreement, either contractually or as a matter of law. 16. INDEMNIFICATION. --------------- The Executive shall be provided indemnification by each of Parent and the Company to the maximum extent permitted under the laws of their respective jurisdictions of incorporation and their respective charter documents. In addition, he shall be covered by a directors' and officers' liability policy with coverage for him to the extent of US$50,000,000. -24- 17. EXCISE TAX ADJUSTMENT PAYMENTS. ------------------------------ (A) PAYMENTS. In the event that it is determined bait any -------- payment or distribution by the Company or Parent to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, other than any payment pursuant to this Section 17(a) (a "PAYMENT"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1996, as amended (the "CODE"), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "EXCISE TAX"), then Executive shall be entitled to receive from the Company or Parent, within 15 days following the determination described in Section 17(b), below, an additional payment ("EXCISE TAX ADJUSTMENT PAYMENT") in an amount such that after payment by Executive of all applicable Federal, state and local taxes (computed at the maximum marginal rates and including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Excise Tax Adjustment Payment, Executive retains an amount of the Excise Tax Adjustment Payment equal to the Excise Tax imposed upon the Payments. -25- (B) DETERMINATIONS. All determinations required to be made under this -------------- Section 17, including whether an Excise Tax Adjustment Payment is required and the amount of such Excise Tax Adjustment Payment, shall be made by KPMG Peat Marwick LLP, or such other national accounting firm as the Company or Parent may designate prior to a Change of Control, which shall provide detailed supporting calculations to the Company and the Executive within 15 business days of the date of termination of Executive's employment. Except as hereinafter provided, any determination by KPMG Peat Marwick LLP, or such other national accounting firm as the Company or Parent may designate prior to a Change of Control, shall be binding upon the Company, Parent and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination hereunder, it is possible that (x) certain Excise Tax Adjustment Payments will not have been made by the Company or Parent which should have been made (an "UNDERPAYMENT"), or (y) certain Excise Tax Adjustment Payments will have been made which should not have been made (an "OVERPAYMENT"), consistent with the calculations required to be made hereunder. In the event of an Underpayment, such Underpayment shall be promptly paid by the Company or Parent to or for the benefit of the Executive. In the event that the Executive discovers that an Overpayment shall have occurred, the -26- amount thereof shall be promptly repaid to the Company or Parent. 18. SETTLEMENT OF DISPUTES. ---------------------- Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executive's service with the Company or Parent shall be resolved by arbitration held in New York City in accordance with the rules of the American Arbitration Association. All costs associated with any arbitration, including all legal expenses, for both Parties shall be borne by the Company and Parent. 19. Amendment or Waiver. ------------------- No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company and Parent. No waiver by any Party of any breach by any other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company and Parent, as the case may be. -27- 20. NOTICES. ------- Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of: If to the Company: Mid Ocean Reinsurance Company, Ltd. Richmond House, 12 Par-la-Ville Road 2 Church Street Hamilton, HM EX Bermuda If to the Parent: Mid Ocean Limited Richmond House 12 Par-la-Ville Road Hamilton HM EX Bermuda If to the Executive: Robert J. Newhouse, Jr. 15 Chestnut Place Short Hills, New Jersey 07078 21. SEVERABILITY. ------------ In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain -28- in full force and effect to the fullest extent permitted by law. 22. SURVIVORSHIP. ------------ The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 23. REFEREES. -------- In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative. 24. GOVERNING LAW. ------------- This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of law. 25. HEADINGS. -------- The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to con- -29- trol or affect the meaning or construction of any provision of this Agreement. 26. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts. -30- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. MID OCEAN REINSURANCE COMPANY LTD. By:_____________________________ MID OCEAN LIMITED By:_____________________________ ________________________________ ROBERT J. NEWHOUSE, JR. EXHIBIT A --------- CHANGE IN CONTROL ----------------- A "Change in Control" shall be deemed to have occurred if: (i) on or after the date hereof, any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicated unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative), or any group (within the meaning of Section 13(d)(3) of the United States Securities Exchange Act of 1934, as amended), becomes the beneficial owner, directly or indirectly, of securities of the Parent representing, or acquires the right to control or direct, or to acquire through the conversion or exchange of securities or the exercise of warrants or other rights to acquire securities ("Beneficial Owner"), 20% or more of the combined voting power of the Parent's then outstanding securities ("Significant Owner") (excluding any person who or group which, together with all affiliates and associates of such -2- person or group, would on the date of this Agreement but for this clause be a Significant Owner as long as such person or group does not subsequently become the Beneficial Owner of any additional securities of the Parent in any manner other than a change in the aggregate number of the outstanding securities of the Parent and other than a change to any purchase or acquisition permitted by the first full paragraph of the second page of that Standstill Agreement dated June 2, 1995 between Parent and EXEL Limited) and, for the purposes hereof "voting power" means the right to vote for the election of directors; or (ii) at any time subsequent to the execution of this contract there shall be elected or appointed to the Parent Board any director or directors whose appointment or election by the Parent's shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors at the date hereof or whose election or appointment or nomination for election was previously so approved. EX-10.11.5 9 MICHAEL A. BUTT EMPLOYMENT AGREEMENT Exhibit 10.11.5 EMPLOYMENT AGREEMENT ---------- MICHAEL A. BUTT --------------- EMPLOYMENT AGREEMENT -------------------- (amended and restated as of August 19, 1996) AGREEMENT, made and entered into as of the 19th day of August, 1996 by and between Mid Ocean Reinsurance Company Ltd., a Bermuda corporation (the "COMPANY"), Mid Ocean Limited, a Cayman Islands Corporation (the "PARENT") and Michael A. Butt (the "EXECUTIVE"). WHEREAS, on May 1, 1993, the Company and the Executive entered into an employment agreement (the "MAY 1 AGREEMENT") pursuant to which the Company agreed to employ the Executive, and the Executive agreed to serve, as Vice Chairman, subject to the terms and conditions of the May 1 Agreement; and WHEREAS, on May 21, 1993, the Company, Parent and Executive agreed to amend the May 1 Agreement (as amended, the "MAY 21 AGREEMENT") to provide, among other things, that the Parent would employ, and Executive would serve, as President and Chief Executive Officer of Parent, subject to the terms and conditions of the May 21 Agreement; and WHEREAS, the Company and the Parent desire to amend and restate the May 21 Agreement as set forth herein; and WHEREAS, the Executive wishes to continue such employment with the Company and Parent under the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, the Parent and the Executive (the "PARTIES") agree as follows: 1. EMPLOYMENT. ---------- The Company and Parent hereby employ the Executive, and the Executive hereby accepts employment with the Company and Parent, for the term of this Agreement as set forth in Section 2, below, in the position and with duties and responsibilities set forth in Section 3, below, and upon such other terms and conditions as are hereinafter stated. 2. TERM OF EMPLOYMENT. ------------------ The term of employment under this Agreement shall commence on August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue through the close Of business on the third anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 9, below. Thereafter such term shall automatically be renewed for successive one-year periods unless the Company and Parent give notice in writing to the Executive or the Executive gives notice in writing to the Company and Parent at least six months prior to the then scheduled expiration date that the term is not to so renew. -2- 3. POSITIONS, DUTIES AND RESPONSIBILITIES. -------------------------------------- (A) GENERAL. The Executive shall be employed as President and Chief ------- Executive Officer of the Company and Parent, with such duties and responsibilities, including but not limited to general management responsibilities over the business and operations of the Company and the Parent, as may be assigned to him by the Chairman of the Board of Directors of the Company (the "BOARD") or the Chairman of the Board of Directors of the Parent (the "PARENT BOARD"), as the case may be. In carrying out his duties and responsibilities, the Executive shall report to the Chairman of the Board or to the Chairman of the Parent Board, as the case may be. During the term of this Agreement, the Executive shall devote his full business time to the business and affairs of the Company and Parent, including any corporation, partnership or other venture in which the Company or Parent owns, directly or indirectly, 50 percent or more of the stock or, in the case of any entity or venture other than a corporation, 50 percent or more of the equity interest (an "AFFILIATE"), and shall use his best efforts, skills and abilities to promote the Company's and Parent's interests. (B) MEMBERSHIPS. It is the intention of the Parties that the ----------- Executive shall be nominated and elected and shall thereafter serve as a member of the Board, as member of the Parent Board and as a member of the Executive Committee of the -3- Board and as a member of the Executive Committee of the Parent Board. (C) PERFORMANCE OF SERVICES. The Executive's services under this ----------------------- Agreement shall be performed outside the United States and generally in Bermuda unless the Executive and the Board and the Parent Board mutually agree in writing to the performance of such services in another location outside the United States. (D) PERMITTED ACTIVITIES. Anything herein to the contrary -------------------- notwithstanding, nothing shall preclude the Executive from (i) serving on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in charitable activities and community affairs and (iii) managing his personal investments and affairs, provided such activities do not materially interfere with the proper performance of his duties and responsibilities as the Company's Vice Chairman and the Parent's President and chief Executive Officer. 4. BASE SALARY. ----------- The Executive shall be paid a Base Salary by the Company at an annual rate of US$460,000, payable in accordance with the Company's regular pay practices. Such Base Salary -4- shall be subject to annual review and may be increased at the discretion of the Executive Committee of the Parent Board (the "EXECUTIVE COMMITTEE"). 5. BONUSES. ------- In addition to the Base Salary provided for in Section 4, above, the Executive may be awarded such annual bonuses as may be determined by the Executive Committee pursuant to the Annual Short Term Bonus Plan approved by the Executive Committee, with a minimum guaranteed bonus of US$75,000. Any annual bonus shall be paid in cash in a lump sum promptly following determination thereof. The Executive shall also be eligible to participate in the Long Term Incentive Plan to be adopted by the Company. 6. SHARE PURCHASE OPTION. --------------------- Concurrently with the execution of the May 21 Agreement, the Company and the Executive entered into a Share Purchase Option, granting to the Executive the right to purchase Outstanding Stock (as defined in Exhibit A thereto) as described therein. The Parties agreed that the Option shall be amended to read as set forth in the form attached hereto as Exhibit A thereto (the "OPTION"). The Option shall be 100% exercisable upon a "CHANGE IN CONTROL" (as defined in Exhibit A hereto). -5- 7. EMPLOYMENT BENEFIT PROGRAMS. --------------------------- During the term of the Executive's employment under this Agreement, the Executive shall be entitled to participate in all employee benefit programs of the Company and Parent as are in effect from time to time and in which senior executives of the Company and Parent are eligible to participate, including medical, hospitalization, life, travel and accident insurance, disability protection and retirement benefits. 8. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. ---------------------------------- (A) EXPENSE REIMBURSEMENT. During the term of the Executive's --------------------- employment under this Agreement, the Executive shall be entitled to receive reimbursement by the Company and Parent for all reasonable out-of-pocket travel expenses, entertainment expenses and other expenses incurred by him in performing his duties under this Agreement, provided that the Executive submits reasonable documentation with respect to such expenses. This shall include, without limitation, reimbursements of any such costs for air fare (which the Executive shall be entitled to on a first-class basis), hotel accommodations and meals. (B) FRINGE BENEFITS. During the term of the Executive's employment --------------- under this Agreement, the Executive shall be entitled to participate in any of the Company's and Parent's -6- executive fringe benefits in accordance with the terms and conditions of such arrangements as are in effect from time to time for the Company's and Parent's senior executives. In all events, the Executive shall be entitled during the period he is employed to the following: (i) a living allowance of up to US$10,000 per month (to be prorated for partial months) while his services are performed in Bermuda, (ii) use of an automobile in Bermuda, (iii) reimbursement of the cost (including initiation fees and annual dues) of membership in three clubs in Bermuda, (iv) reimbursement by the Company for the reasonable cost of financial and tax planning, such reimbursement not to exceed US$10,000 per year; and (v) air fare for up to four round-trip first-class non-business trips per year by the Executive or members of his family between London and Bermuda (the benefit under this Section 8(b)(iv) being in addition to any reimbursement of air fare described in Section 8(a)), above. -7- 9. TERMINATION OF EMPLOYMENT. ------------------------- (A) TERMINATION DUE TO DEATH. In the event the Executive dies during ------------------------ the term of employment, the Executive's spouse, if she survives him, shall be entitled to receive the Executive's Base Salary as provided in Section 4, above, at the rate in effect immediately prior to termination, through the end of the month in which the Executive dies. In the event that the Executive's spouse does not survive him, the estate or other legal representative of the Executive shall be entitled to receive the Base Salary as provided in Section 4, above, at the rate in effect at the time of his death, through the end of the month in which the Executive dies. In addition to the above, the estate or other legal representative of the Executive shall be entitled to: (i) any annual bonus awarded but not yet paid under Section 5, above, (ii) a pro rata bonus for the year of death, if the Executive Committee so determines, (iii) the rights under the Option and any other options held by the Executive to purchase equity securities of the Company or Parent as provided in Section 6, above, or otherwise, determined in accordance with the terms thereof, and -8- (iv) any other rights and benefits available under employee compensation or benefit programs of the Company and Parent, or their equivalent, as provided in Section 7, above, and under business expense reimbursement and fringe benefit programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs. (B) TERMINATION DUE TO DISABILITY. In the event the Executive's ----------------------------- employment with the Company or Parent is terminated due to his disability, as determined under the Company's or Parent's long-term disability plan, the Executive shall be entitled to: (i) the Base Salary as provided in Section 4, above, through the end of the month in which the Executive's employment terminates due to disability, (ii) any annual bonus awarded but not yet paid under Section 5, above, (iii) the rights under the Option and any other options held by the Executive to purchase equity securities of the Company or Parent as provided in Section 6, above, or otherwise, determined in accordance with the terms thereof, and -9- (iv) any other rights and benefits available under employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 7, above, including, without limitation, the terms of any Long-Term Disability Plan, and under the business expense reimbursement and fringe benefit program as described in Section 8, above, determined in accordance with the applicable terms and provisions of such program. (C) TERMINATION FOR CAUSE. --------------------- (i) The employment of the Executive under this Agreement may be terminated by the Parent or the Company for Cause. For this purpose, "CAUSE" shall mean: (A) conviction of the Executive of a felony involving moral turpitude, or (B) the Executive, in carrying out his duties for the Company or Parent under this Agreement, has been guilty of (I) gross neglect or (II) gross misconduct. (ii) In the event of a termination for Cause under Section 9(c)(i), above, the Executive shall be entitled only to: (A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of em- -10- ployment for Cause, through the date on which termination for Cause occurs, (B) the rights, if any, under the Option or any other option to purchase equity securities of the Company and Parent as provided in Section 6, above, or otherwise determined in accordance with the terms thereof, and (C) any other rights and benefits, if any, available under employee benefit program of the Company and Parent, or their equivalent, as provided in Section 7, above, and under the business expense reimbursement and fringe benefits programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs. (D) TERMINATION WITHOUT CAUSE. ------------------------- (i) Anything in this Agreement to the contrary notwithstanding, the Executive's employment may be terminated without Cause as provided in this Section 9(d). A termination due to disability, as described in Section 9(b), above, or a termination for Cause, as described in Section 9(c), above, shall not be deemed a termination without Cause under this Section 9(d). (ii) In the event the Executive's employment is terminated without Cause (x) prior to a Change in Control or (y) -11- following the first anniversary of a Change in Control, the Executive shall be entitled to: (A) Base Salary as provided in Section 4, above, at the rate in effect in accordance with Section 4, above, immediately prior to such termination, payable in equal monthly installments for a period of 12 months following the date of such termination, (B) any annual bonus awarded but not yet paid under Section 5, above, (C) the rights under the Option as provided in Section 6, above, in accordance with the terms thereof, (D) continued coverage under the employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 7, above, in which the Executive was participating at the time of his termination of employment for the period of salary continuation; provided, however, that -------- ------- any such continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent full-time employment and, to the extent the Company or Parent is unable to continue such coverage, the Company or Parent shall provide the Executive with economically equivalent benefits determined on an after-tax basis, and -12- (E) any other rights and benefits available under employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 7, above, and under the business expense reimbursement and fringe benefits programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs. (iii) In the event the Executive's employment is terminated by the Company or Parent without Cause within the 12 month period following a Change in Control (the "POST-CHANGE PERIOD") or the Executive terminates his employment for "GOOD REASON" (as defined in Exhibit B hereto) during the Post-Change Period, the Executive shall be entitled to: (A) Base Salary as provided in Section 4, above, at the rate in effect in accordance with Section 4, above, immediately prior to such termination, payable in equal monthly installments for a period of 36 months following the date of such termination, (B) an amount equal to three times the largest annual bonus awarded to the Executive in the three year period prior to the year in which a Change in Control occurs, paid in equal monthly installments for the period of Base Salary continuation, -13- (C) an amount equal to the annual bonus that would have been awarded to Executive in respect of the year in which the Change in Control occurs, multiplied by a fraction, the numerator of which is the number of months or fraction thereof in which the Executive was employed by the Company or Parent in such year, and the denominator of which is 12, (D) the rights under the Option, and any other options held by the Executive to purchase equity securities of the Company or Parent as provided in Section 6, above, or otherwise, determined in accordance with the terms thereof, (E) continued coverage under the employee benefit programs on the Company and Parent, or their equivalent, as provided in Section 7, above, in which the Executive was participating at the time of his termination of employment for the period of Base Salary continuation; provided, however, -------- ------- that any such continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent full-time employment and, to the extent the Company and Parent is unable to continue such coverage, the Company and Parent shall provide the Executive with economically equivalent benefits determined on an after-tax basis, -14- (F) any other rights and benefits available under employee benefit programs of the Company and Parent, or their equivalent, as provided in Section 7, above, and under the business expense reimbursement and fringe benefits programs as described in Section 8, above, determined in accordance with the applicable terms and provisions of such programs, and (G) full and immediate vesting under the Company's pension plans as of the date of termination, to the extent permitted by applicable law. (iv) If, at any time during the term of the Executive's employment hereunder, the Executive fails to be elected (or re-elected, as appropriate) to the Board or the Parent Board, or is otherwise removed from the Board or the Parent Board, or fails to be appointed (or re-appointed, as appropriate) to the Executive Committee of the Board or the Parent Board involuntarily, the Executive shall have the right to terminate his employment and such termination, if prior to a Change in Control, shall be deemed a termination by the Company and Parent without Cause under Section 9(d)(ii), above, or, if following a Change in Control, shall be deemed a termination without Cause under Section 9(d)(iii), above, provided the Executive, in either case, shall have given the Company and Parent written notice of his decision and shall not within 10 -15- business days thereafter have been reinstated to the relevant positions. (E) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may -------------------------------------- voluntarily terminate his employment prior to the expiration of the term of this Agreement. Such termination shall constitute a voluntary termination and, except as provided in Section 9(d)(iii), above, in such event the Executive shall be limited to the same rights and benefits as applicable to a termination by the Company or Parent for Cause as provided in Section 9(c), above. A voluntary termination under this Section 9(e) shall not be deemed a breach of this Agreement. A termination of the Executive's employment due to disability as described in Section 9(b), above, a termination by the Executive which the Executive is entitled to treat as a termination by the Company or Parent pursuant to Section 9(d), above, or a termination by the Executive under Section 9(d)(iii), above, shall not be deemed a voluntary termination within the meaning of this Section 9(e). 10. NO MITIGATION; NO OFFSET. ------------------------ In the event of any termination of employment under Section 9, above, the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of -16- any remuneration attributable to any subsequent employment that he may obtain. 11. NONCOMPETITION AND NONSOLICIATION. --------------------------------- (A) NONCOMPETITION. During the term of his employment and for a -------------- period of 24 months thereafter, the Executive shall not, directly or indirectly, whether as an employee, consultant, partner, principal, agent, distributor, representative or stockholder (except as a less than one percent stockholder of a publicly traded company or a less than five percent stockholder of a privately held company), engage in any activities in Bermuda if such activities are competitive with the businesses that (i) are then being conducted by the Company or Parent and (ii) during the period of the Executive's employment were either being conducted by the Company or Parent or actively being developed by the Company or Parent. For purposes of this Section 11, the Company or Parent shall be deemed to include any entity that was an Affiliate of the Company or Parent during the period of the Executive's employment as well as the time in question. (B) NONSOLICITATION. During the term of the Executive's employment --------------- under this Agreement, and for a period of 24 months following termination of employment, the Executive shall not (i) encourage any other employee of the Company or Parent to leave the employ of the Company or Parent except as may be -17- in the interests of the Company or Parent during the course of carrying out his duties under Section 3 above or (ii) seek to obtain or solicit business from any person, firm or company which is (so long as the Executive is employed by the Company or Parent) or at the time of the termination of the Executive's employment was a customer of or in the habit of dealing with the Company or Parent. 12. CONFIDENTIAL INFORMATION. ------------------------ The Executive covenants that he shall not, without the prior written consent of the Board or Parent Board or a person authorized by the Board or Parent Board, disclose to any person, other than an employee of the Company or Parent or other person to whom disclosure is necessary to the performance by the Executive of his duties in the employ of the Company or Parent, any confidential proprietary information about the Company or Parent or their business, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application. -18- 13. WITHHOLDING. ----------- Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company or Parent hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company or Parent may reasonably determine either should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company or Parent may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 14. PARENT SERVICES. --------------- (A) LIABILITY. The Parent hereby agrees to be jointly and severally --------- liable together with the Company for the payment to the Executive of his Base Salary, bonus, business expense reimbursement and termination of employment provisions of this Agreement. (B) RESPONSIBILITY. All of the other terms and provisions of this -------------- Agreement relating to the Executive's employment by the Company shall likewise apply mutatis mutandis to the Executive's employment by the Parent including, ------- -------- without limitation, Sections 1, 2, 7, 8, 9, 10, 11, 12, 13 and 18, it -19- being understood that if the Executive terminates his employment, he shall be required to do so with respect to both the Company and the Parent and that a termination of the employment of the Executive by both the Company or the Parent shall be deemed a termination by both. 15. ENTIRE AGREEMENT. ---------------- This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company, Parent and the Executive with respect thereto. 16. ASSIGNABILITY; BINDING NATURE. ----------------------------- This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his right to compensation and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. No rights or obligations of the Company or Parent under this Agreement may be assigned or transferred by the Company or Parent except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company or Parent is not the con- -20- tinuing entity, or the sale or liquidation of all or substantially all of the assets of the Company or Parent, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company or Parent and such assignee or transferee assumes the liabilities, obligations and duties of the Company or Parent, as contained in this Agreement, either contractually or as a matter of law. 17. INDEMNIFICATION. --------------- The Executive shall be provided indemnification by each of Parent and the Company to the maximum extent permitted under the laws of their respective jurisdictions of incorporation and their respective charter documents. In addition, he shall be covered by a directors' and officers' liability policy with coverage for him to the extent of US$50,000,000. 18. SETTLEMENT OF DISPUTES. ---------------------- Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executive's employment with the Company or Parent shall be resolved by arbitration held in New York City in accordance with the rules of the American Arbitration Association. All costs associated with any arbitration, including all legal expenses, for both Parties shall be borne by the Company and Parent. -21- 19. AMENDMENT OR WAIVER. ------------------- No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company and Parent. No waiver by any Party of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company and Parent, as the case may be. 20. NOTICES. ------- Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of: If to the Company: Mid Ocean Reinsurance Company Ltd. Richmond House 12 Par-la-Ville Road Hamilton HM EX, Bermuda -22- If to the Parent: Mid Ocean Limited Richmond House 12 Par-la-Ville Road Hamilton HM EX, Bermuda If to the Executive: Michael A. Butt "Chan Mar" 41 Tucker's Town Road Bermuda 21. SEVERABILITY. ------------ In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 22. SURVIVORSHIP. ------------ The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 23. REFERENCE. --------- In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative. -23- 24. GOVERNING LAW. ------------- This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws. 25. HEADINGS. -------- The heading of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 26. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts. -24- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. MID OCEAN REINSURANCE COMPANY LTD. By: _____________________________ MID OCEAN LIMITED By: _____________________________ _____________________________ Michael A. Butt -25- EXHIBIT A --------- CHANGE IN CONTROL A "Change in Control" shall be deemed to have occurred if: (i) on or after the date hereof, any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative), or any group (within the meaning of Section 13(d)(3) of the United States Securities Exchange Act of 1934, as amended), becomes the beneficial owner, directly or indirectly, of securities of the Parent representing, or acquires the right to control or direct, or to acquire through the conversion or exchange of securities or the exercise of warrants or other rights to acquire securities ("Beneficial Owner"), 20% or more of the combined voting power of the Parent's then outstanding securities ("Significant Owner") (excluding any person who or group which, together with all affiliates and associates of such person or group, would on the date of this Agreement but for this clause be a Significant Owner as long as such person or group does not subsequently become the Beneficial Owner of any additional securities of the Parent in any manner other than a change in the aggregate number of the outstanding securities of the Parent, and other than pursuant to any purchase or acquisition permitted by the first full paragraph of the second page of that Standstill Agreement dated June 2, 1995 between Parent and EXEL Limited) and, for the purposes hereof, "voting power" means the right to vote for the election of directors; or (ii) at any time subsequent to the execution of this contract there shall be elected or appointed to the Parent Board any director or directors whose appointment or election by the Parent's shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors at the date hereof or whose election or appointment or nomination for election was previously so approved. The determination to be made pursuant to clause (i) above shall be made on the basis that (x) all securities beneficially owned by the person or group or over which control or direction is exercised by the person or group which are convertible or ex- -2- changeable into securities carrying voting rights have been converted or exchanged and all options, warrants, exchange rights or other rights which may be exercised to acquire securities beneficially owned by the person or group or over which control or direction is exercised by the person or group have been exercised, and (y) no such convertible or exchangeable securities have been converted or exchanged by any other person and no such options, warrants, exchange rights or other rights have been exercised by any other person. -3- EXHIBIT B --------- GOOD REASON For purposes of this Agreement, "Good Reason" shall mean any of the following (without Executive's express prior written consent): (i) (A) The assignment to Executive of duties materially inconsistent with Executive's position (including duties, responsibilities, status, titles or offices as set forth in Section 2 hereof); or (B) any elimination or reduction of Executive's duties or responsibilities except in connection with the termination of Executive's employment for Cause, disability or as a result of Executive's death or by Executive other than for Good Reason; (ii) The (A) reduction in Executive's Base Salary from the level in effect immediately prior to, or (B) payment of an annual bonus in an amount less than the most recent annual bonus paid prior to the Change in Control; (iii) The failure by the Company or Parent to obtain the specific assumption of this Agreement by any successor or assign of Parent or the Company or any person acquiring substantially all of the Company's or Parent's assets; (iv) Any material breach by the Company or Parent of any provision of this Agreement or any agreements entered into pursuant thereto; (v) Requiring Executive to be based at any office or location other than those described in Section 2(a) hereof, except for travel reasonably required in the performance of the Executive's responsibilities; or (vi) During the twelve month period following a Change in Control, (A) the failure to continue in effect any compensation plan in which Executive participates at the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with substantially similar benefits) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executive's participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of his participation relative to other participants, as existed at the time of the Change in Control; or (B) the failure to continue to provide Executive with benefits at least as favorable in the aggregate as those enjoyed by him under any of the Company's or Parent's pension, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which he was participating at the time of the Change in Control, the taking of any action which would directly or indirectly materially reduce any of such benefits or deprive Executive of any fringe benefit enjoyed by him at the time of the Change in Control, or the failure to provide him with the number of paid vacation days to which he was entitled on the basis of the Company's practice with respect to him as in effect at the time of the Change in Control. -2- EX-10.12.1 10 AMENDMENT TO BROCKBANK AGREEMENT Exhibit 10.12.1 AMENDMENT TO SERVICE AGREEMENT ------------------------------ AMENDMENT TO AGREEMENT, made as of March 16, 1998, by and among The Brockbank Group plc (registered in England under number 1844295) (the "Company") and Exel Merger Company Ltd. ("Newco") (collectively, the "Entities"), and Mark E. Brockbank (the "Executive"). WHEREAS, the Company and the Executive have entered into a Service Agreement, dated 1st January, 1995 ("Service Agreement"), supplemented by an Addendum to Service Agreement, dated 9th March, 1995; a letter to amend Service Agreement, dated 29th September, 1995; a letter to amend Contract of Employment, dated 13th December, 1995; and a letter on restriction of use of name and non- competition clause, dated 13th December, 1995; and WHEREAS, Mid Ocean Limited, EXEL Limited and Newco have entered into an Agreement and Plan of Amalgamation, dated as of March 16, 1998; and WHEREAS, the Entities wish to have the Executive continue his employment with the Company following the consummation of such amalgamation, and the Executive wishes to continue such employment with the Company. -2- NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the Entities and the Executive hereby agree to amend the Service Agreement as follows: 1. Clause 1.2 of the Service Agreement is hereby amended by deleting the clause in its entirety, and adding the following in lieu thereof: The Company shall employ the Executive and the Executive shall serve the Company and any applicable Group Company (subject to the provisions of Clause 12) as and from the Commencement Date unless and until either party shall give to the other not less than twelve months' written notice; provided, that, except as -------- otherwise set forth in this Agreement, such notice shall not expire before the second anniversary of the consummation of the amalgamations (the "Transactions") contemplated by the Agreement and Plan of Amalgamation among Mid Ocean Limited, EXEL Limited and Exel Merger Company Ltd., dated as of March 16, 1998 (the "Amalgamation Agreement") (such consummation date, the "Effective Date" hereunder). 2. Clause 3 of the Service Agreement is hereby amended by adding a new Clause 3.5 as follows: As of the Effective Date, the Executive will be awarded a Stock Option for 40,000 shares of Common Stock of Exel Merger Company Ltd. (the "Option") pursuant to the terms of the EXEL Limited 1991 Performance Incentive Program (the "Option Plan") at an exercise price equal to fair market value on the date of grant. The Option shall vest 33 1/3 per cent per year on each of the first three anniversaries of the Effective Date, and shall be subject to -3- the terms and conditions generally applicable to options granted under the Option Plan. 3. A new Clause 21 is hereby added to the Service Agreement to read as follows: With respect to 50% of the Executive's unvested stock options and shares of restricted stock of Mid Ocean Limited outstanding as of the Effective Date and granted under the Mid Ocean Limited 1993 Long Term Incentive and Share Award Plan, the Executive hereby waives on a pro rata basis, to the extent applicable, accelerated exercisability and vesting as a result of the Transactions (including shareholder approval of the Transactions) and agrees that such options and restricted stock shall continue to vest pursuant to their normal schedule; provided, that upon a -------- termination of Executive's employment due to Executive's death or by the Company other than pursuant to Clause 12, the remaining balance of such options and shares of restricted stock for which accelerated exercisability or vesting was waived shall become immediately exercisable and/or vested. The Executive's Restricted Mid Ocean Ordinary Shares offered under the Restricted Mid Ocean Ordinary Share Alternative shall be replaced by restricted shares of Exel Merger Company Ltd. upon the Effective Date pursuant to the terms and conditions of the Amalgamation Agreement, and all restrictions applicable to such shares shall otherwise continue. 4. This amendment to the Service Agreement shall take effect as of the Effective Date, and shall in no event take effect in the event of the termination and abandonment of the Amalgamation Agreement. -4- IN WITNESS WHEREOF, the parties hereto have executed this amendment to the Agreement as of the year and day first above written. The Brockbank Group plc By: _____________________________ Exel Merger Company Ltd. By: _____________________________ __________________________________ Mark E. Brockbank -4- EX-10.12.2 11 AMENDMENT TO KEELING AGREEMENT EXHIBIT 10.12.2 AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------- AMENDMENT TO AGREEMENT, made as of March 16, 1998, by and among, Mid Ocean Reinsurance Company Ltd., a Bermuda Corporation (the "Company"), Mid Ocean Limited, a Cayman islands Corporation (the "Parent") and Exel Merger Company Ltd. ("Newco") (collectively, the "Entities") and Henry C.V. Keeling (the "Executive"). WHEREAS, on August 19, 1996, the Company and the Parent, and the Executive entered into an amended and restated employment agreement (the "Agreement"); WHEREAS, the Parent, EXEL Limited and Newco, have entered into an Agreement and Plan of Amalgamation, dated as of March 16, 1998; and WHEREAS, the Entities wish to have the Executive continue his employment with the Company following the consummation of such amalgamation, and the Executive wishes to continue such employment with the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the Entities and the Executive hereby agree to amend the Agreement as follows: 1. Section 2 of the Agreement is hereby amended by deleting the first sentence, and adding the following sentence in lieu thereof: The term of employment under this Agreement shall commence upon the consummation of the transactions (the "Transactions") contemplated by the Agreement and Plan of Amalgamation, by and among Parent, EXEL Limited and Exel Merger Company Ltd., dated as of March 16, 1998 (such consummation date, the "Effective Date"), and shall continue through the close of business on the third anniversary of the Effective Date, subject to earlier termination as provided in Section 9 below. 2. Section 3(a) of the Agreement is hereby amended by deleting the first sentence in its entirety, and adding the following in lieu thereof: The Executive shall be employed as President and Chief Executive Officer of the Company, with such duties and responsibilities, including but not limited to general management responsibilities over the business and operations of the Company, as are customary to such positions and shall undertake such additional duties and responsibilities as may be reasonably assigned to him by the Board of the Company. 3. Section 6 of the Agreement is hereby amended by deleting the Section in its entirety, and adding the following in lieu thereof: As of the Effective Date, the Executive will be awarded a Stock Option for 40,000 shares of Common Stock of Exel Merger Company Ltd. (the "Option") pursuant to the terms of the EXEL Limited 1991 Performance Incentive Program Plan (the "Option Plan") an exercise price equal to fair market value on the date of grant. The Option shall vest 33 1/3 per cent per year on each of the first three anniversaries of the Effective Date, and shall be subject to the terms and conditions generally applicable to options granted under the Option Plan. 4. Section 9(d)(ii)(A) of the Agreement is hereby amended to read in its entirety as follows: (A)(1) Base Salary as provided in Section 4, above, at the rate in effect in accordance with Section 4, above, immediately prior to such termination, payable in equal monthly installments for the greater of (A) 12 months following such termination or (B) the balance of the term of employment; and (2) to the extent not otherwise provided by the annual bonus plan, an amount equal to the largest annual bonus awarded to the Executive in the three year period prior to the year in which the date of termination occurs, times the number of years (with partial years treated as full years) remaining in the term of employment, -2- 5. The Executive hereby waives the application of Section 9(d)(iii) of the Agreement in connection with the Transactions. 6. A new sentence is added at the end of Paragraph 11(b) to read as follows: During the term of the Executive's employment, and for a period of 12 months following Executive's termination of employment with the Company (other than a termination by the Company without Cause or a termination by the Executive for Good Reason), the Executive or any entity controlled by the Executive shall not (except in the course of his duties under this Agreement) call on, solicit or take away as a client or customer any person, firm, association, partnership, corporation, or other entity that is or was a client or customer of the Company, Parent or Exel Merger Company Ltd. or any of their affiliates, including actively sought prospective clients or customers, during the term of the Agreement. In the event of the Company's termination of Executive's employment for Cause or Executive's voluntary termination of employment without Good Reason, the immediately preceding sentence shall only apply if the Executive is paid severance under Section 9(d)(ii) of the Agreement. 7. Section 19 is hereby amended by adding the following at the end thereof: If to Exel Merger Company Ltd.: Exel Merger Company Ltd. Cumberland House One Victoria Street Hamilton HM 11 Bermuda Attn: General Counsel 8. A new Section 26 is hereby added to this Agreement to read as follows: With respect to 50% of the Executive's outstanding unvested stock options and shares of restricted stock as of the Effective Date, the Executive hereby waives on a pro rata basis, to the extent applicable, accelerated exercisability and vesting as a result of the Transactions (including shareholder approval of the Transactions) and agrees that such options and restricted stock shall continue to vest pursuant to their normal schedule; -3- provided, that upon a termination of Executive's employment due to Executive's death or disability (as described in Section 9(b)), or a termination by the Company without Cause, the remaining balance of such options and shares of restricted stock for which accelerated exercisability or vesting was waived shall become immediately exercisable and/or vested. 9. This amendment to the Agreement shall take effect as of the Effective Date, and shall in no event take effect in the event of the termination and abandonment of the Amalgamation Agreement. In the event that the Effective Date has not occurred on or prior to March 31, 1999, the parties will enter into good faith negotiations with respect to the modification of this amendment to the Agreement, to the extent requested by any of the parties hereto. -4- IN WITNESS WHEREOF, the parties hereto have executed this amendment to the Agreement as of the year and day first above written. Mid-Ocean Reinsurance Company Ltd. By:_________________________________ Mid-Ocean Limited By:_________________________________ Exel Merger Company Ltd. By:_________________________________ ____________________________________ Henry C. V. Keeling -5- EX-10.12.3 12 AMENDMENT TO NEWHOUSE AGREEMENT Exhibit 10.12.3 AMENDMENT TO SERVICE AGREEMENT ------------------------------ AMENDMENT TO AGREEMENT, made as of March 16, 1998, by and among Mid Ocean Reinsurance Company Ltd., a Bermuda corporation (the "Company"), Mid Ocean Limited (the "Parent"), and Exel Merger Company Ltd. ("Newco") (collectively, the "Entities") and Robert J. Newhouse, Jr. (the "Executive"). WHEREAS, on August 19, 1996, the Company and the Parent, and the Executive entered into an amended and restated service agreement (the "Agreement"); WHEREAS, the Parent, EXEL Limited, and Newco have entered into an Agreement and Plan of Amalgamation, dated as of March 16, 1998; and WHEREAS, the Entities wish to have the Executive continue his employment through October 31, 1998 and to perform services as a consultant to the Company commencing November 1, 1998, and the Executive wishes to continue such employment and then perform services as a consultant to the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the Entities and the Executive hereby agree to amend the Agreement as follows: -2- 1. Section 1 of the Agreement is hereby amended by detecting the Section in its entirety, and adding the following in lieu thereof: The term of service as an employee under this Agreement shall commence on August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue until October 31, 1998; provided, that Executive -------- will cease being Chairman of the Board and a member of the Executive Committee of the Company upon the consummation of the amalgamations contemplated by the Agreement and Plan of Amalgamation, by and among the Parent, EXEL Limited and Exel Merger Company Ltd., dated as of March 16, 1998 (such consummation date, the "EFFECTIVE DATE"). Commencing upon the later of (i) the Effective Date or (ii) November 1, 1998 (such later date, the "COMMENCEMENT DATE"), the Executive shall cease his status as an employee and shall serve the Company as Consultant for Strategic Projects including Mergers and Acquisitions until the second anniversary of the Commencement Date. Executive shall also be elected to the Board of Directors of Exel Merger Company Ltd. upon the Effective Date. 2. Notwithstanding any other provision of the Agreement, in full satisfaction of Section 8 of the Agreement for Executive's termination of employment, Executive and the Company agree that the Company shall provide Executive (i) as a severance payment, with a cash amount equal to (a) US$1,400,000, payable in 24 equal monthly installments beginning on the Commencement Date and (b) if Executive is terminated prior to the Commencement Date under the circumstances described in Section 8(d)(iii) of the Agreement, a pro rata annual bonus to the extent provided under Section 8(d)(iii)(C) of -3- the Agreement, and (ii) Executive's severance benefits under Sections 8(d)(iii)(E) and (F), to the extent not paid as a severance payment, will continue for such 24-month period pursuant to the terms of such paragraphs (provided, that the 12 round-trip first-class non-business trips per year by -------- Executive or members of his family (described in Section 7(b)(ii) of the Agreement) shall be reduced to 4 round-trip first-class non-business trips and shall be limited to Executive or his wife; the 4 round-trip first-class non- business trips per year by Executive or his wife (as described in Section 7(b)(ii) of the Agreement) shall be reduced to 2 round-trip first-class non- business trips; and Executive shall not receive the benefits under Section 7(b)(iii) of the Agreement beyond the US$10,000 reimbursement for 1998). In the event of Executive's death, any remaining installments under (i) above shall be paid to his spouse (or other designated beneficiaries). 3. Section 2(a) of the Agreement is hereby amended by adding the following sentence to the end thereof: Prior to the Commencement Date, Executive will continue his employment as described in Section 1 and shall assist in integration issues. Beginning on the Commencement Date, Executive hereby agrees to provide such consulting services to the Company, Exel Merger Company Ltd. and their affiliates as the Chief Executive Officer of Exel Merger Company Ltd. or his designee shall reasonably request. Such consulting services shall be performed at a mutually agreeable location, -4- 4. Sections 2(b), (c), and (d), 4, 6 and 7(b) of the Agreement shall have no further effect as of the Commencement Date, except to the extent any benefits under such Sections are provided as severance benefits under this amendment to the Agreement. 5. Section 3 of the Agreement is hereby amended by deleting the Section in its entirety and adding the following: Beginning on the Commencement Date, during his consultancy hereunder, the Executive shall be paid a Base Fee by the Company at an annual rate of US$250,000, payable in accordance with the Company's regular pay practices. 6. Section 8 of the Agreement is hereby amended to read in its entirety follows: (a) TERMINATION DUE TO DEATH. In the event the Executive dies during ------------------------ the term of his service under this Agreement, the Executive's spouse, if she survives him, shall be entitled to receive the Executive's Base Fee as provided in Section 3, above, at the rate in effect immediately prior to termination, through the end of the month in which the Executive dies. Upon Executive's death, whether it occurs during or after his service under this Agreement, provided only that his spouse survives him, she will receive payments of $187,500 per year for three years -5- in equal monthly installments. In the event the Executive's spouse dies during the period of such payments, such payments shall thereafter be made to the beneficiary designated by the Executive or, in the absence of such designation, to the estate or other legal representative of the Executive. In the event that the Executive's spouse does not survive him, the estate or other legal representative of the Executive shall be entitled to receive the Base Fee as provided in Section 3, above, at the rate in effect at the time of his death, through the end of the month in which the Executive dies. (b) TERMINATION DUE TO DISABILITY. In the event the Executive's ----------------------------- service with the Company or Parent is terminated due to his disability, as determined pursuant to the definition under the Company's or Parent's long- term disability plan, the Executive shall be entitled to the Base Fee as provided in Section 3, above, through the end of the month in which the Executive's service terminates due to disability. (C) TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. -------------------------------------------- (i) The service of the Executive under this Agreement may be terminated by the Parent or the Com- -6- pany for Cause or may be voluntarily terminated by the Executive. For this purpose, "CAUSE" shall mean: (A) conviction of the Executive of a felony involving moral turpitude, or (B) the Executive, in carrying out his duties for the Company or Parent under this Agreement has been guilty of (I) gross neglect or (II) gross misconduct; provided, however, that -------- ------- any act, or failure to act, by the Executive shall not constitute Cause for purposes of this Section 8(c)(i)(B) if such act, or failure to act, was committed, or omitted, by the Executive in good faith and in a manner he reasonably believed to be in the best interests of the Company or Parent. (ii) In the event of a termination for Cause by the Company or Parent or a voluntary termination by the Executive under Section 8(c)(i), above, the Executive shall be entitled only to the Base Fee as provided in Section 3, above, at the rate in effect at the time of his termination of service for Cause or his voluntary termination, through the date on -7- which termination for Cause or the voluntary termination occurs. (d) TERMINATION WITHOUT CAUSE. ------------------------- (i) Anything in this Agreement to the contrary notwithstanding, the Executive's service may be terminated without Cause as provided in this Section 8(d). A termination due to disability, as described in Section 8(b), above, or a termination for Cause, as described in Section 8(c), above, shall not be deemed a termination without Cause under this Section 8(d). (ii) In the event the Executive's service is terminated without Cause, Executive shall be entitled to the Base Fee as provided in Section 3, above, at the rate in effect in accordance with Section 3, above, immediately prior to such termination, payable in equal monthly installments until the end of the scheduled term. 7. Paragraph 10(b) of the Agreement is hereby amended to add the following sentence to the end thereof: During the term of the Executive's consultancy, and for a period of 12 months following termination of his consultancy, the Executive or any entity con- -8- trolled by the Executive shall not call on, solicit or take away as a client or customer any person, firm, association, partnership, corporation, or other entity that is or was a client or customer of the Company, Parent or Exel Merger Company Ltd. or any of their affiliates, including actively sought prospective clients or customers, during the term of the Agreement. 8. Section 20 of the Agreement is hereby amended by adding the following at the end: If to Exel Merger Company Ltd.: Exel Merger Company Ltd. Cumberland House One Victoria Street Hamilton HM 11 Bermuda Attn: General Counsel 9. This amendment to the Agreement shall take effect as of the Effective Date, and shall in no event take effect in the event of the termination and abandonment of the Amalgamation Agreement. In the event that the Effective Date has not occurred on or prior to March 31, 1999, and the immediately preceding sentence is not applicable, the parties will enter into good faith negotiations with respect to the modification of this amendment to the Agreement, to the extent requested by any of the parties hereto. -9- IN WITNESS WHEREOF, the parties hereto have executed this amendment to the Agreement as of the year and day first above written. Mid-Ocean Reinsurance Company Ltd. By: _____________________________ Mid-Ocean Limited By: _____________________________ Exel Merger Company Ltd. By: _____________________________ __________________________________ Robert J. Newhouse, Jr. EX-10.12.4 13 AMENDMENT TO BUTT AGREEMENT Exhibit 10.12.4 AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------- AMENDMENT TO AGREEMENT, made as of March 16, 1998, by and among Mid Ocean Reinsurance Company Ltd., a Bermuda Corporation (the "Company"), Mid Ocean Limited (the "Parent") and Exel Merger Company Ltd. ("Newco") (collectively, the "Entities") and Michael A. Butt (the "Executive"). WHEREAS, on August 19, 1996, the Company and the Parent, and the Executive entered into an amended and restated service agreement (the "Agreement"); WHEREAS, the Parent, EXEL Limited and Newco have entered into an Agreement and Plan of Amalgamation, dated as of March 16, 1998; and WHEREAS, the Entities wish to have the Executive continue his employment through December 31, 1998 and to perform services as a consultant to the Company commencing January 1, 1999, and the Executive wishes to continue such employment and then perform services as a consultant to the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the Entities and the Executive hereby agree to amend the Agreement as follows: -2- 1. Section 2 of the Agreement is hereby amended by deleting the Section in its entirety, and adding the following in lieu thereof: The term of service as an employee under this Agreement shall commence on August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue until December 31, 1998. Upon the consummation of the amalgamations contemplated by the Agreement and Plan of Amalgamation by and among Parent, EXEL Limited and Exel Merger Company Ltd., dated as March 16, 1998 (such consummation date, the "EFFECTIVE DATE"), Executive shall cease his positions as President and Chief Executive Officer of the Company and the Parent and shall continue as an employee of the Company and the Parent, and shall be elected to the Board of Directors of Exel Merger Company Ltd. and be a member of the management committee of Exel Merger Company Ltd. Commencing upon the later of the (i) Effective Date or (ii) January 1, 1999 (the "COMMENCEMENT DATE"), the Executive shall cease his employment under this Agreement and shall serve the Company as a consultant until the first anniversary of the Commencement Date. 2. Notwithstanding any other provision of the Agreement, in full satisfaction of Section 9 of the Agreement for Executive's termination of employment, Executive and the Company agree that the Company shall provide Executive (i) as a severance payment, with a cash amount equal to (a) US$3,537,000, payable in 36 equal monthly installments beginning on the Commencement Date, and (b) if Executive is terminated prior to the Commencement Date under the circumstances described in Section 9(d)(iii) of the Agreement, a pro rata an- -3- nual bonus to the extent provided under Section 9(d)(iii)(C) of the Agreement, (ii) that Executive's severance benefits under Sections 9(d)(iii)(E) and (F), to the extent not paid as a severance payment, will continue for such 36-month period pursuant to the terms of such paragraphs, and (iii) with vesting upon the Effective Date of fifty (50%) of all of Executive's equity awards that otherwise vest upon a Change in Control and, unless Executive voluntarily terminates employment before such date other than for Good Reason, vesting of the remaining 50% of such equity awards on the Commencement Date. In the event of Executive's death, any remaining installment payments under (i) above shall be paid to his spouse (or other designated beneficiaries). 3. Section 3(a) of the Agreement is hereby amended by adding the following sentences to the end thereof: Prior to the Commencement Date, Executive will continue his employment as described in Section 2 and shall assist in integration issues. Beginning on the Commencement Date, Executive hereby agrees to provide such consulting services to the Company, Exel Merger Company Ltd. and their affiliates as the Chief Executive Officer of Exel Merger Company Ltd. or his designee shall reasonably request. Such consulting services would occupy about 50% of Executive's business time and shall be performed at the corporate offices of the Company in Bermuda or at any other mutually agreeable location. Executive will be provided with an appropriate office and secretary. -4- 4. Sections 3(b), (c) and (d), 5, 7, and 8(b) of the Agreement shall have no further effect as of the Commencement Date, except to the extent any benefits under such Sections are provided as severance benefits under this amendment to the Agreement. 5. Section 4 of the Agreement is hereby amended by adding the following sentence to the end thereof: Beginning on the Commencement Date, during his consultancy hereunder, the Executive shall be paid a Base Fee by the Company at an annual rate equal to US$535,000, payable in accordance with the Company's regular pay practices. 6. Section 9 of the Agreement is hereby amended to read in its entirety as follows: (a) TERMINATION DUE TO DEATH. In the event the Executive dies during ------------------------ the term of his service under this Agreement the Executive's spouse, if she survives him, shall be entitled to receive the Executive's Base Fee as provided in Section 3, above, at the rate in effect immediately prior to termination, through the end of the month in which the Executive dies and thereafter shall be entitled to receive payments at the rate of 50% of the Base Fee per year until the end of the scheduled term. In the event the Executive's spouse dies during such remaining -5- period of the term, such payments shall thereafter be made to the beneficiary designated by the Executive or, in the absence of such designation, to the estate or other legal representative of the Executive. In the event that the Executive's spouse does not survive him, the estate or other legal representative of the Executive shall be entitled to receive the Base Fee as provided in Section 4, above, at the rate in effect at the time of his death, through the end of the month in which the Executive dies. (b) TERMINATION DUE TO DISABILITY. In the event the Executive's ----------------------------- service with the Company or Parent is terminated due to his disability, as determined pursuant to the definition under the Company's or Parent's long- term disability plan, the Executive shall be entitled to the Base Fee as provided in Section 4, above, through the end of the month in which the Executive's service terminates due to disability. (c) TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. -------------------------------------------- (i) The service of the Executive under this Agreement may be terminated by the Parent or the Company for Cause or may be voluntarily terminated by the Executive. For this purpose, "Cause" shall mean: -6- (A) conviction of the Executive of a felony involving moral turpitude, or (B) the Executive, in carrying out his duties for the Company or Parent under this Agreement, has been guilty of (I) gross neglect or (II) gross misconduct; provided, however, that -------- ------- any act, or failure to act, by the Executive shall not constitute Cause for purposes of this Section 9(c)(i)(B) if such act, or failure to act, was committed, or omitted, by the Executive in good faith and in a manner he reasonably believed to be in the best interests of the Company or Parent. (ii) In the event of a termination for Cause by the Company or Parent or a voluntary termination by the Executive under Section 9(c)(i), above, the Executive shall be entitled only to the Base Fee as provided in Section 4, above, at the rate in effect at the time of his termination of service for Cause or his voluntary termination, through the date on which termination for Cause or the voluntary termination occurs. -7- (d) TERMINATION WITHOUT CAUSE. ------------------------- (i) Anything in this Agreement to the contrary notwithstanding, the Executive's service may be terminated without Cause as provided in this Section 9(d). A termination due to disability, as described in Section 9(b), above, or a termination for Cause, as described in Section 9(c), above, shall not be deemed a termination without Cause under this Section 9(d). (ii) In the event the Executive's service is terminated without Cause, Executive shall be entitled to the Base Fee as provided in Section 4, above, at the rate in effect in accordance with Section 4, above, immediately prior to such termination, payable in equal monthly installments until the end of the scheduled term. 7. Paragraph 11(a) of the Agreement is hereby amended to add the following to the end thereof: During the term of the Executive's consultancy, and for a period of 24 months following termination of his consultancy, the Executive or any entity controlled by the Executive shall not call on, solicit or take away as a client or customer any person, firm, association, partnership, corporation, or other entity that is or was a client or customer of the Company, Parent or Exel Merger Company Ltd. or -8- any of their affiliates, including actively sought prospective clients or customers. For purposes of Section 11, "employment" shall also refer to Executive's "consultancy" under this Agreement. 8. Section 20 of the Agreement is hereby amended by adding the following at the end thereof: If to Exel Merger Company Ltd. Exel Merger Company Ltd. Cumberland House One Victoria Street Hamilton HM 11 Bermuda Attn: General Counsel 9. This amendment to the Agreement shall take effect as of the Effective Date, and shall in no event take effect in the event of the termination and abandonment of the Amalgamation Agreement. In the event that the Effective Date has not occurred on or prior to March 31, 1999, and the immediately preceding sentence is not applicable, the parties will enter into good faith negotiations with respect to the modification of this amendment to the Agreement, to the extent requested by any of the parties hereto. -9- IN WITNESS WHEREOF, the parties hereto have executed this amendment to the Agreement as of the year and day first above written. Mid-Ocean Reinsurance Company Ltd. By: _____________________________ Mid-Ocean Limited By: _____________________________ Exel Merger Company Ltd. By: _____________________________ __________________________________ Michael A. Butt EX-10.13 14 ROBERT J. NEWHOUSE CONSULTING AGREEMENT Exhibit 10.13 XL AMERICA, INC. Mr. Robert J. Newhouse, Jr. 5 North Pond Drive Short Hills, New Jersey 07078 Dear Bob: As we have previously agreed, we are pleased to confirm the offer by X.L. America, Inc. (the "Company) to retain you as a consultant for a two-year period on the terms and conditions of the Agreement as specified below: 1. Term. The Company agrees to engage you as a consultant for a 24-month ---- period commencing on November 1, 1998 and ending on October 31, 2000 (the "Term"). 2. Duties. From time to time during the Term, as and when requested by the ------ Chairman of the Company, you will be available to act as a consultant to the Company and to work on special insurance and/or reinsurance projects as may be assigned to you by him, which will utilize your managerial and executive skills subject to your reasonable convenience and other business activities. The consulting services to be performed by you shall be as an independent contractor, not as an employee of the Company. As such, you shall not be entitled to any employee benefits from the Company, and the Company will not exercise any control or direction of your performance of the above described services, but will require that the result to be accomplished be acceptable. It is agreed that, except as may be agreed in writing by the Company, you will not undertake any other consulting services for other clients during the Term, but you will be able to act as an officer and/or director of companies not in competition with the Company. 3. Payment for Services. As consideration for your consulting services -------------------- hereunder, the Company shall compensate you as follows: A. The Company will provide you with an office (including secretarial and other services provided by the -2- landlord) at HQ Business Centers, located at 55 Madison Avenue, Morristown, New Jersey 07960. B. The Company will reimburse you for any expenses, including travel, entertainment and out-of-pocket expenses incurred in connection with your services hereunder. C. The Company shall pay you fees for your consulting services on projects as may be agreed to by the Company and yourself. D. Payment as agreed under this Agreement shall be made by the Company. 4. Prohibition an Disclosure of Information. You recognize and acknowledge ---------------------------------------- that the confidential or proprietary information of the Company and its affiliates, including such trade secrets as may exist from time to time, and information as to the identity of clients of the Company and its affiliates, are valuable, special and unique assets of the Company's business. You will not, during or after the Term, in whole or in part disclose such secrets or confidential or proprietary information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall you make use of any such property for your own purposes or for the benefit of any person, firm, corporation or other entity (except the Company and its affiliates) under any circumstances, during or after the Term. 5. Entire Agreement. This Agreement contains the entire agreement of the ---------------- parties with respect to the matters set forth herein and supersedes all prior written or oral agreements with respect to such matters. It may be changed only by an amendment in writing signed by the party against whom enforcement is sought. 6. Governing Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with the laws of the State of New York. -3- If the terms of this letter are acceptable, kindly execute the enclosed duplicate copy and return it to us. Very truly yours, X.L. America, Inc. By: ________________________ AGREED TO AND ACCEPTED: ____________________________ Robert J. Newhouse, Jr. EX-10.14.1 15 CREDIT AGREEMENT (5-YEAR) Exhibit 10.14.1 ============================================== MID OCEAN LIMITED ____________________ CREDIT AGREEMENT (5-YEAR) Dated as of September 2, 1997 ____________________ $100,000,000 ____________________ THE CHASE MANHATTAN BANK as Administrative Agent ============================================== TABLE OF CONTENTS
Page ---- Section 1. Definitions and Accounting Matters . ................................................ 1 1.01 Certain Defined Terms................................................................ 1 1.02 Accounting Terms; GAAP'.............................................................. 15 1.03 Currencies and Types of Loans . ..................................................... 16 Section 2. Commitments, Loans and Prepayments................................................... 16 2.01 Loans................................................................................ 16 2.02 Borrowings of Loans.................................................................. 17 2.03 Changes of Commitments; Reduction of Maximum Loan Amounts............................ 17 2.04 Fees................................................................................. 17 2.05 Lending Offices...................................................................... 18 2.06 Several Obligations; Remedies Independent............................................ 18 2.07 Evidence of Debt..................................................................... 18 2.08 Optional Prepayments................................................................. 18 2.09 Mandatory Prepayments................................................................ 19 Section 3. Payments of Principal and Interest................................................... 21 3.01 Repayment of Loans................................................................... 21 3.02 Interest............................................................................. 21 Section 4. Payments; Pro Rata Treatment; Computations; Etc...................................... 22 4.01 Payments............................................................................. 22 4.02 Pro Rata Treatment................................................................... 23 4.03 Computations......................................................................... 24 4.04 Minimum Amounts...................................................................... 24 4.05 Certain Notices...................................................................... 25 4.06 Non-Receipt of Funds by the Administrative Agent..................................... 26 4.07 Sharing of Payments, Etc............................................................. 27 Section 5. Yield Protection. Etc................................................................ 28 5.01 Additional Costs..................................................................... 28 5.02 Limitation on Types and Currencies of Loans.......................................... 30 5.03 Treatment of Affected Loans.......................................................... 31 5.04 Compensation......................................................................... 31 5.05 Taxes................................................................................ 32 5.06 Replacement of Banks................................................................. 33 Section 6. Conditions Precedent................................................................. 34 6.01 Initial Loan......................................................................... 34 6.02 Initial and Subsequent Loans......................................................... 35
-i- Credit Agreement ----------------
Page ---- Section 7. Representations and Warranties ...................................................... 36 7.01 Corporate Existence.................................................................. 36 7.02 Financial Condition.................................................................. 36 7.03 Litigation........................................................................... 37 7.04 No Breach............................................................................ 37 7.05 Action............................................................................... 37 7.06 Approvals............................................................................ 37 7.07 Use of Credit........................................................................ 38 7.08 ERISA................................................................................ 38 7.09 Taxes................................................................................ 38 7.10 Investment Company Act............................................................... 38 7.11 Public Utility Holding Company Act................................................... 38 7.12 Environmental Matters................................................................ 38 7.13 Subsidiaries, Etc.................................................................... 39 7.14 Stamp Taxes.......................................................................... 39 7.15 Legal Form........................................................................... 39 7.16 True and Complete Disclosure......................................................... 39 7.17 Withholding of Taxes................................................................. 40 Section 8. Covenants of the Company............................................................. 40 8.01 Financial Statements, Etc............................................................ 40 8.02 Existence, Etc....................................................................... 42 8.03 Insurance............................................................................ 43 8.04 Prohibition of Fundamental Changes................................................... 43 8.05 Limitation on Liens.................................................................. 44 8.06 Certain Financial Covenants.......................................................... 45 8.07 Ratings.............................................................................. 45 8.08 Use of Proceeds...................................................................... 45 8.09 Transactions with Affiliates......................................................... 46 8.10 Compliance with Laws................................................................. 46 8.11 Payment of Obligations............................................................... 46 8.12 Indebtedness......................................................................... 46 8.13 Capital and Surplus of Mid Ocean Reinsurance......................................... 46 Section 9. Events of Default.................................................................... 46 Section 10. The Administrative Agent............................................................. 49 10.01 Appointment, Powers and Immunities................................................... 49 10.02 Reliance by Administrative Agent..................................................... 50 10.03 Defaults............................................................................. 50 10.04 Rights as a Bank..................................................................... 50 10.05 Indemnification...................................................................... 51 10.06 Non-Reliance on Administrative Agent and Other Banks................................. 51
-ii- Credit Agreement ----------------
Page ---- 10.07 Failure to Act....................................................................... 51 10.08 Resignation of Administrative Agent.................................................. 52 Section 11. Miscellaneous........................................................................ 52 11.01 Waiver............................................................................... 52 11.02 Notices.............................................................................. 52 11.03 Expenses, Etc........................................................................ 53 11.04 Amendments, Etc...................................................................... 53 11.05 Successors and Assigns............................................................... 54 11.06 Assignments and Participations....................................................... 54 11.07 Survival............................................................................. 57 11.08 Captions............................................................................. 57 11.09 Counterparts......................................................................... 57 11.10 Governing Law; Submission to Jurisdiction............................................ 57 11.11 Waiver of Jury Trial................................................................. 58 11.12 Confidentiality...................................................................... 58 11.13 Judgment Currency.................................................................... 59 11.14 European Monetary Union.............................................................. 59
SCHEDULE I - Subsidiaries SCHEDULE II - Commitments SCHEDULE III - Liens SCHEDULE IV - Indebtedness EXHIBIT A-I - Form of Opinion of Special Cayman Islands Counsel to the Company EXHIBIT A-2 - Form of Opinion of Special Bermuda Counsel to the Company EXHIBIT A-3 - Form of Opinion of Special New York Counsel to the Company EXHIBIT B - Form of Opinion of Special New York Counsel to Chase EXHIBIT C - Form of Confidentiality Agreement EXHIBIT D - Form of Assignment and Acceptance EXHIBIT E - Form of Promissory Note -iii- Credit Agreement ---------------- CREDIT AGREEMENT (5-YEAR) dated as of September 2, 1997, between: MID OCEAN LIMITED. a corporation duly organized and validly existing under the laws of the Cayman Islands (the "Company"); ------- Each of the lenders that is a signatory hereto identified under the caption "BANKS" on the signature pages hereto or that pursuant to Section 11.06(b) hereof shall become a "Bank" hereunder; and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). -------------------- The Company has requested that the Banks make loans to it in an aggregate principal amount not exceeding $100,000,000 at any one time outstanding in U.S. Dollars and in certain other foreign currencies, and the Banks are prepared to make such loans upon the terms and conditions hereof. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. ---------------------------------- 1.01 Certain Defined Terms. As used herein, the following terms shall --------------------- have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): ---- ----- "Administrative Agent's Account" shall mean, for each Currency, an ------------------------------ account in respect of such Currency designated by the Administrative Agent in a notice to the Company and the Banks. "Administrative Questionnaire" shall mean an Administrative ---------------------------- Questionnaire in a form supplied by the Administrative Agent. "Affiliate" shall mean any Person that directly or indirectly --------- controls, or is under common control with, or is controlled by, the Company and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control" (including, with its correlative meanings, controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any -------- ---- Person that owns directly or indirectly securities having 25% or more of the voting power for the election of directors or other governing body of a corporation or 25% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Credit Agreement ----------------- -2- Affiliate solely by reason of his or her being a director, officer or employee of the Company or any of its Subsidiaries, (b) the Company and its Subsidiaries shall not be Affiliates of each other, and (c) neither the Administrative Agent nor any Bank shall be an Affiliate. "Agreed Foreign Currency" shall mean at any time any of Australian ----------------------- Dollars, English Pounds Sterling, Japanese Yen, New Zealand Dollars and, with the agreement of each Bank, any other Foreign Currency, so long as at such time (a) such Currency is dealt with in the London (or, in the case of English Pounds Sterling, Paris) interbank deposit market, (b) such Currency is freely transferable and convertible into Dollars in the London foreign exchange market and (c) no central bank or other governmental authorization in the country of issue of such Currency is required to permit use of such Currency by any Bank for making any Loan hereunder and/or to permit the Company to borrow and repay the principal thereof and to pay the interest thereon, unless such authorization has been obtained and is in full force and effect. "Assumed Reinsurance" shall mean reinsurance assumed by any Insurance ------------------- Subsidiary from another Person (other than from another Insurance Subsidiary). "Applicable Facility Fee Rate" and "Applicable Margin" shall mean, ---------------------------------------------------- during any period when any Rating Group set forth below is applicable, with respect to any facility fee payable hereunder or any Type of Loan outstanding hereunder, the percentage set forth below opposite such fee or Type of Loan under such Rating Group:
============================================================== Rating Rating Rating Fee or Loan Group Group Group I II III -------------------------------------------------------------- Facility Fee 0.070% 0.100% 0.150% -------------------------------------------------------------- Eurocurrency Loans 0.155% 0.225% 0.325% -------------------------------------------------------------- Base Rate Loans 0.0O0% 0.000% 0.000% ==============================================================
For the purposes of this Agreement, any change in the Applicable Facility Fee Rate or Applicable Margin for any facility fee or any outstanding Loans by reason of (a) a change in the Standard & Poor's Rating shall become effective on the date of announcement or publication of a change in such rating or, in the absence of such announcement or publication, on the effective date of such changed rating and (b) any other change in the Rating Group shall become effective on the date of the occurrence of the event that resulted in such change in the Rating Group. Credit Agreement ----------------- -3- "Applicable Insurance Regulatory Authority" shall mean, with respect ----------------------------------------- to any Insurance Subsidiary, the insurance department or similar insurance regulatory or administrative authority or agency of the jurisdiction in which such Insurance Subsidiary is domiciled. "Applicable Lending Office" shall mean, for each Bank and for each ------------------------- Type and Currency of Loan, the "Lending Office" of such Bank (or of an Affiliate of such Bank) designated for such Type and Currency of Loan in the Administrative Questionnaire submitted by such Bank or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the Administrative Agent and the Company as the office by which its Loans of such Type and Currency are to be made and maintained. "Assignment and Acceptance" shall mean an assignment and acceptance ------------------------- entered into by a Bank and an assignee (with the consent of any Person whose consent is required by Section 11.06(b) hereof), and accepted by the Administrative Agent, in the form of Exhibit D hereto or any other form approved by the Administrative Agent. "Bank" shall mean each of the lenders that is a signatory hereto ---- identified under the caption "BANKS" on the signature pages hereto or that, pursuant to Section 11.06(b) hereof, shall become a "Bank" hereunder. "Base Rate" means, for any day, a rate per annum equal to the higher --------- of (a) the Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1/2 of 1%. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Rate respectively. "Base Rate Loans" shall mean Loans denominated in Dollars that bear --------------- interest at rates based upon the Base Rate. "Basle Accord" shall mean the proposals for risk-based capital ------------ framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. "Best Rating" shall mean, as at any date, the rating of Mid Ocean ----------- Reinsurance most recently published by A.M. Best Company, Inc. "Board of Directors" shall mean the Board of Directors of the Company ------------------ or any duly authorized committee thereof. Credit Agreement ---------------- -4- "Board Resolution" shall mean a copy of a resolution certified by the ---------------- Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors, and to be in full force and effect on the date of the certificate and delivered to the Administrative Agent. "Business Day" shall mean any day (a) on which commercial banks are ------------ not authorized or required to close in New York City, (b) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or the Interest Period for, a Eurocurrency Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, that is also a day on which dealings in deposits denominated in the Currency of such Loan are carried out in the London interbank market and (c) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or the Interest Period for, any Loan denominated in any Foreign Currency or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, that is also a day on which commercial banks settle payments in the Principal Financial Center for the Currency in which such Loan is denominated and in which the London foreign exchange market settles payments in such Currency. "Capital and Surplus" shall mean, as at any date for any Person, the ------------------- aggregate amount of policyholders surplus (determined in accordance with SAP) of such Person. "Capital Lease Obligations" shall mean, for any Person, all ------------------------- obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Ceded Reinsurance" shall mean reinsurance ceded by any Insurance ----------------- Subsidiary to any other Person (other than to another Insurance Subsidiary), other than Surplus Relief Reinsurance. "Change of Control" shall mean (a) the acquisition of ownership, ----------------- directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof) of shares representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (b) occupation of a majority of the seats (other than vacant seats) on the Board of Directors by Persons who were neither (i) nominated by the Board of Directors nor (ii) appointed by directors so nominated. Credit Agreement ---------------- -5- "Chase" shall mean The Chase Manhattan Bank. ----- "Class" shall have the meaning assigned to such term in Section 1.03 ----- hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended from ---- time to time. "Commitment" shall mean, as to each Bank, the obligation of such Bank ---------- to make Loans pursuant to Section 2.01 hereof in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set opposite such Bank's name on Schedule II hereto under the caption "Commitment" (as the same may at any time or from time to time be reduced pursuant to Section 2.03 hereof or be increased or reduced pursuant to Section 11.06 hereof). "Commitment Termination Date" shall mean September 2, 2002; --------------------------- provided that, if such date is not a Business Day, the Commitment Termination Date shall be the next preceding Business Day. "Company Jurisdiction" shall mean (a) Bermuda, (b) the Cayman -------------------- Islands and (c) any other country (i) where the Company is licensed or qualified to do business or (ii) from which payments hereunder are made by the Company. "Currency" shall mean Dollars or any Foreign Currency. -------- "Debt" shall mean Indebtedness referred to in clauses (a) through (c) ---- inclusive, in the definition of the term Indebtedness. "Default" shall mean an Event of Default or an event that with ------- notice or lapse of time or both would become an Event of Default. "Deferred Acquisition Expenses" shall mean, as at any date, ----------------------------- the average of the deferred acquisition expenses for the Company and its Subsidiaries (determined on a consolidated basis, without duplication, in accordance with GAAP) for the four most recent Fiscal Dates. "Derivative Transaction" shall mean (a) any "swap agreement" ---------------------- as defined in Section 10l(53B) of the Bankruptcy Code (other than a spot foreign exchange transaction), (b) any equity swap, floor, collar, cap or option transaction, (c) any option to enter into any of the foregoing and (d) any combination of the foregoing. Credit Agreement ---------------- -6- "Dollar Equivalent" shall mean, with respect to any Loan denominated ----------------- in any Foreign Currency, the amount of Dollars that would be required to purchase the amount of the Foreign Currency of such Loan on the date such Loan is requested (or (i) in the case of any determination made under Section 2.01(e) hereof, on the date of any borrowing referred to in said Section 2.01(c) and (ii) in the case of any determination made under Section 2.09 or redenomination under the last sentence of Section 4.01 hereof, on the date of determination or redenomination therein referred to), based upon the spot selling rate at which Chase offers to sell such Foreign Currency for Dollars in the London foreign exchange market at approximately 11:00 a.m. London time for delivery two Business Days later. "Dollars" and "$" shall mean lawful money of the United States of ------- - America. "Environmental Laws" shall mean any and all present and future ------------------ Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes. "Equity Rights" shall mean, with respect to any Person, any ------------- outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act ----- of 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. "ERISA Affiliate" shall mean any corporation or trade or business that --------------- is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Company is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code, of which the Company is a member. Credit Agreement ---------------- -7- "ERISA Plan" shall mean any "employee benefit plan" (as ---------- defined in Section 3(3) of ERISA) or any "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA that is or, within the preceding five years has been, established or maintained, or to which contributions are or, within the preceding five years have been, made or required to be made, by the Company or any ERISA Affiliates or with respect to which the Company or an ERISA Affiliate may have liability. "Eurocurrency Base Rate" shall mean, with respect to any ---------------------- Eurocurrency Loan in Dollars or any Agreed Foreign Currency for the Interest Period therefor: (a) the arithmetic mean, as calculated by the Administrative Agent of the respective rates per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates appearing on the Screen at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of the Interest Period for such Loan as LIBOR for such Currency having a term comparable to such Interest Period; or (b) if the Screen shall cease to report such LIBOR or, in the reasonable judgment of the Majority Banks, shall cease accurately to reflect such LIBOR (as reported by any publicly available source of similar market data selected by the Majority Banks that, in the reasonable judgment of the Majority Banks, accurately reflects LIBOR for such Currency), the Eurocurrency Base Rate shall mean, with respect to such Eurocurrency Loan for such Interest Period the rate per annum (rounded upwards if necessary, to the nearest 1/16 of 1%), as determined by the Administrative Agent quoted by the Reference Bank at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of the Interest Period for such Eurocurrency Loan for the offering by the Reference Bank to leading banks in the London (or, in the case of Loans denominated in English Pounds Sterling, Paris) interbank market of deposits denominated in such Currency having a term comparable to such Interest Period and in an amount equal to $1,000,000 (or the Foreign Currency Equivalent thereof). "Eurocurrency Loans" shall mean Loans made to the Company in ------------------ Dollars or any Agreed Foreign Currency, which Loans bear interest at rates based on rates referred to in the definition of "Eurocurrency Base Rate" in this Section 1.01. "Eurocurrency Rate" shall mean, for any Eurocurrency Loan for ----------------- the Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the Eurocurrency Base Rate for such Loan for such Interest Period multiplied by the Reserve Rate (if any) for such Interest Period. Credit Agreement ---------------- -8- "Event of Default" shall have the meaning assigned to such ---------------- term in Section 10 hereof. "Federal Funds Rate" shall mean, for any day, the rate per ------------------ annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate charged to Chase on such Business Day on such transactions as determined by the Administrative Agent. "Fiscal Dates" shall mean, with respect to the Company, ------------ January 31, April 30, July 31 and October 31 in each year. "Foreign Benefit Plan" shall mean any plan, fund (including, -------------------- without limitation, any superannuation fund) or other similar program established or maintained outside the United States by the Company or a Subsidiary thereof, with respect to which the Company or such Subsidiary has an obligation to contribute, for the benefit of employees of the Company or the 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. "Foreign Currency" shall mean at any time any Currency other ---------------- than Dollars. "Foreign Currency Equivalent" shall mean, with respect to any --------------------------- amount in Dollars, the amount of any Foreign Currency that could be purchased with such amount of Dollars using the reciprocal of the foreign exchange rate(s) specified in the definition of the term "Dollar Equivalent", as determined by the Administrative Agent. "FRB" shall mean the Board of Governors of the Federal Reserve --- System (or any successor thereto). "GAAP" shall mean generally accepted accounting principles in ---- the United States of America. "Governmental Authority" means the United States of America or ---------------------- any other nation, or any political subdivision of any thereof (whether state or local), and any government, agency, authority, instrumentality, regulatory body, court, central bank or other Credit Agreement ---------------- -9- entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" shall mean a guarantee, an endorsement a --------- contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and --------- "Guaranteed" used as a verb shall have a correlative meaning. ---------- "Indebtedness" shall mean, for any Person: (a) indebtedness ------------ created, incurred or assumed by such Person for borrowed money or obligations of such Person evidenced by bonds, debentures, promissory notes or similar instruments; (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising and accrued expenses incurred, in the ordinary course of business; (c) Capital Lease Obligations of such Person; (d) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (e) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person (other than letters of credit and banker's acceptances arising in the ordinary course of such Person's business); and (f) Guarantees by such Person of Indebtedness of others; provided that Indebtedness shall include Surplus Relief Reinsurance but shall not include (i) obligations with respect to insurance policies underwritten by, or Assumed Reinsurance underwritten by, or Reinsurance Agreements entered into by, an Insurance Subsidiary in the ordinary course of its business and (ii) commissions or other amounts payable in the ordinary course of business to agents or to other representatives of any of the Insurance Subsidiaries. "Insurance Subsidiary" shall mean any Subsidiary of the -------------------- Company that is licensed to conduct an insurance business by an Applicable Insurance Regulatory Authority and provides capital to underwrite insurable risks. Credit Agreement ---------------- -10- "Interest Period" shall mean: --------------- (a) with respect to any Eurocurrency Loan, the period commencing on the date such Loan is made and ending on the numerically corresponding day in the first, second, third, or sixth calendar month thereafter, as the Company may select as provided in Section 4.05 hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month: (b) with respect to any Base Rate Loan, the period commencing on the date such Base Rate Loan is made and ending on the earlier of the first Quarterly Date thereafter or the Commitment Termination Date. Notwithstanding the foregoing: (i) if any Interest Period for any Loan would otherwise end after the Commitment Termination Date in existence at the time such Interest Period is selected, such Interest Period shall not be available hereunder; (ii) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for a Eurocurrency Loan, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clauses (i) and (ii) above, no Interest Period for any Eurocurrency Loan shall have a duration of less than one month and, if the Interest Period for any Eurocurrency Loan would otherwise be a shorter period, such Interest Period shall not be available hereunder. "LIBOR" shall mean, for any Currency, the rate at which ----- deposits in such Currency are offered to lending banks in the London (or, in the case of English Pounds Sterling, Paris) interbank market. "Lien" shall mean, with respect to any Property, any mortgage, ---- deed of trust, lien, pledge, charge or security interest (as defined in Section 1-201(37) of the Uniform Commercial Code as in effect in the State of New York) of any kind in respect of such Property (it being understood that a banker's right of setoff, banker's lien or any similar right of a bank is not a Lien). "Loans" shall mean Loans provided for by Section 2.01 hereof ----- which may be Base Rate Loans or Eurocurrency Loans. "Local Time" shall mean, with respect to any Loan denominated ---------- in or any payment to be made in any Currency, the local time in the Principal Financial Center for the Currency in which such Loan is denominated or such payment is to be made. Credit Agreement ---------------- -11- "Majority Banks" shall mean Banks having more than 50% of the -------------- aggregate amount of the Commitments or if the Commitments shall have terminated. Banks holding more than 50% of the aggregate unpaid principal amount of the Loans. "Margin Stock" shall mean "margin stock" within the meaning of ------------ Regulations G, U and X. "Material Adverse Effect" shall mean a material adverse effect ----------------------- on (a) the business, assets, property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or the rights and remedies of the Administrative Agent or any Bank hereunder. "Material Insurance Subsidiary" shall mean, at any time. (i) ----------------------------- Mid Ocean Reinsurance and (ii) any other Insurance Subsidiary that is a Material Subsidiary. "Material Subsidiary" shall mean, at any time, each Subsidiary ------------------- of the Company that as of such time meets the definition of a "significant subsidiary" contained as of the date hereof in Regulation S-X of the SEC. "Mid Ocean Reinsurance" shall mean Mid Ocean Reinsurance --------------------- Company Limited, a Wholly-Owned Insurance Subsidiary of the Company. "NAIC" shall mean the National Association of Insurance ---- Commissioners and any successor thereto. "Net Worth" shall mean, as at any date, the amount of total --------- shareholders' equity for the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP). "Officer" shall mean the Chairman of the Board, the President ------- or any Vice President of the Company. "Officer's Certificate" shall mean a certificate signed by any --------------------- Officer. "Person" shall mean any individual, corporation, company, ------ voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Post-Default Rate" shall mean, in respect of any principal of ----------------- any Loan or any other amount under this Agreement that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum equal to Credit Agreement ---------------- -12- 2% plus the Base Rate as in effect from time to time (provided that, if the -------- amount so in default is principal of a Eurocurrency Loan and the due date thereof is a day other than the last day of such Interest Period therefor, the "Post-Default Rate" for such principal shall be. for the period from and including such due date to but excluding the last day of such Interest Period, 2% Plus the interest rate for such Loan as provided in Section 3.02 hereof and thereafter, the rate provided for above in this definition). "Prime Rate" shall mean the rate of interest from time to time ---------- announced by Chase at its principal office in New York, New York as its prime commercial lending rate. "Principal Financial Center" shall mean, in the case of an" -------------------------- Currency, the principal financial center of the country that issues such Currency as determined by the Administrative Agent. "Property" shall mean any right or interest in or to property -------- of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Quarterly Dates" shall mean the last Business Day of January, --------------- April, July and October in each year, the first of which shall be the first such day after the date hereof "Rating Group" shall mean any of Rating Group I, Rating Group ------------ II or Rating Group III. "Rating Grout I" shall mean (a) no Event of Default has -------------- occurred and is continuing and the Standard & Poor's Rating is at or above AA: "Rating Grout II" shall mean (a) Rating Group I is not in effect and (b) no Event of Default has occurred and is continuing and (c) the Standard & Poor's Rating is at or above A; and "Rating Group III" shall mean neither Rating Group I nor Rating Group II is in effect. "Reference Bank" shall mean Chase. -------------- "Resister" shall have the meaning assigned to such term in -------- Section 11.06 hereof. "Regulations A. D. G. U and X" shall mean, respectively, ---------------------------- Regulations A, D, G, U and X of the FRB, as the same may be modified and supplemented and in effect from time to time. "Regulatory Change" shall mean, with respect to any Bank, any ----------------- change after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or Credit Agreement ---------------- -13- request applying to a class of banks including such Bank of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reinsurance Agreement" shall mean any agreement contract, --------------------- treaty or other arrangement providing for Ceded Reinsurance by any Insurance Subsidiary or any Subsidiary of such Insurance Subsidiary. "Reserve Rate" shall mean a fraction (expressed as a decimal), ------------ the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special emergency or supplemental reserves) expressed as a decimal established by the FRB to which member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 are subject with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D). Such reserve percentages shall include those imposed pursuant to Regulation D. The Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SAP" shall mean the accounting procedures and practices --- prescribed or permitted by the Applicable Insurance Regulatory Authority or the NAIC. "Screen" shall mean, for any Currency the relevant display ------ page for LIBOR for such Currency (as determined by the Administrative Agent) on the Dow Jones Markets Service; provided that, if the Administrative Agent determines that there is no such relevant display page for LIBOR for such Currency. "Screen" shall mean the relevant display page for LIBOR for such Currency (as determined by the Administrative Agent) on the Reuter Monitor Money Rates Service. "SEC" shall mean the Securities and Exchange Commission or any --- governmental authority succeeding to its principal functions. "Standard & Poor's" shall mean Standard & Poor's Ratings ----------------- Services, a division of The McGraw-Hill Companies, Inc. or any successor thereto. "Standard and Poor's Rating" shall mean, as at any date, the -------------------------- claims-paying rating of Mid Ocean Reinsurance most recently published by Standard & Poor's. "Statutory Statement" shall mean, as to any Insurance ------------------- Subsidiary, a statement of the condition and affairs of such Insurance Subsidiary prepared in accordance with Credit Agreement ---------------- -14- statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority, and filed with the Applicable Insurance Regulatory Authority. "Subsidiary" shall mean, with respect to any Person, any ---------- corporation partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have-voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Surplus Relief Reinsurance" shall mean any transaction in -------------------------- which any Insurance Subsidiary or any Subsidiary of such Insurance Subsidiary cedes business under a reinsurance agreement that would be considered a "financing-type" reinsurance agreement as determined by the independent certified public accountants of the Company in accordance with principles published by the Financial Accounting Standards Board or the Second Edition of the AICPA Audit Guide for Stock Life Insurance Companies (pp. 91-92), as the same may be revised from time to time. "Tangible Net Worth" shall mean, as at any date, the sum for ------------------ the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) Net Worth. minus ----- (b) the sum of the following (without duplication of deductions in respect of items already deducted in arriving at Net Worth): cost of treasury shares and the book value of all assets which should be classified as intangibles but in any event including goodwill, minority interests, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, Deferred Acquisition Expenses and any write-up in the book value of assets resulting from a revaluation thereof subsequent to December 31, 1996. "Taxes" shall have the meaning assigned to such term in ----- Section 5.05(a) hereof. "Total Capital" shall mean the sum of (i) Total Debt and (ii) ------------- Net Worth. Credit Agreement ---------------- -15- "Total Debt" shall mean the aggregate principal amount of all ---------- Debt of the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP). "Type" shall have the meaning assigned to such term in Section ---- 1.03 hereof. "Wholly Owned Subsidiary" shall mean, with respect to any ----------------------- Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation or other similar legal entity, directors qualifying shares or shares held by residents of the jurisdiction in which such corporation or other similar legal entity is organized as required by the law of such jurisdiction) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 1.02 Accounting Terms: GAAP. ---------------------- (a) 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 case may be, as in effect on the date hereof. (b) The Company shall deliver to the Banks at the same time as the delivery of any annual or quarterly financial statement under Section 8.01 hereof (i) a description in reasonable detail of any material variation between the application of GAAP or SAP, as the case may be, employed in the preparation of such statement and the application of GAAP or SAP, as the case may be, as in effect on the date hereof and (ii) reasonable estimates of the difference in covenant compliance arising as a consequence thereof. 1.03 Currencies and Types of Loans. Loans hereunder are ----------------------------- distinguished by "Currency" and by "Type". The "Currency" of a Loan refers to the Currency in which such Loan is denominated. The "Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurocurrency Loan, each of which constitutes a Type. Loans may be identified by one or more of their Currency and Type. Section 2. Commitments, Loans and Prepayments. ---------------------------------- 2.01 Loans. ----- (a) Each Bank severally agrees, on the terms and conditions of this Agreement, to make loans to the Company in Dollars or in any Agreed Foreign Currency during the period from and including the date hereof to but not including the Commitment Termination Credit Agreement ---------------- -16- Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of the Commitment of such Bank as in effect from time to time. Subject to the terms and conditions of this Agreement during such period the Company may borrow, prepay, repay and reborrow the amount of the Commitments. (b) If, after giving effect to any Loan to be made under this Section 2.01. more than four separate Interest Periods in respect of Loans denominated in any single Currency would be outstanding at the same time (for which purpose Interest Periods described in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest Periods even if they are coterminious), then such Loan shall not be required to be made hereunder. (c) For purposes of determining (i) whether the amount of any borrowing of Loans, together with all other Loans then outstanding, would exceed the aggregate amount of Commitments, (ii) under Section 2.03(b) hereof, the aggregate unutilized amount of the Commitments and (iii) under Section 6.02 hereof, the outstanding aggregate principal amount of Loans, the outstanding principal amount of any Loan that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent (determined as of the date of borrowing of such Loan) of the amount in the Foreign Currency of such Loan of the amount in the Currency of such Loan. 2.02 Borrowings of Loans. The Company shall give the ------------------- Administrative Agent notice of each borrowing of Loans hereunder as provided in Section 4.05 hereof. Not later than 11:00 a.m. Local Time on the date specified for each borrowing of Loans hereunder each Bank shall make available the amount of the Loan or Loans to be made by it on such date to the Administrative Agent, at the Administrative Agent's Account for the Currency in which such Loan is denominated, in immediately available funds, for account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company designated by the Company. 2.03 Chances of Commitments: Reduction of Maximum Loan ------------------------------------------------- Amounts. ------- (a) The aggregate amount of the Commitments shall be automatically reduced to zero on the Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Loans are (or at the time will be) outstanding, to terminate the Commitments and (ii) to reduce the aggregate unutilized amount of the Commitments; provided that (x) the Company shall give notice of each such -------- termination or reduction as provided in Section 4.05 Credit Agreement ---------------- -17- hereof and (y) each partial reduction of Commitments shall be in an aggregate amount at least equal to $ 10,000,000 (or a larger integral multiple of $1.000.000). (c) The Commitments once terminated or reduced may not be reinstated. 2.04 Fees. ---- (a) Facility Fee. The Company shall pay to the Administrative Agent ------------ for account of each Bank a facility fee on the daily average amount of such Bank's Commitment (whether used or unused), for the period from and including the date hereof to but not including the earlier of the date such Commitment is terminated and ~he Commitment Termination Date, at a rate per annum equal to the Applicable Facility Fee Rate. Accrued facility fee shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date. (b) Utilization Fee. The Company shall pay to the Administrative Agent --------------- for account of each Bank, during any period that the aggregate outstanding principal amount of Loans exceeds 50% of the aggregate amount of the Commitments, a utilization fee on the daily average aggregate outstanding principal amount of such Bank's Loans at a rate per annum equal to 0.025% per annum. Accrued utilization fee shall be payable on each Quarterly Date and on the earlier of the date Commitments are terminated and the Commitment Termination Date interest on such Bank's Loans are payable. 2.05 Lending Offices. The Loans of each Type and Currency made by each --------------- Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such Type and Currency. 2.06 Several Obligations. The failure of any Bank to make any Loan to ------------------- be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, and neither any Bank nor the Administrative Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. 2.07 Evidence of Debt. ---------------- (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing, with respect to each Loan made by such Bank to the Company, the amounts of principal of and interest on such Loan payable and paid to such Bank from time to time hereunder. (b) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type and Currency thereof and the Interest Credit Agreement ---------------- -18- Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Bank hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for account of the Banks and each Bank's share thereof. (c) The entries made in the accounts maintained pursuant to clause (a) or (b) of this Section 2.07 shall be prima facie evidence of the ----- ----- ----- existence and amounts of the obligations recorded therein; provided that the failure of any Bank or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Company to repay the principal of, interest on and other amounts in respect of Loans in accordance with the terms of this Agreement. (d) Any Bank may request that Loans made by it be evidenced by a a promissory note of the Company. In such event the Company shall prepare, execute and deliver to such Bank a promissory note payable to the order of such Bank and in substantially the form of Exhibit E hereto. 2.08 Optional Prepayments. Subject to Sections 3.02, 4.04 and 5.04 -------------------- hereof, Loans may be prepaid at any time or from time to time, provided that, -------- the Company' shall give the Administrative Agent notice of each such prepayment as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment the amount to be prepaid shall become due and payable hereunder). 2.09 Mandatory Prepayments. --------------------- (a) Upon the receipt by the Administrative Agent of a Currency Valuation Notice (as defined below) and on each Quarterly Date, the Administrative Agent shall promptly determine the aggregate outstanding principal amount of all Loans (for which purpose the outstanding principal amount of any Loan that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent (determined as of the Business Day on which the Administrative Agent shall have received such Currency Valuation Notice prior to 11:00 a.m. New York time (or, if received by the Administrative Agent after such time on any' Business Day, as of the next succeeding Business Day) or as of such Quarterly Date, as the case may be, of the amount in the Foreign Currency of such Loan). Upon making such determination, the Administrative Agent shall promptly notify the Banks and the Company thereof. (b) If, on the date of such determination the aggregate outstanding principal amount of all Loans exceeds 105% of the aggregate amount of the Commitments as then in effect, the Company shall, if requested by the Majority Banks (through the Administrative Agent), prepay the Loans in an amount so that after giving effect thereto the aggregate Credit Agreement ---------------- -19- outstanding principal amount of the Loans does not exceed the Commitments: provided that any such payment shall be accompanied by any amounts payable - - -------- under Sections 3.02 and 5.04 hereof. For purposes of this Section 2.09, "Currency Valuation Notice" shall ------------------------- mean a notice given by the Majority Banks to the Administrative Agent stating that such notice is a "Currency Valuation Notice" and requesting that the Administrative Agent determine the aggregate outstanding principal amount of all Loans. Anything in this Section 2.09 to the contrary notwithstanding. The Administrative Agent shall not be required to make more than one valuation determination pursuant to Currency Valuation Notices within any rolling three month period. Section 3.01 Payments of Principal and Interest. ---------------------------------- 3.01 Repayment of Loans. The Company hereby promises to pay to ------------------ the Administrative Agent for account of each Bank the principal of each Loan made by such Bank to the Company, and each Loan shall mature, on the last day of the Interest Period therefor. 3.02 Interest. The Company hereby promises to pay to the -------- Administrative Agent for account of each Bank interest on the unpaid principal amount of each Loan made by such Bank to the Company for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) if such Loan is a Base Rate Loan, the Base Rate (as in effect from time to time); (b) if such Loan is a Eurocurrency Loan, the Eurocurrency Rate for such Loan for the Interest Period therefor plus the Applicable Margin. Notwithstanding the foregoing, the Company hereby promises to pay to the Administrative Agent for account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank and on any other amount payable by the Company hereunder to or for account of such Bank that shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) on the last day of the Interest Period therefor and, if such Interest Period is longer than three months (in the case of a Eurocurrency Loan), at three-month intervals following the first day of such Interest Period, and (ii) in the case of Credit Agreement ---------------- -20- any Loan. upon the payment or prepayment thereof (but only on the principal amount so paid or prepaid), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Banks to which such interest is payable and to the Company. Section 4. Payments: Pro Rata Treatment: Computations: Etc. ----------------------------------------------- 4.01 Payments. -------- (a) Except to the extent otherwise provided herein, all payments of principal and interest on any Loan and other amounts to be paid by the Company under this Agreement shall be made in the Currency in which such Loan or other amount is denominated, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at the Administrative Agent's Account for the Currency in which such Loan or other amount is denominated, not later than 11:00 a.m. Local Time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day), provided that if a new Loan is to be made by any Bank to the Company on a date - - -------- the Company is to repay any principal of an outstanding Loan of such Bank and in the same Currency, such Bank shall apply the proceeds of such new Loan to the payment of the principal to be repaid and only an amount equal to the difference between the principal to be borrowed and the principal to be repaid shall be made available by such Bank to the Administrative Agent as provided in Section 2.02 hereof or paid by the Company to the Administrative Agent pursuant to this Section 4.01. as the case may be. All amounts owing under this Agreement (including facility fees and utilization fees, but not including principal of, and interest on. Loans denominated in any Foreign Currency) are payable in Dollars. Notwithstanding the foregoing, if the Company shall fail to pay any principal of any Loan when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), the unpaid portion of such Loan shall, if such Loan is not denominated in Dollars, automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor. on the last day of such lnterest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such principal shall be payable on demand; and if the Company shall fail to pay any interest on any Loan that is not denominated in Dollars, such interest shall automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor. on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such interest shall be payable on demand. (b) Subject to the proviso to the first sentence of Section 4.01(a) above, any Bank for whose account any such payment is to be made may (but shall not be obligated to) Credit Agreement ---------------- -21- debit the amount of any such payment that is not made by such time to any ordinary deposit account of the Company with such Bank (with notice to the Company and the Administrative Agent). (c) The Company shall, at the time of making each payment under this Agreement for account of any Bank, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Loans or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that the Company fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02 hereof, may determine to be appropriate). (d) Each payment received by the Administrative Agent under this Agreement for account of any Bank shall be paid by the Administrative Agent promptly to such Bank, in immediately available funds, for account of such Bank's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made. (e) If the due date of any payment under this Agreement would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 Pro Rata Treatment. Except to the extent otherwise provided ------------------ herein: (a) each borrowing under Section 2.01 hereof shall be made from the Banks pro rata according to their respective Commitments; (b) each payment of facility fee under Section 2.04(a) hereof shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.03 hereof shall be applied to the respective Commitments of the Banks, pro rata according to the amounts of their respective Commitments; (c) Eurocurrency Loans denominated in the same Currency and having the same Interest Period shall (other than as provided in Section 5.03 hereof) be allocated pro rata among the Banks according to their respective Commitments; (d) each payment or prepayment by the Company of principal of Loans of any Type and denominated in any Currency shall be made for account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Loans of such Type and denominated in such Currency held by them; and Credit Agreement ---------------- -22- (e) each payment by the Company of interest and utilization fees on Loans of any Type and denominated in any Currency shall be made for account of the Banks pro rata in accordance with the amounts of interest and utilization fees on Loans of such Type and denominated in such Currency then due and payable to them. 4.03 Computations. Interest on Eurocurrency Loans (other than Loans in ------------ English Pounds Sterling), facility fee and utilization fee shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable and interest on Base Rate Loans and Eurocurrencv Loans in English Pounds Sterling shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Notwithstanding the foregoing, for each day that the Base Rate is calculated by reference to the Federal Funds Rate, interest on Base Rate Loans shall be computed on the basis of a year of 360 days and actual days elapsed. 4.04 Minimum Amounts. Except for mandatory prepayments made pursuant --------------- to Section 2.09 hereof, each borrowing and partial prepayment of principal of Loans shall be in an aggregate amount at least equal to $5,000,000 or a larger integral multiple of $1,000,000 or, in the case of Eurocurrency Loans denominated in any Agreed Foreign Currency. the Foreign Currency Equivalent thereof (rounded downwards to the nearest 1.000 units of such Foreign Currency). Borrowings or prepayments of Loans of different Types or denominated in different Currencies or, in the case of Eurocurrency Loans, having different Interest Periods at the same time hereunder shall be deemed separate borrowings and prepayments for purposes of this Section 4.04, one for each Type. Currency or Interest Period. In addition, the aggregate principal amount of Eurocurrency Loans having the same Interest Period shall be in an amount at least equal to $5,000,000 or a larger integral multiple of $1,000,000 or, in the case of Eurocurrency Loans denominated in any Agreed Foreign Currency. the Foreign Currency Equivalent thereof (rounded downwards to the nearest 1,000 units of such Foreign Currency) and, if (i) any Eurocurrency Loans denominated in Dollars would otherwise be in a lesser principal amount for any period, such Loans shall be Base Rate Loans during such period and (ii) any Eurocurrency Loans denominated in any Foreign Currency would otherwise be in a lesser principal amount for any period, such Loans shall be unavailable hereunder. 4.05 Certain Notices. Notices by the Company to the Administrative --------------- Agent of terminations or reductions of the Commitments, of reductions of borrowings and optional prepayments of Loans, of Types and Currencies of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 10:00 a.m. New York time (or. in the case of borrowings or prepayment of, or duration of Interest Periods for, Eurocurrency Loans denominated in a Foreign Currency, London time) on the number of Business Days prior to the date of the relevant Credit Agreement ---------------- -23- termination, reduction, borrowing or prepayment or the first day of such Interest Period specified below: Number of Business Notice Days Prior ------ ---------- Borrowing or prepayment of Base Rate Loans same day Borrowing or prepayment of or duration of Interest Period for, Eurocurrency Loans denominated in Dollars 3 Borrowing or prepayment of, or duration of Interest Period for, Eurocurrency Loans denominated in a Foreign Currency 5 Each such notice of termination or reduction of the Commitments shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing or optional prepayment shall specify the Loans to be borrowed or prepaid and the amount (subject to Section 4.04 hereof), Type and Currency of each Loan to be borrowed or prepaid, the date of borrowing or optional prepayment (which shall be a Business Day), the Interest Period of the Loans to be borrowed or prepaid. The Administrative Agent shall promptly notify the Banks of the contents of each such notice. 4.06 Non-Receipt of Funds by the Administrative Agent. Unless the ------------------------------------------------ Administrative Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which the Payor is to make payment to the Administrative Agent of (in the case of a Bank) the proceeds of a Loan to be made by such Bank hereunder or (in the case of the Company) a payment to the Administrative Agent for account of one or more of the Banks hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made Credit Agreement ---------------- -24- available together with interest thereon in respect of each day during the period commencing on the date (the "Advance Date") such amount was so made ------------ available by the Administrative Agent until but not including the date the Administrative Agent recovers such amount at a rate per annum equal to the greater of (a) the Federal Funds Rate for such day and (b) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the-Payor. together with interest as aforesaid, provided that if neither -------- the recipient(s) nor the Payor shall return the Required Payment to the Administrative Agent within three Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by the Company to the Banks, the Company and the recipient(s) shall each be obligated retroactively to the Advance Date to pay (without duplication) interest in respect of the Required Payment at the Post-Default Rate (without duplication of the obligation of such Company under Section 3.02 hereof to pay interest on the Required Payment at the Post-Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of the Company under said Section 3.02 to pay interest at the Post-Default Rate in respect of the Required Payment; and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Banks to the Company, the Payor and the Company shall each be obligated retroactively to the Advance Date to pay (without duplication) interest in respect of the Required Payment at the rate applicable to such Loan pursuant to Section 3.02 hereof. it being understood that the return by the Company of the Required Payment to the Administrative Agent shall not limit any claim the Company may have against the Payor in respect of such Required Payment. 4.07 Sharing of Payments. Etc. ------------------------ (a) The Company agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option (to the fullest extent permitted by law), to set-off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of the Company at any of such Bank's offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans or any other amount payable to such Bank hereunder, that is not paid when due (regardless of whether such deposit or other indebtedness is then due to the Company), in which case it shall Credit Agreement ---------------- -25- promptly notify the Company and the Administrative Agent thereof, provided that -------- such Bank's failure to give such notice shall not affect the validity thereof. (b) If any Bank shall obtain from the Company payment of any principal of or interest on any Loan and denominated in any Currency owing to it or payment of any other amount under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Administrative Agent, as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on the Loans denominated in such Currency (the "Applicable Loans") or such other amounts then due hereunder by the Company' to ---------------- such Bank than the percentage received by any other Bank to which principal of or interest on the Applicable Loans or such other amounts is then due hereunder by the Company. it shall promptly purchase from such other Banks participations in (or. if and to the extent specified by such Bank, direct interests in) the Applicable Loans or such other amounts, respectively. owing to such other Banks (or in interest due thereon, as the case may be) in such amounts. and make such other adjustments from time to time as shall be equitable, to the end that all such Banks shall share the benefit of such excess payment (net of any expenses that may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Applicable Loans or such other amounts, respectively, owing to each of such Banks. To such end all such Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Bank so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation (or direct interest). (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Credit Agreement ---------------- -26- Section 5. Yield Protection. Etc. ---------------------- 5.01 Additional Costs. ---------------- (a) The Company shall pay (but without duplication, including by reason of Section 5.05(a) hereof) directly to each Bank from time to time such amounts as such Bank may reasonably determine to be necessary to compensate such Bank for any costs incurred by such Bank that such Bank reasonably determines are attributable to its making or maintaining of any Eurocurrency Loans to the Company or its obligation to make any Eurocurrencv Loans to the Company hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation resulting from any Regulatory Change that: (i) shall subject such Bank (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or changes the basis of taxation of any amounts payable to such Bank under this Agreement in respect of any of such Loans (excluding changes in the rate of tax on the net income of such Bank or of such Applicable Lending Office by any jurisdiction in which such Bank is organized or has its principal office or in which such Applicable Lending Office is located or carrying on business); or (ii) imposes or increases any reserve, special deposit or similar requirements (other than the reserve requirement utilized in the determination of the Eurocurrency Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including, without limitation, any of such Loans or any deposits referred to in the definition of "Eurocurrency Base Rate" in Section 1.01 hereof), or any commitment of such Bank (including, without limitation, the Commitment of such Bank hereunder); or (iii) imposes any other material condition affecting this Agreement (or any of such extensions of credit or liabilities) or its Commitment (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"). ---------------- If any Bank requests compensation from any Company under this Section 5.01(a), the Company may, by notice to such Bank (with a copy to the Administrative Agent), suspend the obligation of such Bank thereafter to make Eurocurrency Loans to such Company until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.03 hereof shall be applicable), provided that such suspension shall not affect the right -------- of such Bank to receive the compensation so requested. Credit Agreement ---------------- -27- (b) Without limiting the effect of the provisions of paragraph (a) of this Section 5.01, in the event that, by reason of any Regulatory Change any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank that includes deposits by reference to which the interest rate on Eurocurrency Loans denominated in an Currency as determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank that includes Eurocurrency Loans denominated in such Currency or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold then, if such Bank so elects by notice to the Company (with a copy to the Administrative Agent), the obligation of such Bank to make Eurocurrency Loans in such Currency hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.03 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may reasonably determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it reasonably determines are attributable to the maintenance by such Bank (or any Applicable Lending Office or such bank holding company) of capital in respect of its Commitment or Loans pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority implementing at the national level the BasIc Accord (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any Applicable Lending Office or such bank holding company) to a level below that which such Bank (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). (d) Each Bank shall notify the Company of any event occurring after the date hereof entitling such Bank to compensation under paragraph (a) or (c) of this Section 5.01 as promptly as practicable, but in any event within 90 days, after such Bank obtains actual knowledge thereof; provided that (i) if any -------- Bank fails to give such notice within 90 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 90 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different Applicable Lending Office for the Loans of such Bank affected by such Credit Agreement ---------------- -28- event if such designation will avoid the need for, or reduce the amount of such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank. except that such Bank shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Bank will furnish to the Company a certificate setting forth in reasonable detail the basis and amount of each request by such Bank for compensation under paragraph (a) or (c) of this Section 5.01. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (c) of this Section 5.01, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans. and of the amounts required to compensate such Bank under this Section 5.01. shall be conclusive absent manifest error, so long as such determinations and allocations are made on a reasonable basis. 5.02 Limitation on Types and Currencies of Loans. Anything herein to ------------------------------------------- the contrary notwithstanding, if, on or prior to the determination of any Eurocurrency Base Rate for any Interest Period pursuant to clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof: (a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof are not being provided by the Reference Bank in the relevant amounts or Currencies or for the relevant maturities for purposes of determining rates of interest for Eurocurrency Loans referred to in said clause (b) as provided herein; or (b) the Majority Banks determine, which determination shall be conclusive, and notify (or notifies, as the case may be) the Administrative Agent that the relevant rates of interest referred to in clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurocurrency Loans denominated in any Currency for such Interest Period is to be determined are not likely adequately to cover the cost to such Banks (or to such quoting Bank) of making or maintaining Eurocurrency Loans denominated in such Currency for such Interest Period; then the Administrative Agent shall give the Company and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make additional Eurocurrency Loans denominated in such Currency. 5.03 Treatment of Affected Loans. If the obligation of any Bank to --------------------------- make Eurocurrency Loans denominated in Dollars shall be suspended pursuant to Section 5.01 hereof, then, unless and until such Bank gives notice as provided below that the circumstances Credit Agreement ---------------- -29- specified in Section 5.01 hereof that gave rise to such suspension no longer exist, all Loans that would otherwise be made by such Bank as Eurocurrency Loans denominated in Dollars shall be made instead as Base Rate Loans. If the obligation of any Bank to make Eurocurrency Loans denominated in any Agreed Foreign Currency to the Company shall be suspended pursuant to Section 5.01 hereof, then, unless and until such Bank gives notice as provided below that the circumstances specified in Section 5.01 hereof that gave rise to such suspension no longer exist, all Loans that would otherwise be made by such Bank to the Company as Eurocurrency Loans denominated in such Agreed Foreign Currency shall, except as provided in the immediately preceding sentence, be made instead as Eurocurrency Loans denominated in Dollars. 5.04 Compensation. The Company shall pay to the Administrative Agent ------------ for account of each Bank, upon the request of such Bank through the Administrative Agent. such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense that such Bank reasonably determines is attributable to: (a) any payment or mandatory or optional prepayment, of a Eurocurrency Loan to such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation. the failure of any of the conditions precedent specified in Section 6 hereof to be satisfied) to borrow a Eurocurrency Loan from such Bank on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 hereof. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid or not borrowed for the period ("Relevant Period") from the date of such payment, --------------- prepayment or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate equal to the arithmetic mean, as reasonably determined by such Bank, of the respective rates per annum (rounded upward, if necessary, to the nearest 1/16 of 1%) of the bid rates for deposits in the Currency in which such Loan is denominated for the period approximately equal to the Relevant Period appearing on the Screen or other publicly available source (as described in the definition of the term "Eurocurrency Base Rate" in Section 1.01 hereof); provided that if -------- Credit Agreement ---------------- -30- the Screen is not publicly available, then the provisions of paragraph (b) of the definition of the term "Eurocurrency Base Rate" in Section 1.01 hereof shall apply herein mutatis mutandis. ------- -------- 5.05 Taxes. ----- (a) The Company agrees to pay to each Bank such additional amounts as are necessary in order that the net payment of any amount due to such Bank hereunder, after deduction for or withholding in respect of any Taxes imposed with respect to such payment (or in lieu thereof, payment of such Taxes by such Bank) will not be less than the amount stated herein to be then due and payable, provided that the foregoing obligation to pay such additional amounts shall not - - -------- apply: (i) to any payment to any Bank hereunder unless such Bank is, on the date hereof (or on the date it becomes a Bank hereunder as provided in Section 11.06(b) hereof) and on the date of any change in the Applicable Lending Office of such Bank. entitled to a complete (or, in the case of an assignee or participant pursuant to paragraph (b) or (e) of Section 11.06 hereof, at least to the extent of the assignor or applicable Bank at the time of such assignment or participation) exemption from withholding or deduction by the Company of Taxes on all amounts to be received by such Bank hereunder in respect of the Loans made by such Bank to the Company, or (ii) to any Taxes required to be deducted or withheld solely by reason of the failure by such Bank, after being requested by the Company, to comply with applicable certification, information, documentation or other reporting requirements specifically identified by the Company in such request concerning the nationality, residence, identity or connections with any Company Jurisdiction if such compliance is required by treaty, statute or regulation as a precondition to relief or exemption from such Taxes. For the purposes of this Section 5.05(a), "Taxes" shall mean with respect to the ----- Company all present or future income, franchise and other taxes and levies, imposts, deductions, charges, and withholdings whatsoever, and all interest, penalties or similar amounts with respect thereto, now or hereafter imposed, assessed, levied or collected by any Governmental Authority of any Company Jurisdiction on or in respect of payments of principal, interest, fees or other amounts payable under this Agreement, or any promissory notes evidencing the Loans made hereunder, including (without limitation) payments under this Section 5.05(a) Provided, however, that Taxes shall not include (x) income or franchise -------- ------- taxes imposed on or measured by the net income or capital of a Bank (or its Applicable Lending Office) by any Company Jurisdiction as a result of (i) such Bank being organized under the laws of such Company Jurisdiction, (ii) such Bank having its chief executive office in such Company Jurisdiction or (iii) its Applicable Lending Office being located or carrying on business in Credit Agreement ---------------- -31- such Company Jurisdiction (v) interest, penalties or additions to tax not attributable to any act, failure to act or misrepresentation of the Company (other than any act or failure to act permitted or contemplated hereunder) and (z) any tax other than a withholding tax unless the Bank's interest in the Loan became subject thereto solely by reason of such Bank's participation in the transactions contemplated hereby. (b) Within 30 days after paying any amount to the Administrative Agent or any Bank from which it is required by law to make any deduction or withholding and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Company shall deliver to the Administrative Agent for delivery to such Bank evidence satisfactory to such Bank of such deduction, withholding or payment (as the case may be). 5.06 Replacement of Banks. If any Bank requests compensation pursuant -------------------- to Section 5.01 or 5.05 hereof, or any Bank's obligation to make Loans of any Type or denominated in any Currency shall be suspended pursuant to Section 5.01 hereof (any such Bank requesting such compensation, or whose obligations are so suspended, being herein called a "Requesting Bank"), the Company, upon three --------------- Business Days' notice to the Administrative Agent, may require that such Requesting Bank transfer all of its right, title and interest under this Agreement to any bank or other financial institution identified by the Company that is satisfactory to the Administrative Agent in its reasonable determination (a) if such bank or other financial institution (a "Proposed Bank") agrees to ------------- assume all of the obligations of such Requesting Bank hereunder, and to purchase all of such Requesting Bank's Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Requesting Bank's Loans, together with interest thereon to the date of such purchase and (b) if such Requesting Bank has requested compensation pursuant to Section 5.01 or 5.05 hereof, such Proposed Bank's aggregate requested compensation, if any, pursuant to said Section 5.01 or 5.05 with respect to such Requesting Bank's Loans is lower than that of the Requesting Bank. Subject to the provisions of Section 11.06(b) hereof, such Proposed Bank shall be a "Bank" for all purposes hereunder. Without prejudice to the survival of any other agreement of the Company hereunder the agreements of the Company contained in Sections 5.01, 5.05 and 11.03 (without duplication of any payments made to such Requesting Bank by the Company or the Proposed Bank) shall survive for the benefit of such Requesting Bank under this Section 5.06 with respect to the time prior to such replacement. Section 6. Conditions Precedent. -------------------- 6.01 Initial Loan. The obligation of any Bank to make its ------------ initial Loan hereunder is subject to the condition precedent that the Administrative Agent shall have received the following documents (with sufficient copies for each Bank), each of which shall Credit Agreement -32- be satisfactory to the Administrative Agent (and to the extent specified below, to each Bank) in form and substance: (a) Corporate Documents. Certified copies of the organizational ------------------- documents of the Company and of all corporate authority for the Company (including, without limitation, board of director resolutions and evidence of the incumbency and specimen signature of officers) with respect to the execution, delivery and performance of this Agreement and each other document to be delivered by the Company from time to time in connection herewith and with the Loans hereunder (and each of the Administrative Agent and each Bank may conclusively rely on such certificate of incumbency until it receives notice in writing from the Company to the contrary). (b) Opinions of Counsel to the Company. An opinion, dated the date ---------------------------------- hereof of (i) Conyers, Dill & Pearman, Cayman Islands counsel to the Company, substantially in the form of Exhibit A-I hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request, (ii) Conyers, Dill & Pearman, Bermuda counsel to the Company, substantially in the form of Exhibit A-2 hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request and (iii) Cahill Gordon & Reindel, special New York counsel to the Company, substantially in the form of Exhibit A-3 hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request (and the Company hereby instructs each such counsel to deliver such opinions to the Banks and the Administrative Agent). (c) Opinion of Special New York Counsel to Chase. An opinion, dated -------------------------------------------- the date hereof, of Milbank, Tweed, Hadley & McCloy special New York counsel to Chase substantially in the form of Exhibit B hereto (and Chase hereby instructs such counsel to deliver such opinion to the Banks). (d) Other Documents. Such other documents as the Administrative Agent --------------- or any Bank or special New York counsel to Chase may reasonably request. The obligation of any Bank to make its initial extension of credit hereunder is also subject to the payment or delivery by the Company of such fees as the Company shall have agreed to pay or deliver to any Bank or an affiliate thereof or the Administrative Agent in connection herewith, including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy. special New York counsel to Chase. in connection with the negotiation, preparation, execution and delivery of this Agreement and each other document to be delivered by the Company and the extensions of credit hereunder (to the extent that statements for such fees and expenses have been delivered to the Company). Credit Agreement ----------------- -33- 6.02 Initial and Subsequent Loans. The obligation of any Bank ---------------------------- to make any Loan hereunder (including such Bank's initial Loan) is subject to the further conditions precedent that, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) if such borrowing will increase the Dollar Equivalent of the aggregate outstanding principal amount of the Loans of the Banks hereunder, no Default shall have occurred and be continuing; and (b) if such borrowing will increase the Dollar Equivalent of the aggregate outstanding principal amount of the Loans of the Banks hereunder, the representations and warranties made by the Company in Section 7 hereof (other than the last sentence of Section 7.02 (a) hereof) shall be true and complete in all material respects on and as of the date of the making of such Loan with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Each notice of borrowing by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice and as of the date of such borrowing). Section 7. Representations and Warranties. The Company represents and ------------------------------ warrants to the Administrative Agent and the Banks that: 7.01 Corporate Existence. Each of the Company and its Material ------------------- Subsidiaries: (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have (either individually or in the aggregate) a Material Adverse Effect. 7.02 Financial Condition. ------------------- (a) The Company has heretofore furnished to each of the Banks (a) the consolidated balance sheet of the Company and its Subsidiaries as at October 31, 1996 and the related consolidated statements of operations and cash flows of the Company and its Subsidiaries for the fiscal year ended on said date, with the opinion thereon of KPMG Peat Marwick and (b) the unaudited consolidated balance sheet of the Company and its Credit Agreement --------------- -34- Subsidiaries as at April 30, 1997 and the related consolidated statements of operations and cash flows of the Company and its Subsidiaries for the three- month period ended on said date, All such financial statements present fairly, in all material respects. the financial position of the Company and its Subsidiaries as at said dates and the results of their operations for the fiscal year and three-month period ended on said dates (subject in the case of such financial statements as at April 30, 1997 to normal year-end audit adjustments), all in conformity with generally accepted accounting principles in the United States of America. None of the Company nor any of its Subsidiaries has on the date hereof any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said financial statements (or in the notes thereto) as at said dates. Since October 31, 1996, there has been no material adverse change in the consolidated business, operations or financial condition of the Company and its Subsidiaries taken as a whole from that set forth in said financial statements as at said dates. (b) The Company has heretofore furnished to each of the Banks the annual and quarterly Statutory Statements of each of its Material Insurance Subsidiaries for the fiscal year ended October 31, 1996 and for the quarterly fiscal period ended April 30, 1997 as filed with the Applicable Insurance Regulatory Authority. All such Statutory Statements present fairly, in all material respects, the financial condition of each Insurance Subsidiary. respectively, as at the respective dates thereof and its results of operations through fiscal year ended on October 31, 1996 and the quarterly fiscal period ended April 30, 1997, in accordance with statutory accounting practices prescribed or permitted by the Applicable Insurance Regulatory Authority. 7.03 Litigation. There are no legal or arbitral proceedings, or any ---------- proceedings by or before any Governmental Authority, now pending or (to the knowledge of the Company) threatened against the Company or any of its Subsidiaries that, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. 7.04 No Breach. None of the execution and delivery of this Agreement --------- and each other document to be delivered by the Company from time to time in connection herewith and with the Loans hereunder, the consummation of the transactions herein contemplated or compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent (other than action by the board of directors of the Company that has already been taken) under, (a) the charter or by-laws of the Company, (b) any applicable law or regulation, (c) any agreement or instrument to which the Company or any of its Material Subsidiaries is a party' or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument or (d) any judgment, order, injunction or decree of any Credit Agreement ---------------- -35- Governmental Authority by which the Company or any of its Material Subsidiaries or any of their Property is bound or to which any of them is subject. 7.05 Action. The Company has all necessary corporate power, authority ------ and legal right to execute, deliver and perform its obligations under this Agreement and each other document to be delivered by the Company from time to time in connection herewith and with the Loans hereunder; the execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action on its part; and this Agreement has been duly and validly executed and delivered by the Company and constitutes its legal, valid and binding obligation, enforceable under the law of the State of New York against the Company in accordance with its terms, except as such enforceability may be limited (a) by bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights or (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or law). 7.06 Approvals. No authorizations, approvals or consents of, --------- and no filings or registrations with, any Governmental Authority are necessary for the execution, delivery or performance by the Company of this Agreement or for the legality, validity or enforceability hereof. 7.07 Use of Credit. No part of the proceeds of the Loans hereunder ------------- will be used to buy or carry any Margin Stock. 7.08 ERISA. Neither the Company nor any of its Subsidiaries ----- maintains, or has incurred any material obligation in connection with, an ERISA Plan. Neither the Company nor any of its Subsidiaries is, or has been within the preceding five years, an ERISA Affiliate of any Person. All contributions required to be made by the Company or any of its Subsidiaries with respect to a Foreign Benefit Plan have been timely made. Each Foreign Benefit Plan has been maintained in substantial compliance with its terms and with the requirements of any and all applicable laws and has been maintained, where required, in good standing with applicable Governmental Authorities. Neither the Company nor any of its Subsidiaries has incurred any material obligation in connection with the termination, withdrawal from, or payment of benefits under any Foreign Benefit Plan. 7.09 Taxes. The Company and its Subsidiaries have filed all income tax ----- returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries, except for any such tax being contested in good faith and by proper proceedings and against which adequate reserves are being maintained. The charges, accruals Credit Agreement ---------------- -36- and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company adequate. 7.10 Investment Company Act. Neither the Company nor any of its ---------------------- Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940 as amended. 7.11 Public Utility Holding Company Act. Neither the Company ---------------------------------- nor any of its Subsidiaries is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.12 Environmental Matters. Each of the Company and its --------------------- Material Subsidiaries has obtained all environmental, health and safety permits, licenses and other authorizations required under all Environmental Laws from time to time in effect to carry on its business as now being or as proposed to be conducted, except to the extent failure to have any such permit, license or authorization would not (either individually or in the aggregate) have a Material Adverse Effect. 7.13 Subsidiaries. Etc. ----------------- (a) Set forth in Schedule I hereto is a complete and correct list, as of the date of this Agreement of all of the Material Subsidiaries of the Company, 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 nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Schedule I hereto, as of the date of this Agreement (x) each of the Company 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 I hereto, (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) there are no outstanding Equity Rights with respect to such Person. (b) None of the Subsidiaries of the Company is, on the date hereof, subject to any indenture, agreement instrument or other arrangement that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence or payment of Indebtedness, the declaration or payment of dividends, or the making of loans, advances or investments. 7.14 Stamp Taxes. To ensure the legality, validity, enforceability or ----------- admissibility in evidence of this Agreement or any promissory notes evidencing Loans made Credit Agreement ---------------- -37- (or to be made), it is not necessary that this Agreement or such promissory notes or any other document be filed or recorded with any Governmental Authority or that any stamp or similar tax be paid on or in respect of this Agreement or such promissory notes or any other document other than such filings and recordations that have already been made and such stamp or similar taxes that have already been paid. 7.15 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 Company Jurisdiction for the admissibility thereof in the courts of such Company Jurisdiction. 7.16 True and Complete Disclosure. The information reports financial ---------------------------- statements, exhibits and schedules furnished in writing by or on behalf of the Company to the Administrative Agent or any Bank in connection with the negotiation preparation or delivers of this Agreement or included herein or delivered pursuant hereto, when taken as a whole do not contain any statement of material fact that is materially untrue or omit to state any material fact necessary to make the statements herein, in light of the circumstances under which they were made, not materially misleading. 7.17 Withholding of Taxes. As of the date of this Agreement the -------------------- payments of the principal of and interest of the Loans, the fees under Section 2.04 hereof and all other amounts payable hereunder will not be subject by withholding or deduction, to any Taxes imposed by any Company Jurisdiction. Section 8. Covenants of the Company. The Company covenants and ------------------------ agrees with the Banks and the Administrative Agent that so long as any Commitment is outstanding and until payment in full of all of the principal of and interest on each Loan and all fees payable under Section 2.04 hereof; 8.01 Financial Statements. Etc. The Company shall deliver to each of ------------------------- the Banks: (a) as soon as available and in any event within 50 days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Company, consolidated statements of operations and cash flows of the Company and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheet of the Company and its Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the corresponding period (except in the case of the balance sheet to the last day of) in the preceding fiscal year (it being understood that delivery to the Banks of the Company's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this Section 8.01(a) so long as the financial information Credit Agreement ---------------- -38- required to be contained in such Report is substantially' the same as the financial information required under this Section 8.01(a)), accompanied by an Officer's Certificate, which certificate shall state that said consolidated financial statements present fairly, in all material respects, the consolidated financial condition and results of operations of the Company and its Subsidiaries in accordance with generally accepted accounting principles (except for the absence of footnotes), consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 95 days after the end of each fiscal year of the Company, consolidated statements of operations and cash flows of the Company and its Subsidiaries for such fiscal year and the related consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year (it being understood that delivery to the Banks of the Company's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this Section 8.01(b) so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this Section 8.01(b)), and accompanied by a report thereon of KPMG Peat Marwick or any other independent certified public accountants of recognized national standing, which report shall state (without a "going concern" or like qualification or exception and without qualification or exception as to the scope of its audit) that said consolidated financial statements present fairly, in all material respects, the consolidated financial condition and results of operations of the Company and its Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles in the United States of America, and a certificate of such accountants addressed to the Banks stating that, in making the examination necessary for their opinion, nothing came to their attention that caused them to believe that the Company had failed to comply with any of its obligations under Sections 8.04 to 8.07 (inclusive) or that any Default specified in paragraph (b) or (e) through (i), inclusive, of Section 9 hereof had occurred, except as specifically stated (which certificate may be limited to the extent required by accounting rules and guidelines); (c) within 5 days after filing with the Applicable lnsurance Regulatory Authority and in any event within 55 days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Company the quarterly Statutory Statement of each Material Insurance Subsidiary for such fiscal period, together with a certificate of a senior financial officer of the Company or of such Subsidiary stating that such Statutory Statement fairly presents, in all Material respects, the financial condition of each Material Insurance Subsidiary, respectively, for such quarterly fiscal period in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority. Credit Agreement ---------------- -39- (d) within 5 days after filing with the Applicable Insurance Regulatory Authority and in any event within 55 days after the end of each fiscal year of the Company the annual Statutory Statement of each Material Insurance Subsidiary for such year, together with an Officer's Certificate stating that such annual Statutory Statement fairly presents, in all material respects, the financial condition of each Material Insurance Subsidiary, respectively, for such fiscal year in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority. (e) promptly upon their becoming available, copies of all registration statements (other than those on Form S-8) and regular periodic reports, if any, which the Company shall have filed with the SEC or any national securities exchange; (f) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed: (g) promptly after the Company knows that any Default has occurred and is continuing, a notice of such Default specifying that such notice is a "Notice of Default" and describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto; (h) the Company will promptly give to each Bank notice of any legal or arbitral proceedings, or any proceedings before any Governmental Authority, pending or (to the knowledge of the Company) threatened, against the Company or any of its Subsidiaries that either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect; and (i) from time to time such other information regarding the financial condition, operations or business of the Company or any of its Subsidiaries as the Administrative Agent may reasonably request. The Company will furnish to each Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, an Officer's Certificate (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 8.05(g), 8.05(h) and 8.06 hereof as of the end of the respective quarterly fiscal period or fiscal year. Credit Agreement ---------------- -40- 8.02 Existence Etc. The Company will, and will cause each of its -------------- Material Subsidiaries to: (a) preserve and maintain its legal existence and all of its material rights. privileges, licenses and franchises (Drovided that nothing in this Section 8.02 shall prohibit any transaction permitted under Section 8.04 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements is reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect; (c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which, in the opinion of the Company, adequate reserves are being maintained in accordance with GAAP; (d) keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied; (e) maintain all of its material Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; and (f) permit representatives of any Bank of the Administrative Agent during normal business hours to examine or inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Bank of the Administrative Agent (as the case may be). 8.03 Insurance. The Company will, and will cause each of its --------- Material Subsidiaries to, (a) maintain fidelity and liability insurance with financially sound and reputable insurance companies (or through self-insurance programs so long as such self-insurance is administered in accordance with sound business practices), and with respect to risks of a character (other than insurance written or reinsurance assumed by the Company or its Subsidiaries) usually maintained by corporations engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such corporations and carry such other insurance as is usually carried by such corporations and (b) furnish to the Administrative Agent, upon written request full information as to such insurance carried. Credit Agreement ---------------- -41- 8.04 Prohibition of Fundamental Changes. The Company will ---------------------------------- not, nor will it permit any of its Material Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, nor will it permit any of its Material Subsidiaries to convey, sell, lease, transfer or otherwise dispose of any capital stock of any of its Material Insurance Subsidiaries, whether now owned or hereafter acquired, unless, after giving effect to such Disposition at least 95% of the capital stock of such Material Insurance Subsidiary is directly or indirectly owned and controlled by the Company. Notwithstanding the foregoing provisions of this Section 8.04: (a) any Material Subsidiary may be merged or consolidated with or into: (i) the Company if the Company shall be the continuing or surviving corporation or (ii) any other Subsidiary of the Company; provided that (x) if any such transaction shall be between a Subsidiary -------- and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; and (b) the Company or any Material Subsidiary may merge or consolidate with any other Person if (i) in the case of a merger or consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving corporation is after giving effect to such merger or consolidation, a Wholly-Owned Subsidiary of the Company and (ii) after giving effect thereto no Default would exist hereunder. 8.05 Limitation on Liens. ------------------- The Company will not, nor will it permit Mid Ocean Reinsurance, any Affiliate or Subsidiary of the Company having direct or indirect ownership of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance to create, incur, assume or suffer to exist any Lien upon any of their respective Properties, whether now owned or hereafter acquired, except: (a) Liens in existence on the date hereof and listed on Schedule III hereto; (b) Liens imposed by any Governmental Authority for taxes, assessments or charges not yet due or which are being contested in good faith and by appropriate proceedings, unless the amount thereof is material with respect to it or its financial condition, if adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; Credit Agreement ---------------- -42- (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary' course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 9(h) hereof; (d) pledges or deposits under worker's compensation unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business: (f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company; (g) Liens upon real and/or tangfble personal Property acquired after the date hereof (by purchase, construction or otherwise) by the Company, each of which Liens either existed on such Property before the time of its acquisition and was not created in anticipation thereof or was created solely for the purpose of securing Indebtedness incurred to finance, refinance, or refund the cost (including the cost of construction) of such Property; provided that (i) no -------- such Lien shall extend to or cover any Property of the Company other than the Property so acquired and improvements thereon and (ii) the principal amount of Indebtedness secured by any such Lien shall not exceed 80% of the fair market value (as determined in good faith by a senior financial officer of the Company) of such Property at the time it was acquired (by purchase, construction or otherwise); (h) Liens to secure reimbursement obligations of Mid Ocean Reinsurance or any such Subsidiary or Affiliate of the Company or any Subsidiary of Mid Ocean Reinsurance in respect of letters of credit caused to be issued in the ordinary course of business; (i) additional Liens created after the date hereof so long as the Indebtedness secured thereby and incurred after the date hereof does not exceed $5,000,000 in the aggregate at any one time outstanding; and Credit Agreement ---------------- -43- (j) any extension, renewal or replacement of the foregoing: provided -------- that the Liens permitted by this paragraph shall not extend to or cover any additional lndebtedness or Property (other than a substitution of like Property). Notwithstanding anything contained herein to the contrary the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien on any of the capital stock of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance. 8.06 Certain Financial Covenants. --------------------------- (a) Tangible Net Worth. The Company will not, at any time, permit ------------------ Tangible Net Worth to be less than $800,000,000. (b) Total Debt to Total Capital. The Company shall, at all --------------------------- times, maintain a ratio of Total Debt to Total Capital of not more than 0.30 to 1. 80.7 Ratings. The Company will not allow the Standard and Poor's ------- Rating or the Best Rating to be less than A. 8.08 Use of Proceeds. The Company will use the proceeds of the --------------- Loans hereunder for general corporate purposes (in compliance with all applicable legal and regulatory requirements, including, without limitation, Regulations G, U and X and the Securities Act of 1933 and the Securities Exchange Act of 1934 and the regulations thereunder); provided that neither the -------- Administrative Agent nor any Bank shall have any responsibility as to the use of any of such proceeds. 8.09 Transactions with Affiliates. The Company will not, and ---------------------------- will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any Property to, or purchase, lease or otherwise acquire any Property from, or otherwise engage in any other transactions with, any of its Affiliates, except at prices and on terms and conditions not less favorable to the Company or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties. 8.10 Compliance with Laws. The Company will, and will cause -------------------- each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to 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. 8.11 Payment of Obligations. The Company will, and will cause ---------------------- each of its Subsidiaries to, pay its obligations that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount Credit Agreement ---------------- -44- thereof is being contested in good faith by appropriate proceedings, (b) the Company or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. 8.12 Indebtedness. The Company will not permit Mid Ocean ------------ Reinsurance any Affiliate or Subsidiary of the Company having direct or indirect ownership of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance to, create, incur or suffer to exist any Debt or any Guarantee of Indebtedness of any other Person, except for Debt or Guarantees of Indebtedness outstanding on the date hereof and listed in Schedule IV hereto. 8.13 Capital and Surplus of Mid Ocean Reinsurance. The Company will -------------------------------------------- not permit the Capital and Surplus of Mid Ocean Reinsurance to be less than $800,000,000 at any time. Section 9. Events of Default. If one or more of the following events ----------------- (herein called "Events of Default") shall occur and be continuing: ----------------- (a) The Company shall: (i) default in the payment of any principal of any Loan when due (whether at stated maturity or at mandatory or optional prepayment or otherwise); or (ii) default in the payment of any interest on any Loan or any facility fee or utilization fee payable under Section 2.04 hereof and such default shall continue unremedied for two or more Business Days or (iii) default in the payment of any other amount payable by it hereunder when due and such default shall have continued unremedied for five or more days; or (b) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any Indebtedness aggregating $5,000,000 or more, or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or to have the interest rate thereon reset to a level so that securities evidencing such Indebtedness trade at a level specified in relation to the par value thereof; or any Obligor shall default in the payment when due of any amount in excess of $5,000,000 under any Derivative Transaction; or any event specified in any Derivative Transaction to which any Obligor is a party shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to Credit Agreement ---------------- -45- permit, termination or liquidation payment or payments in excess of $5,000,000 to become due; or (c) Any representation, warranty or certification made or deemed made herein or in any other document to be delivered by the Company in connection herewith and with the Loans hereunder (or in any modification or supplement hereto or thereto) by the Company, or any certificate furnished to any Bank or the Administrative Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or deemed made or furnished in any material respect: or (d) The Company shall default in the performance of its obligations under Sections 8.01(g), 8.04 through 8.07, 8.12, or 8.13 hereof (inclusive); or the Company shall default in the performance of any of its other obligations in this Agreement or in any other document to be delivered by the Company in connection herewith and with the Loans hereunder and such default shall continue unremedied for a period of thirty or more days after notice thereof to the Company by the Administrative Agent or any Bank (through the Administrative Agent); or (e) The Company or any of its Material Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of its Material Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) file, or consent by answer or otherwise fail to controvert in a timely and appropriate manner the filing against it of, a petition seeking relief or to take advantage of any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts or (iv) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Material Subsidiaries, in any court or governmental regulatory authority of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or such Subsidiary or of all or any substantial part of its Property or (iii) similar relief in respect of the Company or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall Credit Agreement ---------------- -46- continue undismissed for a period of 60 or more days or an order judgment or decree approving or ordering any of the foregoing shall be entered; or (h) A judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company or any of its Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal: or (i) A Change of Control shall occur; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Section 9 with respect to the Company (A) the Administrative Agent may and, upon request of the Majority Banks, shall, by notice to the Company, terminate the Commitments and they shall thereupon terminate, and (B) the Administrative Agent may and, upon request of Banks holding more than 50% of the aggregate unpaid principal amount of the Loans, shall, by notice to the Company declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder (including, without limitation, any amounts payable under Section 5.04 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company: and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Section 9 with respect to the Company, the Commitments shall automatically be terminated and the principal amount then outstanding of and the accrued interest on, the Loans and all other amounts payable by the Company hereunder (including, without limitation, any amounts payable under Section 5.04 hereof) shall automatically become immediately due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. Section 10. The Administrative Agent. ------------------------ 10.01 Appointment Powers and Immunities. Each Bank hereby appoints and --------------------------------- authorizes the Administrative Agent to act as its agent hereunder with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Administrative Agent Credit Agreement ---------------- -47- (which term as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Bank. (b) shall not be responsible to the Banks for any recitals, statements. representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement. or for the value, validity, effectiveness, genuineness. enforceability or sufficiency of this Agreement or any other document referred to or provided for herein or for any failure by the Company to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys- in-fact selected by it in good faith. The Administrative Agent may deem and treat the payee of any promissory note evidencing any Loans hereunder as the holder thereof for all purposes hereof unless and until an Assignment and Acceptance relating to such Loans shall have been filed with the Administrative Agent. together with the consent of the Company thereto (to the extent provided in Section 11.06(b) hereof). 10.02 Reliance by Administrative Agent. The Administrative Agent -------------------------------- shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone. telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions given by the Majority Banks (or. if so provided in Section 11.04 hereof, all of the Banks), and such instructions of the Credit Agreement ---------------- -48- Majority Banks (or all of the Banks as the case may be) and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 10.03 Defaults. The Administrative Agent shall not be deemed to have -------- knowledge or notice of the occurrence of a Default unless the Administrative Agent has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall (subject to Sections 10.01 and 10.07 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, provided that, unless and until the Administrative Agent shall have -------- received such directions, the Administrative Agent may (but shall not be obligated to) take such action or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 10.04 Rights as a Bank. With respect to its Commitment and the Loans ---------------- made by it, Chase (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Chase (and any successor acting as Administrative Agent) and its Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Company (and any of its Subsidiaries or Affiliates) as if it were not acting as the Administrative Agent, and Chase (and any other successor acting as Administrative Agent) and its Affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 10.05 Indemnification. The Banks agree to indemnify the --------------- Administrative Agent (to the extent not reimbursed under Section 11.03 hereof, but without limiting the obligations of the Company under said Section 11.03) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Bank) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Section 11.03 hereof but excluding (i) normal Credit Agreement -49- administrative costs and expenses incident to the performance of its agency duties hereunder and (ii) the costs and expenses of the Administrative Agent in connection with the negotiation and preparation of this Agreement) or the enforcement of any of the terms hereof or of any such other documents, provided -------- that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 10.06 Non-Reliance on Administrative Agent and Other Banks. Each Bank ---------------------------------------------------- agrees that it has, independently and without reliance on the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition, operations, business, Properties, liabilities or prospects of the Company or any of its Subsidiaries (or any of their Affiliates) that may come into the possession of the Administrative Agent or any of its Affiliates. 10.07 Failure to Act. Except for action expressly required of the -------------- Administrative Agent hereunder. the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 10.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 10.08 Resignation of Administrative Agent. Subject to the appointment ----------------------------------- and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Banks and the Company. Upon any such resignation, the Majority Banks shall have the right (with, so long as no Default shall have occurred and be continuing, the consent of the Company, which consent shall not be unreasonably withheld or delayed) to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation of the retiring Administrative Agent, then the retiring Credit Agreement ---------------- -50- Administrative Agent may, on behalf of the Banks. (with. so long as no Default shall have occurred and be continuing, the consent of the Company, which consent shall not be unreasonably withheld or delayed) appoint a successor Administrative Agent. that shall be a Bank that has an office in New York, New York with a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights. powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. Section 11. Miscellaneous. ------------- 11.01 Waiver. No failure on the part of the Administrative Agent or ------ any Bank to exercise and no delay in exercising. and no course of dealing with respect to. any' right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. All notices, requests and other communications ------- provided for herein (including, without limitation, any modifications of or waivers, requests or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telecopy) to the intended recipient at (a) if to any Company or the Administrative Agent, the "Address for Notices" specified below its name on the signature pages hereof or (b) if to any Bank, the address (or telecopy number) set forth in its Administrative Questionnaire; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03 Expenses. Etc. The Company agrees to pay or reimburse each of -------------- the Banks and the Administrative Agent for: (a) all reasonable out-of-pocket costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy. special New York counsel to Chase) in connection with the negotiation or preparation of any modification, supplement or waiver of any of the terms of this Agreement (whether or not consummated); (b) all reasonable out-of-pocket costs and expenses of the Banks and the Administrative Agent (including, without limitation, the reasonable fees and expenses of legal counsel) in connection with (i) any Default and any Credit Agreement ---------------- -51- enforcement or collection proceedings resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 11.03; and (c) all transfer, stamp, documentary, recording or other similar taxes. assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any other document referred to herein. The Company hereby agrees to indemnify the Administrative Agent and each Bank and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses (without duplication of anything covered by Section 5 hereof) incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Administrative Agent to any Bank, whether or not the Administrative Agent or any Bank is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the Loans hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the Loans hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 11.04 Amendments. Etc. Except as otherwise expressly provided in this --------------- Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Company and the Majority Banks, or by the Company and the Administrative Agent acting with the consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks or by the Administrative Agent acting with the consent of the Majority Banks; provided that (a) no such modification, supplement or waiver shall: (i) - - -------- increase, or extend the term of the Commitment of any Bank, or extend the time or waive any requirement for the reduction or termination of such Commitment, without the written consent of such Bank; (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fee hereunder, without the written consent of each Bank affected thereby; (iii) reduce the amount of any such payment of principal, without the written consent of each Bank affected thereby; (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, without the written consent of each Bank affected thereby; (v) alter the rights or obligations of the Company to prepay Loans, without the written consent of each Bank affected thereby; (vi) alter the terms of Sections 4.02 or 4.07(b) hereof or this Section 11.04, without the written consent of each Bank; or (vii) modify the definition of the terms "Agreed Foreign Currency" or "Majority Banks" or modify in any other manner the Credit Agreement ---------------- -52- number or percentage of the Banks required to make any determinations or waive any rights hereunder or to modify any provision hereof, without the written consent of each Bank; and (b) any modification of any of the rights or obligations of the Administrative Agent hereunder shall require the consent of the Administrative Agent. 11.05 Successors and Assigns. This Agreement shall be binding upon ---------------------- and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Assignments and Participations. ------------------------------ (a) The Company may not assign any of its rights or obligations hereunder without the prior consent of all of the Banks and the Administrative Agent. (b) Any Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) subject to the following; (i) except in the case of an assignment to a Bank or an affiliate of a Bank, each of the Company and the Administrative Agent shall have given their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Bank or an affiliate of a Bank or an assignment of the entire remaining amount of the assigning Bank's Commitment the amount of the Commitment of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Company and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Bank's rights and obligations under this Agreement, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,000, and (v) the assignee, if it shall not be a Bank, shall (x) be entitled to an exemption from withholding or deduction by the Company of Taxes on all amounts to be received by it hereunder at least the same extent as the assignor and (y) deliver to the Administrative Agent an Administrative Questionnaire; provided further that any consent of the Company -------- ------- otherwise required under this Section shall not be required if an Event of Default under paragraph (f) or (g) of Section 9 has occurred and is continuing with respect to the Company. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Bank under this Agreement, and the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto but shall Credit Agreement ---------------- -53- continue to be entitled to the benefits of Sections 5.01. 5.04. 5.05 and 11.03). Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Bank of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Company, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to each Bank pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be -------- conclusive, and the Company and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Company and any Bank, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Bank and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Bank hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Bank may without the consent of the Company, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Bank's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Bank's obligations under this Agreement shall remain - - -------- unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Company and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Bank sells such a participation shall provide that such Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that -------- such Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the proviso to Section 11.04 that affects such Participant. Subject to paragraph (f) of this Section the Company agrees that each Participant shall be entitled to the benefits of Sections 5.01, 5.04 and 5.05 to the same extent as if it were a Bank and had Credit Agreement ---------------- -54- 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 4.07(a) as though it were a Bank, provided that any exercise by any Participant of any such benefits shall constitute the agreement of such Participant to be subject to Section 4.07(b) as though it were a Bank. (f) A Participant shall not be entitled to receive any greater payment under Section 5.01 or 5.05 than the applicable Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Company's prior written consent. A Participant shall not be entitled to the benefits of Section 5.05 unless the Company is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Company, to bound by Section 5.05 as though it were a Bank. (g) In addition to the assignments and participations permitted under the foregoing provisions of this Section 11.06, any Bank may (without notice to the Company, the Administrative Agent or any other Bank and without payment of any fee) pledge or grant a security interest in all or any portion of its Loans to secure any obligations of such Bank (including, without limitation, to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank). No such assignment shall release the assigning Bank from its obligations hereunder. (h) A Bank may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.12(b) hereof. (i) Anything in this Section 11.06 to the contrary notwithstanding, no Bank may assign or participate any interest in any Loan held by it hereunder to the Company or any Affiliate or Subsidiary of the Company without the prior consent of each Bank. 11.07 Survival. The obligations of the Company to any Bank under -------- Sections 5.01, 5.04, 5.05, and 11.03 hereof, and the obligations of any Bank under Sections 10.05 and 11.12 hereof, shall survive the repayment of the Loans made by such Bank and the termination of the Commitment of such Bank and, in the case of any Bank that may assign any interest in its Commitment or Loans hereunder, shall survive the making of such assignment, notwithstanding that such assigning Bank may cease to be a "Bank" hereunder. In addition, each representation and warranty made, or deemed to be made by a notice of any Loan, herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any Loan, any Default that (i) may arise by reason of such representation or warranty proving to have Credit Agreement ---------------- -55- been false or misleading or (ii) exists at the time such Loan was made, notwithstanding that such Bank or the Administrative Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading, or that such Default was existing, at the time such Loan was made. 11.08 Captions. The table of contents and captions and section -------- headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.09 Counterparts. This Agreement may be executed in any number of ------------ counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10 Governing Law; Submission to Jurisdiction. This Agreement shall ----------------------------------------- be governed by, and construed in accordance with, the law of the State of New York. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York County (and any appellate court from any thereof) for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company hereby irrevocably agrees and consents that service of process in any such legal proceeding in any such court may be made on the Company by the mailing thereof by registered mail postage prepaid or by transmitting the same by telecopier, to the Company in the manner specified in Section 11.02 hereof, and any such service shall be deemed good and effective when transmitted by telecopier or, in the case of mail, upon receipt; provided that nothing herein will affect the right of any Bank or the Administrative Agent to serve process in any other manner permitted by law. To the extent that the Company 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. 11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE ADMINISTRATIVE -------------------- AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR Credit Agreement ---------------- -56- RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.12 Confidentiality. Each of the Banks and the Administrative --------------- Agent agrees (on behalf of itself and each of its Affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with its customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement that is identified by the Company as being confidential at the time the same is delivered to the Banks or the Administrative Agent; provided that nothing herein shall limit the disclosure of -------- any such non-public information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Banks or the Administrative Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Administrative Agent or any other Bank (or to Chase Securities Inc.), (v) in connection with any litigation to which any one or more of the Banks or the Administrative Agent is a party, (vi) to a subsidiary or Affiliate of such Bank as provided in paragraph (a) above or (vii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank a Confidentiality Agreement substantially in the form of Exhibit C hereto; and provided, further, that in no event shall any Bank or the -------- Administrative Agent be obligated or required to return any materials furnished by the Company. The obligations of any assignee that has executed a Confidentiality Agreement in the form of Exhibit C hereto shall be superseded by this Section 11.12 upon the date upon which such assignee becomes a Bank hereunder pursuant to Section 11.06 hereof. 11.13 Judgment Currency. This is an international loan transaction ----------------- in which the specification of Dollars or any Foreign Currency, as the case may be (the "Specified Currency"), and any payment in New York County or the country ------------------ of the Specified Currency as the case may be (the "Specified Place"), is of the --------------- essence, and the Specified Currency shall be the currency of account in all events relating to Loans denominated in the Specified Currency. The payment obligations of the Company under this Agreement shall not be discharged by an amount paid in another currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on conversion to the Specified Currency and transfer to the Specified Place under normal banking procedures does not yield the amount of the Specified Currency at the Specified Place due hereunder. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in the Specified Currency into another currency (the "Second Currency"), the rate of exchange which shall be applied --------------- shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the Specified Currency with the Second Currency on the Business Day next preceding that on which such judgment is rendered. The obligation of the Company in respect of any such sum due from it to the Administrative Agent or any Bank Credit Agreement ---------------- -57- hereunder shall, notwithstanding the rate of exchange actually applied in rendering such judgment, be discharged only to the extent that on the Business Day following receipt by the Administrative Agent or such Bank, as the case may be, of any sum adjudged to be due hereunder in the Second Currency to the Administrative Agent or such Bank, as the case may be, the Administrative Agent or such Bank, as the case may be, may in accordance with normal banking procedures purchase and transfer to the Specified Place the Specified Currency with the amount of the Second Currency so adjudged to be due: and the Company hereby, as a separate obligation and notwithstanding any such judgment, agrees to indemnify the Administrative Agent or such Bank, as the case may be, against, and to pay the Administrative Agent or such Bank, as the case may be, on demand in the Specified Currency, any difference between the sum originally due to the Administrative Agent or such Bank. as the case may be, in the Specified Currency and the amount of the Specified Currency so purchased and transferred. 11.14 European Monetary Union. (a) If, as a result of the ----------------------- implementation of European monetary union, (i) any European Currency ceases to be lawful currency of the nation issuing the same and is replaced by a European common currency (the "Euro"), or (ii) any European Currency and the Euro are at the same time recognized by any Governmental Authority of the nation issuing such European Currency as lawful currency of such nation and the Administrative Agent or the Majority Banks shall so request in a notice delivered to the Company, then any amount payable hereunder by any party hereto in such European Currency shall instead be payable in the Euro and the amount so payable shall be determined by translating the amount payable in such European Currency to the Euro at the exchange rate recognized by the European Central Bank for the purpose of implementing European monetary union. Prior to the occurrence of the event or events described in clause (i) or (ii) of the preceding sentence, each amount payable hereunder in any European Currency will, except as otherwise provided herein, continue to be payable only in that Currency. (b) The Company agrees, at the request of any Bank, to compensate such Bank for any loss, cost, expense or reduction in return that such Bank shall reasonable determine shall be incurred or sustained by such Bank as a result of the implementation of European monetary union and that would not have been incurred or sustained but for the transactions provided for herein. A certificate of a Bank setting forth such Bank's determination of the amount or amounts necessary to compensate such Bank shall be delivered to the Company and shall be conclusive absent manifest error so long as such determination is made on a reasonable basis. The Company shall pay such Bank the amount shown as due on any such certificate within 10 days after receipt thereof. (c) The parties hereto agree, at the time of or at any time following the implementation of European monetary union, to use reasonable efforts to enter into an agreement amending this Agreement in order to reflect the implementation of such monetary Credit Agreement ---------------- -58- union, to permit (if feasible) the Euro to qualify as an Agreed Foreign Currency under the terms and conditions of the definition of such term and to place the parties hereto in the position with respect to the settlement of payments of the Euro as they would have been with respect to the settlement of the Currencies it replaced. Credit Agreement ---------------- -59- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. MID OCEAN LIMITED By: /s/ Charles F. Hays, -------------------------- Name: Charles F. Hays, Title: Senior Vice President, Chief Financial and Administrative Officer. Address for Notices: Mid Ocean Limited 6th Floor, Richmond House 12 Par-La-Ville Road Hamilton, HM 08, Bermuda Attention: Charles F. Hays Telecopier No.: (441) 292-0876 Telephone No.: (441) 292-1358 BANKS ----- THE CHASE MANHATTAN BANK By: /s/ Heather Lindstrom ------------------------- Title: Vice President CITIBANK N.A. By /s/ Andrew C. Fowler ------------------------ Title: V.P By________________________ Title: Credit Agreement ---------------- -60- DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /s/ John S. McGill ---------------------------- John S. McGill Title: Vice President By /s/ Gayma Z. Shivnarain ----------------------------- Gayma Z. Shivnarain Title: Vice President MELLON BANK, N.A. By____________________________ Title: ROYAL BANK OF CANADA By____________________________ Title: THE BANK OF BERMUDA LIMITED By____________________________ Title: CREDIT LYONNAIS NEW YORK BRANCH By____________________________ Title: Credit Agreement ---------------- EX-10.14.2 16 AMENDMENT NO. 1 TO CREDIT AGREEMENT (5-YEAR) Exhibit 10.14.2 AMENDMENT NO. 1 TO CREDIT AGREEMENT (5-YEAR) AMENDMENT NO. 1 dated as of August 5, 1998, between MID OCEAN LIMITED, a corporation duly organized and validly existing under the laws of the Cayman Islands (the "Company"); each of the lenders that is a signatory hereto ------- (individually, a "Bank" and, collectively, the "Banks"); and THE CHASE MANHATTAN ---- ----- BANK, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). -------------------- The Company, the Banks and the Administrative Agent are parties to a Credit Agreement (5-Year) dated as of September 2, 1997 (the "Credit ------ Agreement"), providing, subject to the terms and conditions thereof, for loans - - --------- to be made by said Banks to the Company in an aggregate principal amount not exceeding $100,000,000. The Company, the Banks and the Administrative Agent wish to amend the Credit Agreement in certain respects, and accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this ----------- Amendment No. 1, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Upon the execution of this Amendment No. 1 by ---------- the Company and the Majority Banks, the Credit Agreement shall be amended as follows: 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement shall be amended by adding the following new definitions (to the extent not already included in said Section 1.01) and inserting the same in the appropriate alphabetical locations and amending the following definitions (to the extent already included in said Section 1.01), as follows: "Change of Control" shall mean (a) the acquisition of ownership, ----------------- directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof), other than Exel or Exel Holdings, of shares representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (b) occupation of a majority of the seats (other than vacant seats) on the Board of Directors by Persons who were not (i) nominated by the Board of Directors; (ii) appointed by directors so nominated or (iii) elected by EXEL or Exel Holdings in their capacities as shareholders of the Company. "EXEL" shall mean EXEL Limited, a corporation duly organized and ---- validly existing under the laws of the Cayman Islands. "Exel Holdings" shall mean any Person that owns directly or indirectly ------------- all or substantially all of the aggregate ordinary voting power represented by the issued and outstanding capital stock of EXEL. Amendment No. 1 to Credit Agreement (5-Year) ------------------------------------------- -2- "Exel Group" shall mean EXEL, Exel Holdings and, at any time, each --------- Subsidiary of either Exel or Exel Holdings that as of such time meets the definition of a "significant subsidiary" contained as of the date hereof in Regulation S-X of the SEC. "Mid Ocean Reinsurance" shall mean Mid Ocean Reinsurance Company Limited, a --------------------- Wholly-Owned Insurance Subsidiary of the Company, any successor thereto, and from and after the XL Reinsurance Amalgamation, the resulting Person. "XL Insurance" shall mean X.L. Insurance Company, Ltd., a corporation duly ------------ organized and validly existing under the laws of Bermuda, all of whose capital stock is owned by EXEL. "XL Reinsurance Amalgamation" shall mean the amalgamation of X.L. Global --------------------------- Reinsurance Company, Ltd. with Mid Ocean Reinsurance in accordance with Bermuda law. 2.03. The definition of "Indebtedness" in Section 1.01 of the Credit Agreement is hereby amended by replacing "and" at the end of clause (i) thereof with a comma and by replacing the period at the end of clause (ii) thereof with the following: "and (iii) liabilities arising in the ordinary course of business of an insurance Subsidiary as an insurance company or a corporate member of Lloyd's and not arising in connection with the borrowing of money or other financing activities of such Insurance Subsidiary or an Affiliate thereof." 2.04. Section 6.02 of the Credit Agreement is hereby amended by replacing "; and" at the end of clause (a) thereof with ";", replacing the period at the end of clause (b) thereof with "; and", and by inserting a new clause (c) after clause (b) thereof as follows: "(c) the Company has delivered to the Administrative Agent for each Bank with the notice of borrowing, Federal Reserve Forms U-1 duly completed and, if the Company fails to deliver such Federal Reserve Form U-1, it shall be deemed to have represented and warranted that immediately after giving effect to such Loan, not more than 25% of the value (as determined by any reasonable method) of the property subject to Section 8.04 or 8.05 hereof consists of Margin Stock." 2.05. Section 7.07 of the Credit Agreement is hereby amended to read in its entirety as follows: "7.07 Use of Credit. No part of the proceeds of the Loans hereunder ------------- will be used to buy or carry any Margin Stock; provided that at any time -------- that the Company is a Wholly-Owned Subsidiary of Exel Holdings, proceeds of Loans hereunder may be used to buy or redeem capital stock of EXEL or Exel Holdings or to make payments of cash in lieu of shares of Exel Holdings to holders of common stock of EXEL or of the Company who would otherwise be entitled to receive shares of common stock or Excel Holdings in connection with the acquisition by EXEL Holdings of the capital stock of Company if, immediately after giving effect to the making of any such Loan hereunder, not more than 25% of the value (as determined by any Amendment No. 1 to Credit Agreement (5-Year) -------------------------------------------- -3- reasonable method) of the Property subject to Section 8.04 or 8.05 hereof consists of Margin Stock." 2.06. Section 8.04(b) of the Credit Agreement is hereby amended to read in its entirety as follows: "(b) the Company or any Material Subsidiary may merge, amalgamate or consolidate with any other Person if (i) in the case of a merger, amalgamation or consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving or resulting corporation is, immediately after giving effect to such merger, amalgamation or consolidation, a Wholly-Owned Subsidiary of the Company and (ii) immediately after giving effect thereto no Default would exist hereunder." 2.07. Section 8.12 of the Credit Agreement is hereby amended to read in its entirety as follows: "8.12 Indebtedness. The Company will not permit Mid Ocean ------------ Reinsurance,any Affiliate or Subsidiary of the Company having direct or indirect ownership of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance to, create, incur or suffer to exist any Debt or any Guarantee of Indebtedness of any other Person, except for: (i) Debt or Guarantees of Indebtedness outstanding on the date hereof and listed in Schedule IV hereto; (ii) Indebtedness of X.L. Global Reinsurance Company, Ltd. outstanding on the date of the XL Reinsurance Amalgamation to the extent that such Indebtedness was outstanding before the XL Reinsurance Amalgamation and not created in anticipation thereof; and (iii) from and after the XL Reinsurance Amalgamation, Indebtedness of Mid Ocean Reinsurance incurred pursuant to (a) that certain Revolving Credit Agreement (364-Day) dated as if June 6, 1997, as amended in contemplation of the XL Reinsurance Amalgamation, between XL Insurance and X.L. Reinsurance Company, Ltd., as Borrowers, XL Insurance and Exel Acquisition Ltd., as Guarantors, the Banks party thereto and Mellon Bank N.A., as Agent, in an aggregate principal amount not to exceed $50,000,000 and (b) that certain Revolving Credit Agreement (5-Year) dated as of June 6, 1997, as amended in contemplation of the XL Reinsurance Amalgamation, between XL Insurance and X.L. Reinsurance Company, Ltd., as Borrowers, XL Insurance and Exel Acquisition Ltd., as Guarantors, the Banks party thereto and Mellon Bank N.A., as Agent, in an aggregate principal amount not to exceed $50,000,000. 2.08. Sections 8.01(c) and 8.01(d) of the Credit Agreement are hereby amended to read in their entirety as follows: "(c) within 5 days after filing with the Applicable Insurance Regulatory Authority and in any event no later than 5 days after the date by which it is required to be filed by the Applicable Amendment No.1 to Credit Agreement (5 - Year) --------------------------------------------- -4- Insurance Regulatory Authority the quarterly Statutory Statement of each Material Insurance Subsidiary, together with a certificate of a senior financial officer of the Company or of such Subsidiary stating that such Statutory Statement fairly presents, in all material respects, the financial condition of each Material Insurance Subsidiary, respectively, for the period covered thereby in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority; (d) within 5 days after filing with the Applicable Insurance Regulatory Authority and in any event no later than 5 days after the date by which it is required to be filed by the Applicable Insurance Regulatory Authority the annual Statutory Statement of each Material Insurance Subsidiary, together with an Officer's Certificate stating that such annual Statutory Statement fairly presents, in all material respects, the financial condition of each Material Insurance Subsidiary, respectively, for the period covered thereby in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority." 2.09. Section 9(b) of the Credit Agreement is hereby amended by replacing "The Company or any of its Subsidiaries" with "The Company or any of its Subsidiaries or any member of the Exel Group" therein. 2.10. Sections 9(e), 9(f) and 9(g) of the Credit Agreement are hereby amended by (i) replacing "The Company or any of its Material Subsidiaries" with "The Company or any of its Material Subsidiaries or any number of the Exel Group" therein and (ii) replacing "Company or such Subsidiary" with "Company, such Subsidiary of the Company or such member of the Exel Group" in 9(f) and 9(g) therein. 2.11. Section 9 of the Credit Agreement is hereby amended by replacing ";" in clause (i) thereof with ": or" and by adding a new clause (j) after clause (i) as follows: "(j) Exel Holdings shall, at any time, enter into a Guarantee ("EXCEL ----- Guarantee") of any Indebtedness of EXEL or XL Insurance without also Guaranteeing the Indebtedness of the Company hereunder pursuant to a guaranty agreement substantially similar to the EXEL Guarantee." Section 3. Miscellaneous. Except as herein provided, the Credit Agreement ------------- shall remain unchanged and in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of New York. Amendment No. 1 to Credit Agreement (5-Year) -------------------------------------------- -5- IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. MID OCEAN LIMITED By: /s/ Michael A. Butt ------------------------ Michael A. Butt President and Chief Executive Officer BANKS ----- THE CHASE MANHATTAN BANK By: /s/ ------------------------ Title: Vice President CITIBANK N.A. By: /s/ Malcom Constable ------------------------ Malcolm Constable, VP Vice President Citibank, N.A. DEUTSCHE BANK AG. NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: /s/ John S. McGill ------------------------ John S. McGill Vice President By: /s/ Eckhard Osenberg ------------------------ Eckhard Osenberg Vice President Amendment No. 1 to Credit Agreement (5-Year) -6- MELLON BANK, N.A. By: /s/ ------------------------ Title: Vice President ROYAL BANK OF CANADA By: /s/ ------------------------ Title: THE BANK OF BERMUDA LIMITED By: /s/ ------------------------ Title: Assistant Vice President, Corporate Banking CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Sebastian Rocco ------------------------ Title: Sebastian Rocco Senior Vice President STATE STREET BANK AND TRUST COMPANY By: /s/ Edward M. Anderson ------------------------ Title: Vice President Amendment No. 1 to Credit Agreement (5-Year) -7- BANQUE NATIONALE DE PARIS By: /s/ Frances Melville --------------------------- Title: Frances Melville Assistant Treasurer By: /s/ Veronique Marcus --------------------------- Title: Veronique Marcus Assistant Vice President THE BANK OF NOVA SCOTIA By: /s/ --------------------------- Title: Senior Relationship Manager Amendment No. 1 to Credit Agreement (5-Year) EX-10.14.3 17 CREDIT AGREEMENT (364-DAY) Exhibit 10.14.3 ============================= MID OCEAN LIMITED -------------------- CREDIT AGREEMENT (364-DAY) Dated as of September 2, 1997 ____________________ $100,000,000 ____________________ THE CHASE MANHATTAN BANK as Administrative Agent =============================
TABLE OF CONTENTS Page ---- Section 1. Definitions and Accounting Matters..................................... 1 1.01 Certain Defined Terms............................................ 1 1.02 Accounting Terms; GAAP........................................... 15 1.03 Currencies and Types of Loans.................................... 16 Section 2. Commitments, Loans and Prepayments..................................... 16 2.01 Loans............................................................ 16 2.02 Borrowings of Loans.............................................. 17 2.03 Changes of Commitments; Reduction of Maximum Loan Amounts........ 17 2.04 Fees............................................................. 17 2.05 Lending Offices.................................................. 18 2.06 Several Obligations; Remedies Independent........................ 18 2.07 Evidence of Debt................................................. 18 2.08 Optional Prepayments............................................. 18 2.09 Mandatory Prepayments............................................ 19 2.10 Extension of Commitment Termination Date......................... 19 Section 3. Payments of Principal and Interest..................................... 21 3.01 Repayment of Loans............................................... 21 3.02 Interest......................................................... 21 Section 4. Payments; Pro Rata Treatment; Computations; Etc........................ 22 4.01 Payments......................................................... 22 4.02 Pro Rita Treatment............................................... 23 4.03 Computations..................................................... 24 4.04 Minimum Amounts.................................................. 24 4.05 Certain Notices.................................................. 25 4.06 Non-Receipt of Funds by the Administrative Agent................. 26 4.07 Sharing of Payments, Etc......................................... 27 Section 5. Yield Protection, Etc.................................................. 28 5.01 Additional Costs................................................. 28 5.02 Limitation on Types and Currencies of Loans...................... 30 5.03 Treatment of Affected Loans...................................... 31 5.04 Compensation..................................................... 31 5.05 Taxes............................................................ 32 5.06 Replacement of Banks............................................. 33 Section 6. Conditions Precedent................................................... 34 6.01 Initial Loan..................................................... 34 6.02 Initial and Subsequent Loan...................................... 35
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Page ---- Section 7. Representations and Warranties........................................ 36 7.01 Corporate Existence.............................................. 36 7.02 Financial Condition.............................................. 36 7.03 Litigation....................................................... 37 7.04 No Breach........................................................ 37 7.05 Action........................................................... 37 7.06 Approvals........................................................ 37 7.07 Use of Credit.................................................... 38 7.08 ERISA............................................................ 38 7.09 Taxes............................................................ 38 7.10 Investment Company Act........................................... 38 7.11 Public Utility Holding Company Act............................... 38 7.12 Environmental Matters............................................ 38 7.13 Subsidiaries, Etc................................................ 39 7.14 Stamp Taxes...................................................... 39 7.15 Legal Form....................................................... 39 7.16 True and Complete Disclosure..................................... 39 7.17 Withholding of Taxes............................................. 40 Section 8. Covenants of the Company.............................................. 40 8.01 Financial Statements, Etc........................................ 40 8.02 Existence, Etc................................................... 42 8.03 Insurance........................................................ 43 8.04 Prohibition of Fundamental Changes............................... 43 8.05 Limitation on Liens.............................................. 44 8.06 Certain Financial Covenants...................................... 45 8.07 Ratings.......................................................... 45 8.08 Use of Proceeds.................................................. 45 8.09 Transactions with Affiliates..................................... 46 8.10 Compliance with Laws............................................. 46 8.11 Payment of Obligations........................................... 46 8.12 Indebtedness..................................................... 46 8.13 Capital and Surplus of Mid Ocean Reinsurance..................... 46 Section 9. Events of Default..................................................... 46 Section 10. The Administrative Agent.............................................. 49 10.01 Appointment, Powers and Immunities............................... 49 10.02 Reliance by Administrative Agent................................. 50 10.03 Defaults......................................................... 50 10.04 Rights as a Bank................................................. 50 10.05 Indemnification.................................................. 51 10.06 Non-Reliance on Administrative Agent and Other Banks............. 51
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Page ---- 10.07 Failure to Act.................................................... 51 10.08 Resignation of Administrative Agent............................... 52 Section 11. Miscellaneous.......................................................... 52 11.01 Waiver............................................................ 52 11.02 Notices........................................................... 52 11.03 Expenses, Etc..................................................... 53 11.04 Amendments, Etc................................................... 53 11.05 Successors and Assigns............................................ 54 11.06 Assignments and Participations.................................... 54 11.07 Survival.......................................................... 57 11.08 Captions.......................................................... 57 11.09 Counterparts...................................................... 57 11.10 Governing Law; Submission to Jurisdiction......................... 57 11.11 Waiver of Jury Trial.............................................. 58 11.12 Confidentiality................................................... 58 11.13 Judgment Currency................................................. 59 11.14 European Monetary Union........................................... 59
SCHEDULE I - Subsidiaries SCHEDULE II - Commitments SCHEDULE III - Liens SCHEDULE IV - Indebtedness EXHIBIT A-1 - Form of Opinion of Special Cayman Islands Counsel to the Company EXHIBIT A-2 - Form of Opinion of Special Bermuda Counsel to the Company EXHIBIT A-3 - Form of Opinion of Special New York Counsel to the Company EXHIBIT B - Form of Opinion of Special New York Counsel to Chase EXHIBIT C - Form of Confidentiality Agreement EXHIBIT D - Form of Assignment and Acceptance EXHIBIT E - Form of Promissory Note -iii- Credit Agreement ---------------- CREDIT AGREEMENT (364-DAY) dated as of September 2, 1997, between: MID OCEAN LIMITED, a corporation duly organized and validly existing under the laws of the Cayman Islands (the "Company") ------- Each of the lenders that is a signatory hereto identified under the caption "BANKS" on the signature pages hereto or that, pursuant to Section 11.06(b) hereof, shall become a "Bank" hereunder; and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). -------------------- The Company has requested that the Banks make loans to it in an aggregate principal amount not exceeding $lO0,000,000 at any one time outstanding in U.S. Dollars and in certain other foreign currencies, and the Banks are prepared to make such loans upon the terms and conditions hereof. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. ---------------------------------- 1.01 Certain Defined Terms. As used herein, the following terms shall --------------------- have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): ---- ----- "Administrative Agent's Account" shall mean, for each Currency, an ------------------------------ account in respect of such Currency designated by the Administrative Agent in a notice to the Company and the Banks. "Administrative Questionnaire" shall mean an Administrative ---------------------------- Questionnaire in a form supplied by the Administrative Agent. "Affiliate" shall mean any Person that directly or indirectly --------- controls, or is under common control with, or is controlled by, the Company and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust As used in this definition, "control" (including, with its correlative meanings, ------- "controlled by" and "under common control with") shall mean possession, directly ------------- ------------------------- or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any -------- Person that owns directly or indirectly securities having 25% or more of the voting power for the election of directors or other governing body of a corporation or 25% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Credit Agreement ---------------- -2- Affiliate solely by reason of his or her being a director. officer or employee of the Company or any of its Subsidiaries, (b) the Company and its Subsidiaries shall not be Affiliates of each other, and (c) neither the Administrative Agent nor any Bank shall be an Affiliate. "Agreed Foreign Currency" shall mean at any time any of Australian ----------------------- Dollars. English Pounds Sterling, Japanese Yen, New Zealand Dollars and, with the agreement of each Bank, any other Foreign Currency, so long as at such time (a) such Currency is dealt with in the London (or, in the case of English Pounds Sterling, Paris) interbank deposit market, (b) such Currency is freely transferable and convertible into Dollars in the London foreign exchange market and (c) no central bank or other governmental authorization in the country of issue of such Currency is required to permit use of such Currency by any Bank for making any Loan hereunder and/or to permit the Company to borrow and repay the principal thereof and to pay the interest thereon, unless such authorization has been obtained and is in full force and effect. "Assumed Reinsurance" shall mean reinsurance assumed by any Insurance ------------------- Subsidiary from another Person (other than from another Insurance Subsidiary). "Applicable Facility Fee Rate" and "Applicable Margin" shall mean, ---------------------------------------------------- during any period when any Rating Group set forth below is applicable, with respect to any facility fee payable hereunder or any Type of Loan outstanding hereunder, the percentage set forth below opposite such fee or Type of Loan under such Rating Group:
================================================================= Rating Rating Rating Fee or Loan Group Group Group I II III ----------------------------------------------------------------- Facility Fee 0.050% 0.070% 0.100% Eurocurrency Loans 0.175% 0.255% 0.375% ----------------------------------------------------------------- Base Rate Loans 0.000% 0.000% 0.000% =================================================================
For the purposes of this Agreement, any change in the Applicable Facility Fee Rate or Applicable Margin for any facility fee or any outstanding Loans by reason of (a) a change in the Standard & Poor's Rating shall become effective on the date of announcement or publication of a change in such rating or, in the absence of such announcement or publication, on the effective date of such changed rating and (b) any other change in the Rating Group shall become effective on the date of the occurrence of the event that resulted in such change in the Rating Group. Credit Agreement ---------------- -3- "Applicable Insurance Regulatory Authority" shall mean, with respect ----------------------------------------- to any Insurance Subsidiary, the insurance department or similar insurance regulatory or administrative authority or agency of the jurisdiction in which such Insurance Subsidiary is domiciled. "Applicable Lending Office" shall mean, for each Bank and for each ------------------------- Type and Currency of Loan, the "Lending Office" of such Bank (or of an Affiliate of such Bank) designated for such Type and Currency of Loan in the Administrative Questionnaire submitted by such Bank or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the Administrative Agent and the Company as the office by which its Loans of such Type and Currency are to be made and maintained. "Assignment and Acceptance" shall mean an assignment and acceptance ------------------------- entered into by a Bank and an assignee (with the consent of any Person whose consent is required by Section 11.06(b) hereof), and accepted by the Administrative Agent, in the form of Exhibit D hereto or any other form approved by the Administrative Agent. "Bank" shall mean each of the lenders that is a signatory hereto ---- identified under the caption "BANKS" on the signature pages hereto or that, pursuant to Section 11.06(b) hereof, shall become a "Bank" hereunder. "Base Rate" means, for any day, a rate per annum equal to the higher --------- of (a) the Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1/2 of 1%. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. "Base Rate Loans" shall mean Loans denominated in Dollars that bear --------------- interest at rates based upon the Base Rate. "Basis Accord" shall mean the proposals for risk-based capital ------------ framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. "Best Rating" shall mean, as at any date, the rating of Mid Ocean ----------- Reinsurance most recently published by A.M. Best Company, Inc. "Board of Directors" shall mean the Board of Directors of the Company ------------------ or any duly authorized committee thereof. Credit Agreement ---------------- -4- "Board Resolution" shall mean a copy of a resolution certified by the ---------------- Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors, and to be in full force and effect on the date of the certificate and delivered to the Administrative Agent. "Business Day" shall mean any day (a) on which commercial banks are ------------ not authorized or required to close in New York City, (b) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or the interest Period for, a Eurocurrency Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, that is also a day on which dealings in deposits denominated in the Currency of such Loan are carried out in the London interbank market and (c) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or the Interest Period for, any Loan denominated in any Foreign Currency or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, that is also a day on which commercial banks settle payments in the Principal Financial Center for the Currency in which such Loan is denominated and in which the London foreign exchange market settles payments in such Currency. "Capital and Surplus" shall mean, as at any date for any Person, the ------------------- aggregate amount of policyholders surplus (determined in accordance with SAP) of such Person. "Capital Lease Obligations" shall mean, for any Person, all ------------------------- obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Ceded Reinsurance" shall mean reinsurance ceded by any Insurance ----------------- Subsidiary to any other Person (other than to another Insurance Subsidiary), other than Surplus Relief Reinsurance. "Change of Control" shall mean (a) the acquisition of ownership, ----------------- directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof) of shares representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (b) occupation of a majority of the seats (other than vacant seats) on the Board of Directors by Persons who were neither (i) nominated by the Board of Directors nor (ii) appointed by directors so nominated. Credit Agreement ---------------- -5- "Chase" shall mean The Chase Manhattan Bank. ----- "Class" shall have the meaning assigned to such term in Section 1.03 ----- hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended from ---- time to time. "Commitment" shall mean, as to each Bank, the obligation of such Bank ---------- to make Loans pursuant to Section 2.01 hereof in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set opposite such Bank's name on Schedule II hereto under the caption "Commitment" (as the same may at any time or from time to time be reduced pursuant to Section 2.03 hereof or be increased or reduced pursuant to Section 11.06 hereof). "Commitment Termination Date" shall mean September 1, 1998, subject to --------------------------- extension as provided in Section 2.10 hereof; provided that, if such date is not a Business Day, the Commitment Termination Date shall be the next preceding Business Day. "Company Jurisdiction" shall mean (a) Bermuda, (b) the Cayman Islands -------------------- and (c) any other country (i) where the Company is licensed or qualified to do business or (ii) from which payments hereunder are made by the Company. "Currency" shall mean Dollars or any Foreign Currency. -------- "Debt" shall mean Indebtedness referred to in clauses (a) through (c), ---- inclusive, in the definition of the term Indebtedness. "Default" shall mean an Event of Default or an event that with notice ------- or lapse of time or both would become an Event of Default. "Deferred Acquisition Expenses" shall mean, as at any date, the ----------------------------- average of the deferred acquisition expenses for the Company and its Subsidiaries (determined on a consolidated basis, without duplication, in accordance with GAAP) for the four most recent Fiscal Dates. "Derivative Transaction" shall mean (a) any "swap agreement" as ---------------------- defined in Section 101(53B) of the Bankruptcy Code (other than a spot foreign exchange transaction), (b) any equity swap, floor, collar, cap or option transaction, (c) any option to enter into any of the foregoing and (d) any combination of the foregoing. Credit Agreement ---------------- -6- "Dollar Equivalent" shall mean, with respect to any Loan denominated ----------------- in any Foreign Currency, the amount of Dollars that would be required to purchase the amount of the Foreign Currency of such Loan on the date such Loan is requested (or (i) in the case of any determination made under Section 2.0 1(c) hereof, on the date of any borrowing referred to in said Section 2.0 1(c) and (ii) in the case of any determination made under Section 2.09 or redenomination under the last sentence of Section 4.01 hereof, on the date of determination or redenomination therein referred to), based upon the spot selling rate at which Chase offers to sell such Foreign Currency for Dollars in the London foreign exchange market at approximately 11:00 a.m. London time for delivery two Business Days later. "Dollars" and "S" shall mean lawful money of the United States of ------- - America. "Environmental Laws" shall mean any and all present and future ------------------ Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes. "Equity Rights" shall mean, with respect to any Person, any ------------- outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. "ERISA Affiliate" shall mean any corporation or trade or business that --------------- is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Company is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(II) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code, of which the Company is a member. Credit Agreement ---------------- -7- "ERISA Plan" shall mean any "employee benefit plan" (as defined in ---------- Section 3(3) of ERISA) or any "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA that is or, within the preceding five years has been, established or maintained, or to which contributions are or, within the preceding five years have been, made or required to be made, by the Company or any ERISA Affiliates or with respect to which the Company or any ERISA Affiliate may have liability. "Eurocurrency Base Rate" shall mean, with respect to any Eurocurrency ---------------------- Loan in Dollars or any Agreed Foreign Currency for the Interest Period therefor: (a) the arithmetic mean, as calculated by the Administrative Agent, of the respective rates per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates appearing on the Screen at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of the Interest Period for such Loan as LIBOR for such Currency having a term comparable to such Interest Period; or (b) if the Screen shall cease to report such LIBOR or, in the reasonable judgment of the Majority Banks, shall cease accurately to reflect such LIBOR (as reported by any publicly available source of similar market data selected by the Majority Banks that, in the reasonable judgment of the Majority Banks, accurately reflects LIBOR for such Currency), the Eurocurrency Base Rate shall mean, with respect to such Eurocurrency Loan for such Interest Period the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%), as determined by the Administrative Agent, quoted by the Reference Bank at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of the Interest Period for such Eurocurrency Loan for the offering by the Reference Bank to leading banks in the London (or, in the case of Loans denominated in English Pounds Sterling, Paris) interbank market of deposits denominated in such Currency having a term comparable to such Interest Period and in an amount equal to $1,000,000 (or the Foreign Currency Equivalent thereof). "Euroccurrency Loans" shall mean Loans made to the Company in Dollars ------------------- or any Agreed Foreign Currency, which Loans bear interest at rates based on rates referred to in the definition of "Eurocurrency Base Rate" in this Section 1.01. "Eurcurrency Rate" shall mean, for any Eurocurrency Loan for the ---------------- Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the Eurocurrency Base Rate for such Loan for such Interest Period multiplied by the Reserve Rate (if any) for such Interest Period. Credit Agreement ---------------- -8- "Event of Default" shall have the meaning assigned to such term in ---------------- Section 10 hereof. "Federal Funds Rate" shall mean, for any day, the rate per annum ------------------ (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to -------- be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate charged to Chase on such Business Day on such transactions as determined by the Administrative Agent. "Fiscal Dates" shall mean, with respect to the Company, January 31, ------------ April 30, July 31 and October 31 in each year. "Foreign Benefit Plan" shall mean any plan, fund (including, without -------------------- limitation, any superannuation fund) or other similar program established or maintained outside the United States by the Company or a Subsidiary thereof, with respect to which the Company or such Subsidiary has an obligation to contribute, for the benefit of employees of the Company or the 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. "Foreign Currency" shall mean at any time any Currency other than ---------------- Dollars. "Foreign Currency Equivalent" shall mean, with respect to any amount --------------------------- in Dollars, the amount of any Foreign Currency that could be purchased with such amount of Dollars using the principal of the foreign exchange rate(s) specified in the definition of the term "Dollar Equivalent", as determined by the Administrative Agent. "FRB" shall mean the Board of Governors of the Federal Reserve System --- (or any successor thereto). "GAAP" shall mean generally accepted accounting principles in the ---- United States of America. "Governmental Authority" means the United States of America or any ---------------------- other nation, or any political subdivision of any thereof (whether state or local), and any government, agency, authority, instrumentality, regulatory body, court, central bank or other Credit Agreement ---------------- -9- entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" shall mean a guarantee, an endorsement, a contingent --------- agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a lebtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall --------- ---------- have a correlative meaning. "Indebtedness" shall mean, for any Person: (a) indebtedness created, ------------ incurred or assumed by such Person for borrowed money or obligations of such Person evidenced by bonds, debentures, promissory notes or similar instruments; (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business; (c) Capital Lease Obligations of such Person; (d) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (e) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person (other than letters of credit and banker's acceptances arising in the ordinary course of such Person's business); and (f) Guarantees by such Person of Indebtedness of others; provided that Indebtedness shall include Surplus Relief Reinsurance but shall not include (i) obligations with respect to insurance policies underwritten by, or Assumed Reinsurance underwritten by, or Reinsurance Agreements entered into by, an Insurance Subsidiary in the ordinary course of its business and (ii) commissions or other amounts payable in the ordinary course of business to agents or to other representatives of any of the Insurance Subsidiaries. "Insurance Subsidiary" shall mean any Subsidiary of the Company that -------------------- is licensed to conduct an insurance business by an Applicable Insurance Regulatory Authority and provides capital to underwrite insurable risks. Credit Agreement ---------------- -10- "Interest Period" shall mean: --------------- (a) with respect to any Eurocurrency Loan, the period commencing on the date such Loan is made and ending on the numerically corresponding day in the first, second, third, or sixth calendar month thereafter, as the Company may select as provided in Section 4.05 hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month: (b) with respect to any Base Rate Loan, the period commencing on the date such Base Rate Loan is made and ending on the earlier of the first Quarterly Date thereafter or the Commitment Termination Date. Notwithstanding the foregoing: (i) if any Interest Period for any Loan would otherwise end after the Commitment Termination Date in existence at the time such Interest Period is selected, such Interest Period shall not be available hereunder; (ii) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for a Eurocurrency Loan, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clauses (i) and (ii) above, no Interest Period for any Eurocurrency Loan shall have a duration of less than one month and, if the Interest Period for any Eurocurrency Loan would otherwise be a shorter period, such Interest Period shall not be available hereunder. "LIBOR" shall mean, for any Currency, the rate at which deposits in ----- such Currency are offered to lending banks in the London (or, in the case of English Pounds Sterling, Paris) interbank market. "Lien" shall mean, respect to any Property, any mortgage, deed of ---- trust, lien, pledge, charge or security interest (as defined in Section 1- 201(37) of the Uniform Commercial Code as in effect in the State of New York) of any kind in respect of such Property (it being understood that a banker's right of setoff, banker's lien or any similar right of a bank is not a Lien). "Loans" shall mean Loans provided for by Section 2.01 hereof which may ----- be Base Rate Loans or Eurocurrency Loans. "Local Time" shall mean, with respect to any Loan denominated in or ---------- any payment to be made in any Currency, the local time in the Principal Financial Center for the Currency in which such Loan is denominated or such payment is to be made. Credit Agreement ---------------- -11- "Majority Banks" shall mean Banks having more than 50% of the -------------- aggregate amount of the Commitments or, if the Commitments shall have terminated, Banks holding more than 50% of the aggregate unpaid principal amount of the Loans. "Margin Stock" shall mean "margin stock" within the meaning of ------------ Regulations G, U and X. "Material Adverse Effect" shall mean a material adverse effect on (a) ----------------------- the business, assets, property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole or (b) the validity or enforceability of its Agreement or the rights and remedies of the Administrative Agent or any Bank hereunder. "Material Insurance Subsidiary" shall mean, at any time, (i) Mid Ocean ----------------------------- Reinsurance and (ii) any other Insurance Subsidiary that is a Material Subsidiary. "Material Subsidiary" shall mean, at any time, each Subsidiary of the ------------------- Company that as of such time meets the definition of a "significant subsidiary" contained as of the date hereof in Regulation S-X of the SEC. "Mid Ocean Reinsurance" shall mean Mid Ocean Reinsurance Company --------------------- Limited, a Wholly-Owned Insurance Subsidiary of the Company. "NAIC" shall mean the National Association of Insurance Commissioners ---- and any successor thereto. "Net Worth" shall mean, as at any date, the amount of total --------- shareholders' equity for the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP). "Officer" shall mean the Chairman of the Board, the President or any ------- Vice President of the Company. "Officer's Certificate" shall mean a certificate signed by any --------------------- Officer. "Person" shall mean any individual, corporation, company, voluntary ------ association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Post-Default Rate" shall mean, in respect of any principal of any ----------------- Loan or any other amount under this Agreement that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum equal to Credit Agreement ---------------- -12- 2% plus the Base Rate as in effect from time to time (provided that, if the ---- -------- amount so in default is principal of a Eurocurrency Loan and the due date thereof is a day other than the last day of such Interest Period therefor, the "Post-Default Rate" for such principal shall be for the period from and including such due date to but excluding the last day of such Interest Period, 2% plus the interest rate for such Loan as provided in Section 3.02 hereof and ---- thereafter, the rate provided for above in this definition). "Prime Rate" shall mean the rate of interest from time to time ---------- announced by Chase at its principal office in New York, New York as its prime commercial lending rate. "Principal Financial Center" shall mean, in the case of any Currency, -------------------------- the principal financial center of the country that issues such Currency, as determined by the Administrative Agent. "Property" shall mean any right or interest in or to property of any -------- kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Quarterly Dates" shall mean the last Business Day of January, April, --------------- July and October in each year, the first of which shall be the first such day after the date hereof. "Rating Group" shall mean any of Rating Group I, Rating Group II or ------------ Rating Group III. "Rating Group I" shall mean (a) no Event of Default has occurred and -------------- is continuing and the Standard & Poor's Rating is at or above AA; "Rating Group II" shall mean (a) Rating Group I is not in effect and (b) no Event of Default has occurred and is continuing and (c) the Standard & Poor's Rating is at or above A; and "Rating Grout, III" shall mean neither Rating Group I nor Rating Group II is in effect. "Reference Bank" shall mean Chase. -------------- "Re??????" shall have the meaning assigned to such term in Section -------- 11.06 hereof. "Regulations A. D. G. U and X" shall mean, respectively, Regulations ---------------------------- A, D, G, U and X of the FRB, as the same may be modified and supplemented and in effect from time to time. "Regulatory Change" shall mean, with respect to any Bank, any change ----------------- after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or Credit Agreement ---------------- -13- request applying to a class of banks including such Bank of or under any Federal. state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reinsurance Agreement" shall mean any agreement. contract, treaty or --------------------- other arrangement providing for Ceded Reinsurance by any Insurance Subsidiary or any Subsidiary of such Insurance Subsidiary. "Reserve Rate" shall mean a fraction (expressed as a decimal), the ------------ numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special. emergency or supplemental reserves) expressed as a decimal established by the FRB to which member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,O00,000 are subject with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D). Such reserve percentages shall include those imposed pursuant to Regulation D. The Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SAP" shall mean the accounting procedures and practices prescribed or --- permitted by the Applicable Insurance Regulatory Authority or the NAIC. "Screen" shall mean, for any Currency, the relevant display page for ------ LIBOR for such Currency (as determined by the Administrative Agent) on the Dow Jones Markets Service; provided that, if the Administrative Agent determines that there is no such relevant display page for LIBOR for such Currency, "Screen" shall mean the relevant display page for LIBOR for such Currency (as determined by the Administrative Agent) on the Reuter Monitor Money Rates Service. "SEC" shall mean the Securities and Exchange Commission or any --- governmental authority succeeding to its principal functions. "Standard & Poor's" shall mean Standard & Poor's Ratings Services, a ----------------- division of The McGraw-Hill Companies, Inc., or any successor thereto. "Standard and Poor's Rating" shall mean, as at any date, the claims- -------------------------- paying rating of Mid Ocean Reinsurance most recently published by Standard & Poor's. "???? Statement" shall mean, as to any Insurance Subsidiary, a -------------- statement of the condition and affairs of such Insurance Subsidiary, prepared in accordance with Credit Agreement ---------------- -14- statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority, and filed with the Applicable Insurance Regulatory Authority. "Subsidiary" shall mean, with respect to any Person, any corporation, ---------- partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Surplus Relief Reinsurance" shall mean any transaction in which any -------------------------- Insurance Subsidiary or any Subsidiary of such Insurance Subsidiary cedes business under a reinsurance agreement that would be considered a "financing- type" reinsurance agreement as determined by the independent certified public accountants of the Company in accordance with principles published by the Financial Accounting Standards Board or the Second Edition of the AICPA Audit Guide for Stock Life Insurance Companies (pp. 91-92), as the same may be revised from time to time. "Tangible Net Worth" shall mean, as at any date, the sum for the ------------------ Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) Net Worth, minus ----- (b) the sum of the following (without duplication of deductions in respect of items already deducted in arriving at Net Worth): cost of treasury shares and the book value of all assets which should be classified as intangibles but in any event including goodwill, minority interests, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, Deferred Acquisition Expenses and any write-up in the book value of assets resulting from a revaluation thereof subsequent to December 31, 1996. "Taxes" shall have the meaning assigned to such term in Section ----- 5.05(a) hereof. "Total Capital" shall mean the sum of (i) Total Debt and (ii) Net ------------- Worth. Credit Agreement ---------------- -15- "Total Debt" shall mean the aggregate principal amount of all Debt of ---------- the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP). "Type" shall have the meaning assigned to such term in Section 1.03 ---- hereof. "Wholly Owned Subsidiary" shall mean, with respect to any Person, any ----------------------- corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation or other similar legal entity, directors' qualifying shares or shares held by residents of the jurisdiction in which such corporation or other similar legal entity is organized as required by the law of such jurisdiction) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 1.02 Accounting Terms: GAAP. ---------------------- (a) 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 case may be, as in effect on the date hereof. (b) The Company shall deliver to the Banks at the same time as the delivery of any annual or quarterly financial statement under Section 8.01 hereof (i) a description in reasonable detail of any material variation between the application of GAAP or SAP, as the case may be, employed in the preparation of such statement and the application of GAAP or SAP, as the case may be, as in effect on the date hereof and (ii) reasonable estimates of the difference in covenant compliance arising as a consequence thereof. 1.03 Currencies and Types of Loans. Loans hereunder are by ------------------------------ distinguished by "Currency" and by "Type". The "Currency" of a Loan refers to the Currency in which such Loan is denominated. The "Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurocurrency Loan, each of which constitutes a Type. Loans may be identified by one or more of their Currency and Type. Section 2. Commitments, Loans and Prepayments. ---------------------------------- 2.01 Loans. ----- (a) Each Bank severally agrees, on the terms and conditions of this Agreement, to make loans to the Company in Dollars or in any Agreed Foreign Currency during the period from and including the date hereof to but not including the Commitment Termination Credit Agreement ---------------- -16- Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of the Commitment of such Bank as in effect from time to time. Subject to the terms and conditions of this Agreement, during such period the Company may borrow, prepay, repay and reborrow the amount of the Commitments. (b) If, after giving effect to any Loan to be made under this Section 2.01, more than four separate Interest Periods in respect of Loans denominated in any single Currency would be outstanding at the same time (for which purpose Interest Periods described in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different interest Periods even if they are coterminous), then such Loan shall not be required to be made hereunder. (c) Except as provided in Section 2.10 hereof, for purposes of determining (i) whether the amount of any borrowing of Loans, together with all other Loans then outstanding, would exceed the aggregate amount of Commitments, (ii) under Section 2.03(b) hereof, the aggregate unutilized amount of the Commitments and (iii) under Section 6.02 hereof, the outstanding aggregate principal amount of Loans, the outstanding principal amount of any Loan that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent (determined as of the date of borrowing of such Loan) of the amount in the Foreign Currency of such Loan of the amount in the Currency of such Loan. 2.02 Borrowings of Loans. The Company shall give the Administrative ------------------- Agent notice of each borrowing of Loans hereunder as provided in Section 4.05 hereof. Not later than 11:00 a.m. Local Time on the date specified for each borrowing of Loans hereunder, each Bank shall make available the amount of the Loan or Loans to be made by it on such date to the Administrative Agent, at the Administrative Agent's Account for the Currency in which such Loan is denominated, in immediately available funds, for account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company designated by the Company. 2.03 Chances of Commitments: Reduction of Maximum Loan Amounts. --------------------------------------------------------- (a) The aggregate amount of the Commitments shall be automatically reduced to zero on the Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Loans are (or at the time will be) outstanding, to terminate the Commitments and (ii) to reduce the aggregate unutilized amount of the Commitments; provided that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.05 -------- Credit Agreement ---------------- -17- hereof and (y) each partial reduction of Commitments shall be in an aggregate amount at least equal to $10,000,000 (or a larger integral multiple of $1,000,000). (c) The Commitments once terminated or reduced may not be reinstated. 2.04 Fees. ---- (a) Facility Fee. The Company shall pay to the Administrative Agent ------------ for account of each Bank a facility fee on the daily average amount of such Bank's Commitment (whether used or unused), for the period from and including the date hereof to but not including the earlier of the date such Commitment is terminated and the Commitment Termination Date, at a rate per annum equal to the Applicable Facility Fee Rate. Accrued facility fee shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date. (b) Utilization Fee. The Company shall pay to the Administrative --------------- Agent for account of each Bank, during any period that the aggregate outstanding principal amount of Loans exceeds 50% of the aggregate amount of the Commitments, a utilization fee on the daily average aggregate outstanding principal amount of such Bank's Loans at a rate per annum equal to 0.025% per annum. Accrued utilization fee shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date interest on such Bank's Loans are payable. 2.05 Lending Offices. The Loans of each Type and Currency made by each --------------- Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such Type and Currency. 2.06 Several Obligations. The failure of any Bank to make any Loan to ------------------- be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, and neither any Bank nor the Administrative Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. 2.07 Evidence of Debt. ---------------- (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing, with respect to each Loan made by such Bank to the Company, the amounts of principal of and interest on such Loan payable and paid to such Bank from time to time hereunder. (b) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type and Currency thereof and the Interest Credit Agreement ---------------- -18- Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Bank hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for account of the Banks and each Bank's share thereof. (c) The entries made in the accounts maintained pursuant to clause (a) or (b) of this Section 2.07 shall be prima facie evidence of the existence ----- ----- and amounts of the obligations recorded therein; provided that the failure of -------- any Bank or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Company to repay the principal of, interest on, and other amounts in respect of, Loans in accordance with the terms of this Agreement. (d) Any Bank may request that Loans made by it be evidenced by a promissory note of the Company. In such event the Company shall prepare, execute and deliver to such Bank a promissory note payable to the order of such Bank and in substantially the form of Exhibit E hereto. 2.08 Optional Prepayments. Subject to Sections 3.02, 4.04 and 5.04 -------------------- hereof, Loans may be prepaid at any time or from time to time, provided that, -------- the Company shall give the Administrative Agent notice of each such prepayment as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder). 2.09 Mandatory Prepayments. --------------------- (a) Upon the receipt by the Administrative Agent of a Currency Valuation Notice (as defined below) and on each Quarterly Date, the Administrative Agent shall promptly determine the aggregate outstanding principal amount of all Loans (for which purpose the outstanding principal amount of any Loan that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent (determined as of the Business Day on which the Administrative Agent shall have received such Currency Valuation Notice prior to 11:00 a.m. New York time (or, if received by the Administrative Agent after such time on any Business Day, as of the next succeeding Business Day) or as of such Quarterly Date, as the case may be, of the amount in the Foreign Currency of such Loan). Upon making such determination, the Administrative Agent shall promptly notify the Banks and the Company thereof. (b) If, on the date of such determination the aggregate outstanding principal amount of all Loans exceeds 105% of the aggregate amount of the Commitments as then in effect, the Company shall, if requested by the Majority Banks (through the Administrative Agent), prepay the Loans in an amount so that after giving effect thereto the aggregate Credit Agreement ---------------- -19- outstanding principal amount of the Loans does not exceed the Commitments; provided that, any such payment shall be accompanied by any amounts payable - - -------- under Sections 3.02 and 5.04 hereof. For purposes of this Section 2.09, "Currency Valuation Notice" shall ------------------------- mean a ??????????^ Majority Banks to the Administrative Agent stating that such notice is a "Currency Valuation Notice" and requesting that the Administrative Agent determine the aggregate outstanding principal amount of all Loans. Anything in this Section ?09^ to the contrary notwithstanding, the Administrative Agent shall not be required to make more than one valuation determination pursuant to Currency Valuation Notices within any rolling three month period. 2.10 Extension of Commitment Termination Date. ---------------------------------------- (a) The Company may, by notice to the Administrative Agent (which shall promptly notify the Banks) given not less than 50 days, and not more than 60 days prior to the Commitment Termination Date then in effect (the "Existing -------- Commitment Termination Date"), request that the Banks extend the Commitment - - --------------------------- Termination Date for an additional 364 days from the Consent Date (as defined below). Each Bank, acting in its sole discretion, shall, by notice to the Company and the Administrative Agent given no later than the date that is 30 days prior to the Existing Commitment Termination Date (herein, the "Consent ------- Date") advise the Company whether or not such Bank agrees to such extension; - - ---- provided that (i) each Bank that determines not to extend the Commitment - - -------- Termination Date (a "Non-Extending Bank") shall notify the Administrative Agent ------------------ (which shall notify the Banks) of such fact promptly after such determination (but in any event no later than the Consent Date) and any Bank that does not advise the Company on or prior to the Consent Date that such Bank agrees to such extension shall be deemed to be a Non-Extending Bank and (ii) the notice that any Bank agrees to such extension given prior to the Consent Date shall be revocable until the close of business in New York on the Consent Date. The election of any Bank to agree to such extension shall not obligate any other Bank to so agree. (b) The Company may, at any time prior to the Existing Commitment Termination Date, replace any Non-Extending Bank, by giving not less than ten Business Days' prior notice to the Administrative Agent (which shall promptly notify such Non-Extending Bank), that it intends to replace such Non-Extending Bank with respect to its rights and obligations (including, without limitation, its Commitments) as a "Bank" under this Agreement (collectively, the "Transferred Interest") with one or more banks or other financial institutions -------------------- (including, but not limited to, any other Bank or an affiliate of any Bank) selected by the Company and acceptable to the Administrative Agent in its reasonable determination (each, a "Replacement Bank"). Upon the Existing ---------------- Commitment Termination Date (and as a Credit Agreement ---------------- -20- condition to the extension thereof), (i) the Company shall pay or cause to be paid to such Non-Extending Bank being replaced an amount equal to all fees and other amounts then owing to such Non-Extending Bank hereunder and under any other document delivered by the Company in connection herewith in respect of the Transferred Interest (all or a portion of which amount may constitute consideration for an assignment by such Non-Extending Bank of all or a portion of the Transferred Interest) and (ii) such Non-Extending Bank shall assign to each Replacement Bank, pursuant to an Assignment and Acceptance substantially in the form of Exhibit D hereto, a portion of the Transferred Interest specified by the Company, whereupon (x) each Replacement Bank shall become a "Bank" for all purposes of this Agreement having the Commitments in the amount of such Non- Extending Bank's Commitments assumed by it and all of the rights and obligations under this Agreement of "Bank(s)" holding the Transferred Interest and (y) such Non-Extending Bank shall cease to be responsible or liable for, and shall cease to be entitled to the rights and benefits of, all or any portion of the Transferred Interest (except to the extent provided in Section 11.07 hereof). (c) If (and only if) the sum of the aggregate amount of the Commitments of Banks having agreed so to extend the Existing Commitment Termination Date on or prior to the Existing Commitment Termination Date plus the aggregate amount of the Commitments of the Replacement Banks shall equal or exceed 66-2/3% of the aggregate amount of the Commitments in effect immediately prior to the Existing Commitment Termination Date, then, effective as of the Existing Commitment Termination Date, the Existing Commitment Termination Date shall be extended to the date falling 364 days after the Consent Date (except that, if such date is not a Business Day, such Commitment Termination Date as so extended shall be the next preceding Business Day); provided that the Commitment -------- of each Non-Extending Bank shall terminate on the Existing Commitment Termination Date. (d) Notwithstanding the foregoing clauses (a) through (c), the extension of the Existing Commitment Termination Date shall not be effective with respect to any Bank unless: (i) no Default shall have occurred and be continuing on each of the date of the notice requesting such extension (the "Request Date"), the ------------ Consent Date and the Existing Commitment Termination Date; (ii) each of the representations and warranties made by the Company in Section 7 hereof shall be true and complete in all material respects on and as of each of the Request Date, the Consent Date and the Existing 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); and Credit Agreement ---------------- -21- (iii) without duplication of the obligation of the Company to make the payments required by clause (b)(i) of this Section 2.10 with respect to any Non-Extending Lender being replaced hereunder, the Company shall pay or cause to paid to each Non-Extending Lender an amount equal to all fees and other amounts then owing to such Non-Extending Lender hereunder. Section 3. Payments of Principal and Interest. 3.01 Repayment of Loans. The Company hereby promises to pay to ------------------ the Administrative Agent for account of each Bank the principal of each Loan made by such Bank to the Company, and each Loan shall mature, on the last day of the Interest Period therefor. 3.02 Interest. The Company hereby promises to pay to the -------- Administrative Agent for account of each Bank interest on the unpaid principal amount of each Loan made by such Bank to the Company for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) if such Loan is a Base Rate Loan, the Base Rate (as in effect from time to time); (b) if such Loan is a Eurocurrency Loan, the Eurocurrency Rate for such Loan for the Interest Period therefor plus the Applicable Margin. Notwithstanding the foregoing, the Company hereby promises to pay to the Administrative Agent for account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank and on any other amount payable by the Company hereunder to or for account of such Bank, that shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) on the last day of the Interest Period therefor and, if such Interest Period is longer than three months (in the case of a Eurocurrency Loan), at three-month intervals following the first day of such Interest Period, and (ii) in the case of any Loan, upon the payment or prepayment thereof (but only on the principal amount so paid or prepaid), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Banks to which such interest is payable and to the Company. Credit Agreement ---------------- -22- Section 4. Payments: Pro Rata Treatment: Computations: Etc. ------------------------------------------------ 4.01 Payments. -------- (a) Except to the extent otherwise provided herein, all payments of principal and interest on any Loan and other amounts to be paid by the Company under this Agreement shall be made in the Currency in which such Loan or other amount is denominated, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at the Administrative Agent's Account for the Currency in which such Loan or other amount is denominated, not later than 11:00 a.m. Local Time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day), provided that if a new Loan is to be made by any Bank to the Company on a date - - -------- the Company is to repay any principal of an outstanding Loan of such Bank and in the same Currency, such Bank shall apply the proceeds of such new Loan to the payment of the principal to be repaid and only an amount equal to the difference between the principal to be borrowed and the principal to be repaid shall be made available by such Bank to the Administrative Agent as provided in Section 2.02 hereof or paid by the Company to the Administrative Agent pursuant to this Section 4.01, as the case may be. All amounts owing under this Agreement (including facility fees and utilization fees, but not including principal of, and interest on, Loans denominated in any Foreign Currency) are payable in Dollars. Notwithstanding the foregoing, if the Company shall fall to pay any principal of any Loan when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), the unpaid portion of such Loan shall, if such Loan is not denominated in Dollars, automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such principal shall be payable on demand; and if the Company shall fail to pay any interest on any Loan that is not denominated in Dollars, such interest shall automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such interest shall be payable on demand. (b) Subject to the proviso to the first sentence of Section 4.0 1(a) above, any Bank for whose account any such payment is to be made may (but shall not be obligated to) debit the amount of any such payment that is not made by such time to any ordinary deposit account of the Company with such Bank (with notice to the Company and the Administrative Agent). (c) The Company shall, at the time of making each payment under this Agreement for account of any Bank, specify to the Administrative Agent (which shall so Credit Agreement ---------------- -23- notify the intended recipient(s) thereof) the Loans or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that the Company fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02 hereof, may determine to be appropriate). (d) Each payment received by the Administrative Agent under this Agreement for account of any Bank shall be paid by the Administrative Agent promptly to such Bank, in immediately available funds, for account of such Bank's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made. (e) If the due date of any payment under this Agreement would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 Pro Rata Treatment. Except to the extent otherwise ------------------ provided herein: (a) each borrowing under Section 2.01 hereof shall be made from the Banks pro rata according to their respective Commitments; (b) each payment of facility fee under Section 2.04(a) hereof shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.03 hereof shall be applied to the respective Commitments of the Banks, pro rata according to the amounts of their respective Commitments; (c) Eurocurrency Loans denominated in the same Currency and having the same Interest Period shall (other than as provided in Section 5.03 hereof) be allocated pro rata among the Banks according to their respective Commitments; (d) each payment or prepayment by the Company of principal of Loans of any Type and denominated in any Currency shall be made for account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Loans of such Type and denominated in such Currency held by them; and (e) each payment by the Company of interest and utilization fees on Loans of any Type and denominated in any Currency shall be made for account of the Banks pro rata in accordance with the amounts of interest and utilization fees on Loans of such Type and denominated in such Currency then due and payable to them. Credit Agreement ---------------- -24- 4.03 Computations. Interest on Eurocurrency Loans (other than ------------ Loans in English Pounds Sterling), facility fee and utilization fee shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable and interest on Base Rate Loans and Eurocurrency Loans in English Pounds Sterling shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Notwithstanding the foregoing, for each day that the Base Rate is calculated by reference to the Federal Funds Rate, interest on Base Rate Loans shall be computed on the basis of a year of 360 days and actual days elapsed. 4.04 Minimum Amounts. Except for mandatory prepayments made --------------- pursuant to Section 2.09 hereof, each borrowing and partial prepayment of principal of Loans shall be in an aggregate amount at least equal to $5,000,000 or a larger integral multiple of $1,000,000 or, in the case of Eurocurrency Loans denominated in any Agreed Foreign Currency, the Foreign Currency Equivalent thereof (rounded downwards to the nearest 1,000 units of such Foreign Currency). Borrowings or prepayments of Loans of different Types or denominated in different Currencies or, in the case of Eurocurrency Loans, having different Interest Periods at the same time hereunder shall be deemed separate borrowings and prepayments for purposes of this Section 4.04, one for each Type, Currency or Interest Period. In addition, the aggregate principal amount of Eurocurrency Loans having the same Interest Period shall be in an amount at least equal to $5,000,000 or a larger integral multiple of $1,000,000 or, in the case of Eurocurrency Loans denominated in any Agreed Foreign Currency, the Foreign Currency Equivalent thereof (rounded downwards to the nearest 1,000 units of such Foreign Currency) and, if (i) any Eurocurrency Loans denominated in Dollars would otherwise be in a lesser principal amount for any period, such Loans shall be Base Rate Loans during such period and (ii) any Eurocurrency Loans denominated in any Foreign Currency would otherwise be in a lesser principal amount for any period, such Loans shall be unavailable hereunder. 4.05 Certain Notices. Notices by the Company to the --------------- Administrative Agent of terminations or reductions of the Commitments, of reductions of borrowings and optional prepayments of Loans, of Types and Currencies of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 10:00 a.m. New York time (or, in the case of borrowings or prepayment of, or duration of Interest Periods for, Eurocurrency Loans denominated in a Foreign Currency, London time) on the number of Business Days prior to the date of the relevant termination, reduction, borrowing or prepayment or the first day of such Interest Period specified below: Credit Agreement ---------------- -25- Number of Business Notice Days Prior Borrowing or prepayment of Base Rate Loans same day Borrowing or prepayment of, or duration of Interest Period for, Eurocurrency Loans denominated in Dollars 3 Borrowing or prepayment of, or duration of Interest Period for, Eurocurrency Loans denominated in a Foreign Currency 5 Each such notice of termination or reduction of the Commitments shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing or optional prepayment shall specify the Loans to be borrowed or prepaid and the amount (subject to Section 4.04 hereof), Type and Currency of each Loan to be borrowed or prepaid, the date of borrowing or optional prepayment (which shall be a Business Day), the Interest Period of the Loans to be borrowed or prepaid. The Administrative Agent shall promptly notify the Banks of the contents of each such notice. 4.06 Non-Receipt of Funds by the Administrative Agent. Unless ------------------------------------------------ the Administrative Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which the Payor is to make payment to the Administrative Agent of (in the case of a Bank) the proceeds of a Loan to be made by such Bank hereunder or (in the case of the Company) a payment to the Administrative Agent for account of one or more of the Banks hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the "Advance Date") such amount was so made available by ------------ the Administrative Agent until but not including the date the Administrative Agent recovers such amount at a Credit Agreement ---------------- -26- rate per annum equal to the greater of (a) the Federal Funds Rate for such day and (b) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, provided that if neither the recipient(s) nor the Payor shall return -------- the Required Payment to the Administrative Agent within three Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) `shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by the Company to the Banks, the Company and the recipient(s) shall each be obligated retroactively to the Advance Date to pay (without duplication) interest in respect of the Required Payment at the Post-Default Rate (without duplication of the obligation of such Company under Section 3.02 hereof to pay interest on the Required Payment at the Post-Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of the Company under said Section 3.02 to pay interest at the Post-Default Rate in respect of the Required Payment; and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Banks to the Company, the Payor and the Company shall each be obligated retroactively to the Advance Date to pay (without duplication) interest in respect of the Required Payment at the rate applicable to such Loan pursuant to Section 3.02 hereof, it being understood that the return by the Company of the Required Payment to the Administrative Agent shall not limit any claim the Company may have against the Payor in respect of such Required Payment. 4.07 Sharing of Payments. Etc. ------------------------ (a) The Company agrees that, in addition to (and without limitation of) my right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option (to the fullest extent permitted by law), to set-off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of the Company at any of such Bank's offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans or any other amount payable to such Bank hereunder, that is not paid when due (regardless of whether such deposit or other indebtedness is then due to the Company), in which case it shall promptly notify the Company and the Administrative Agent thereof, provided that such Bank's failure to give such -------- notice shall not affect the validity thereof. Credit Agreement ----------------- -27- (b) If any Bank shall obtain from the Company payment of any principal of or interest on any Loan and denominated in any Currency owing to it or payment of any other amount under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on the Loans denominated in such Currency (the "Applicable Loans") or such other amounts then due hereunder by the Company to such Bank than the percentage received by any other Bank to which principal of or interest on the Applicable Loans or such other amounts is then due hereunder by the Company, it shall promptly purchase from such other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Applicable Loans or such other amounts, respectively, owing to such other Banks (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all such Banks shall share the benefit of such excess payment (net of any expenses that may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Applicable Loans or such other amounts, respectively, owing to each of such Banks. To such end all such Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Bank so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation (or direct interest). (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Credit Agreement ---------------- -28- Section 5. Yield Protection Etc. ---------------------- 5.01 Additional Costs. ---------------- (a) The Company shall pay (but without duplication, including by reason of Section 5.05(a) hereof) directly to each Bank from time to time such amounts as such Bank may reasonably determine to be necessary to compensate such Bank for any costs incurred by such Bank that such Bank reasonably determines are attributable to its making or maintaining of any Eurocurrency Loans to the Company or its obligation to make any Eurocurrency Loans to the Company hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation resulting from any Regulatory Change that: (i) shall subject such Bank (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or changes the basis of taxation of any amounts payable to such Bank under this Agreement in respect of any of such Loans (excluding changes in the rate of tax on the net income of such Bank or of such Applicable Lending Office by any jurisdiction in which such Bank is organized or has its principal office or in which such Applicable Lending Office is located or carrying on business); or (ii) imposes or increases any reserve, special deposit or similar requirements (other than the reserve requirement utilized in the determination of the Eurocurrency Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including, without limitation, any of such Loans or any deposits referred to in the definition of "Eurocurrency Base Rate" in Section 1.01 hereof), or any commitment of such Bank (including, without limitation, the Commitment of such Bank hereunder); or (iii) imposes any other material condition affecting this Agreement (or any of such extensions of credit or liabilities) or its Commitment (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"). ---------------- If any Bank requests compensation from any Company under this Section 5.01(a), the Company may, by notice to such Bank (with a copy to the Administrative Agent), suspend the obligation of such Bank thereafter to make Eurocurrency Loans to such Company until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.03 hereof shall be applicable), provided that such suspension shall not affect the right -------- of such Bank to receive the compensation so requested. Credit Agreement ---------------- -29- (b) Without limiting the effect of the provisions of paragraph (a) of this Section 5.01, in the event that, by reason of any Regulatory Change. any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank that includes deposits by reference to which the interest rate on Eurocurrency Loans denominated in any Currency as determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank that includes Eurocurrency Loans denominated in such Currency or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Bank so elects by notice to the Company (with a copy to the Administrative Agent), the obligation of such Bank to make Eurocurrency Loans in such Currency hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.03 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may reasonably determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it reasonably determines are attributable to the maintenance by such Bank (or any Applicable Lending Office or such bank holding company) of capital in respect of its Commitment or Loans pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority implementing at the national level the Bade Accord (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any Applicable Lending Office or such bank holding company) to a level below that which such Bank (or any Applicable Lending Office or such bank holding company) could have achieved but for rich law, regulation, interpretation, directive or request). (d) Each Bank shall notify the Company of any event occurring after the date hereof entitling such Bank to compensation under paragraph (a) or (c) of this Section 5.01 as promptly as practicable, but in any event within 90 days, after such Bank obtains actual knowledge thereof; provided that (i) if any Bank fails to give such notice within 90 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 90 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different Applicable Lending Office for the Loans of such Bank affected by such Credit Agreement ---------------- -30- event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank, except that such Bank shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Bank will furnish to the Company a certificate setting forth in reasonable detail the basis and amount of each request by such Bank for compensation under paragraph (a) or (c) of this Section 5.01. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (c) of this Section 5.01, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Bank under this Section 5.01, shall be conclusive absent manifest error, so long as such determinations and allocations are made on a reasonable basis. 5.02 Limitation on Types and Currencies of Loans. Anything ------------------------------------------- herein to the contrary notwithstanding, if, on or prior to the determination of any Eurocurrency Base Rate for any Interest Period pursuant to clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof: (a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof are not being provided by the Reference Bank in the relevant amounts or Currencies or for the relevant maturities for purposes of determining rates of interest for Eurocurrency Loans referred to in said clause (b) as provided herein; or (b) the Majority Banks determine, which determination shall be conclusive, and notify (or notifies, as the case may be) the Administrative Agent that the relevant rates of interest referred to in clause (b) of the definition of "Eurocurrency Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurocurrency Loans denominated in any Currency for such Interest Period is to be determined are not likely adequately to cover the cost to such Banks (or to such quoting Bank) of making or maintaining Eurocurrency Loans denominated in such Currency for such Interest Period; then the Administrative Agent shall give the Company and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make additional Eurocurrency Loans denominated in such Currency. 5.03 Treatment of Affected Loans. If the obligation of any --------------------------- Bank to make Eurocurrency Loans denominated in Dollars shall be suspended pursuant to Section 5.01 hereof, then, unless and until such Bank gives notice as provided below that the circumstances Credit Agreement ---------------- -31- specified in Section 5.01 hereof that gave rise to such suspension no longer exist, all Loans that would otherwise be made by such Bank as Eurocurrency Loans denominated in Dollars shall be made instead as Base Rate Loans. If the obligation of any Bank to make Eurocurrency Loans denominated in any Agreed Foreign Currency to the Company shall be suspended pursuant to Section 5.01 hereof, then, unless and until such Bank gives notice as provided below that the circumstances specified in Section 5.01 hereof that gave rise to such suspension no longer exist, all Loans that would otherwise be made by such Bank to the Company as Eurocurrency Loans denominated in such Agreed Foreign Currency shall, except as provided in the immediately preceding sentence, be made instead as Eurocurrency Loans denominated in Dollars. 5.04 Compensation. The Company shall pay to the Administrative Agent ------------ for account of each Bank, upon the request of such Bank through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense that such Bank reasonably determines is attributable to: (a) any payment or mandatory or optional prepayment, of a Eurocurrency Loan to such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 6 hereof to be satisfied) to borrow a Eurocurrency Loan from such Bank on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 hereof. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid or not borrowed for the period ("Relevant Period") from the date of such payment, --------------- prepayment or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate equal to the arithmetic mean, as reasonably determined by such Bank, of the respective rates per annum (rounded upward, if necessary, to the nearest 1/16 of 1%) of the bid rates for deposits in the Currency in which such Loan is denominated for the period approximately equal to the Relevant Period appearing on the Screen or other publicly available source (as described in the definition of the term "Eurocurrency Base Raze" in Section 1.01 hereof); provided that if -------- Credit Agreement ---------------- -32- the Screen is not publicly available, then the provisions of paragraph (b) of the definition of the term "Eurocurrency Base Rate" in Section 1.01 hereof shall apply herein mutatis mutandis. 5.05 Taxes. ----- (a) The Company agrees to pay to each Bank such additional amounts as are necessary in order that the net payment of any amount due to such Bank hereunder, after deduction for or withholding in respect of any Taxes imposed with respect to such payment (or in lieu thereof, payment of such Taxes by such Bank), will not be less than the amount stated herein to be then due and payable, provided that the foregoing obligation to pay such additional amounts -------- shall not apply: (i) to any payment to any Bank hereunder unless such Bank is, on the date hereof (or on the date it becomes a Bank hereunder as provided in Section 11.06(b) hereof) and on the date of any change in the Applicable Lending Office of such Bank, entitled to a complete (or, in the case of an assignee or participant pursuant to paragraph (b) or (e) of Section 11.06 hereof, at least to the extent of the assignor or applicable Bank at the time of such assignment or participation) exemption from withholding or deduction by the Company of Taxes on all amounts to be received by such Bank hereunder in respect of the Loans made by such Bank to the Company, or (ii) to any Taxes required to be deducted or withheld solely by reason of the failure by such Bank, after being requested by the Company, to comply with applicable certification, information, documentation or other reporting requirements specifically identified by the Company in such request concerning the nationality, residence, identity or connections with any Company Jurisdiction if such compliance is required by treaty, statute or regulation as a precondition to relief or exemption from such Taxes. For the purposes of this Section 5.05(a), "Taxes" shall mean with respect to the ----- Company all present or future income, franchise and other taxes and levies, imposts, deductions, charges, and withholdings whatsoever, and all interest, penalties or similar amounts with respect thereto, now or hereafter imposed, assessed, levied or collected by any Governmental Authority of any Company Jurisdiction on or in respect of payments of principal, interest, fees or other amounts payable under this Agreement, or any promissory notes evidencing the Loans made hereunder, including (without limitation) payments under this Section 5.05(a); provided however, that Taxes shall not include (x) income or franchise -------- ------- taxes imposed on or measured by the net income or capital of a Bank (or its Applicable Lending Office) by any Company Jurisdiction as a result of (i) such Bank being organized under the laws of such Company Jurisdiction, (ii) such Bank having its chief executive office in such Company Jurisdiction or (iii) its Applicable Lending Office being located or carrying on business in Credit Agreement ---------------- -33- such Company Jurisdiction, (y) interest, penalties or additions to tax not attributable to any act, failure to act or misrepresentation of the Company (other than any act or failure to act permitted or contemplated hereunder) and (z) any tax other than a withholding tax unless the Bank's interest in the Loan became subject thereto solely by reason of such Bank's participation in the transactions contemplated hereby. (b) Within 30 days after paying any amount to the Administrative Agent or any Bank from which it is required by law to make any deduction or withholding, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Company shall deliver to the Administrative Agent for delivery to such Bank evidence satisfactory to such Bank of such deduction, withholding or payment (as the case may be). 5.06 Replacement of Banks. If any Bank requests compensation -------------------- pursuant to Section 5.01 or 5.05 hereof, or any Bank's obligation to make Loans of any Type or denominated in any Currency shall be suspended pursuant to Section 5.01 hereof (any such Bank requesting such compensation, or whose obligations are so suspended, being herein called a "Requesting Bank"), the Company, upon three Business Days' notice to the Administrative Agent, may require that such Requesting Bank transfer all of its right, title and interest under this Agreement to any bank or other financial institution identified by the Company that is satisfactory to the Administrative Agent in its reasonable determination (a) if such bank or other financial institution (a "Proposed, Bank") agrees to assume all of the obligations of such Requesting Bank hereunder, and to purchase all of such Requesting Bank's Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Requesting Bank's Loans, together with interest thereon to the date of such purchase and (b) if such Requesting Bank has requested compensation pursuant to Section 5.01 or 5.05 hereof, such Proposed Bank's aggregate requested compensation, if any, pursuant to said Section 5.01 or 5.05 with respect to such Requesting Bank's Loans is lower than that of the Requesting Bank. Subject to the provisions of Section 11.06(b) hereof, such Proposed Bank shall be a "Bank' for all purposes hereunder. Without prejudice to the survival of any other agreement of the Company hereunder the agreements of the Company contained in Sections 5.01, 5.05 and 11.03 (without duplication of any payments made to such Requesting Bank by the Company or the Proposed Bank) shall survive for the benefit of such Requesting Bank under this Section 5.06 with respect to the time prior to such replacement. Section 6. Conditions Precedent -------------------- 6.01 Initial Loan. The obligation of any Bank to make its ------------ initial Loan hereunder is subject to the condition precedent that the Administrative Agent shall have received the following documents (with sufficient copies for each Bank), each of which shall Credit Agreement ---------------- -34- be satisfactory to the Administrative Agent (and to the extent specified below, to each Bank) form and substance: (a) Corporate Documents. Certified copies of the organizational ------------------- documents of the Company and of all corporate authority for the Company (including, without limitation, board of director resolutions and evidence of the incumbency and specimen signature of officers) with respect to the execution, delivery and performance to this Agreement and each other document to be delivered by the Company from time to time in connection herewith and with the Loans hereunder (and each of the Administrative Agent and each Bank may conclusively rely on such certificate of incumbency until it receives notice in writing from the Company to the contrary). (b) Opinions of Counsel to the Company. An opinion, dated the date ---------------------------------- hereof, of (i) Conyers, Dill & Pearman, Cayman Islands counsel to the Company, substantially in the form of Exhibit A-1 hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request, (ii) Conyers, Dill & Pearman, Bermuda counsel to the Company, substantially in the form of Exhibit A-2 hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request and (iii) Cahill Gordon & Reindel, special New York counsel to the Company, substantially in the form of Exhibit A-3 hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request (and the Company hereby instructs each such counsel to deliver such opinions to the Banks and the Administrative Agent). (c) Opinion of Special New York Counsel to Chase. An opinion, dated the ------------------------------------------- date hereof, of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase, substantially in the form of Exhibit B hereto (and Chase hereby instructs such counsel to deliver such opinion to the Banks). (d) Other Documents. Such other documents as the Administrative Agent --------------- or any Bank or special New York counsel to Chase may reasonably request. The obligation of any Bank to make its initial extension of credit hereunder is also subject to the payment or delivery by the Company of such fees as the Company shall have agreed to pay or deliver to any Bank or an affiliate thereof or the Administrative Agent in connection herewith, including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase, in connection with the negotiation, preparation, execution and delivery of this Agreement and each other document to be delivered by the Company and the extensions of credit hereunder (to the extent that statements for such fees and expenses have been delivered to the Company). Credit Agreement ---------------- -35- 6.02 Initial and Subsequent Loans. The obligation of any Bank to make ---------------------------- any Loan hereunder (including such Bank's initial Loan) is subject to the further conditions precedent that, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) if such borrowing will increase the Dollar Equivalent of the aggregate outstanding principal amount of the Loans of the Banks hereunder, no Default shall have occurred and be continuing; and (b) if such borrowing will increase the Dollar Equivalent of the aggregate outstanding principal amount of the Loans of the Banks hereunder, the representations and warranties made by the Company in Section 7 hereof (other than the last sentence of Section 7.02 (a) hereof) shall be true and complete in all material respects on and as of the date of the making of such Loan with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Each notice of borrowing by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice and as of the date of such borrowing). Section 7. Representations and Warranties. The Company represents and ------------------------------ warrants to the Administrative Agent and the Banks that: 7.01 Corporate Existence. Each of the Company and its Material ------------------- Subsidiaries: (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have (either individually or in the aggregate) a Material Adverse Effect. 7.02 Financial Condition. ------------------- (a) The Company has heretofore furnished to each of the Banks a the consolidated balance sheet of the Company and its Subsidiaries as at October 31, 1996 and the related consolidated statements of operations and cash flows of the Company and its Subsidiaries for the fiscal year ended on said date, with the opinion thereon of KPMG Peat Marwick and (b)the unaudized consolidated balance sheet of the Company and its Credit Agreement ---------------- -36- Subsidiaries as at April 30, 1997 and the related consolidated statements of operations and cash flows of the Company and its Subsidiaries for the three- month period ended on said date. All such financial statements present fairly, in all material respects, the financial position of the Company and its Subsidiaries as at said dates and the results of their operations for the fiscal year and three-month period ended on said dates (subject, in the case of such financial statements as at April 30, 1997 to normal year-end audit adjustments), all in conformity with generally accepted accounting principles in the United States of America. None of the Company nor any of its Subsidiaries has on the date hereof any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said financial statements (or in the notes thereto) as at said dates. Since October 31, 1996, there has been no material adverse change in the consolidated business, operations or financial condition of the Company and its Subsidiaries taken as a whole from that set forth in said financial statements as at said dates. (b) The Company has heretofore furnished to each of the Banks the annual and quarterly Statutory Statements of each of its Material Insurance Subsidiaries for the fiscal year ended October 31, 1996 and for the quarterly fiscal period ended April 30, 1997 as filed with the Applicable Insurance Regulatory Authority. All such Statutory Statements present fairly, in all material respects, the financial condition of each Insurance Subsidiary, respectively, as at the respective dates thereof and its results of operations through fiscal year ended on October 31, 1996 and the quarterly fiscal period ended April 30, 1997, in accordance with statutory accounting practices prescribed or permitted by the Applicable Insurance Regulatory Authority. 7.03 Litigation. There are no legal or arbitral proceedings, ---------- or any proceedings by or before any Governmental Authority, now pending or (to the knowledge of the Company) threatened against the Company or any of its Subsidiaries that, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. 7.04 No Breach. None of the execution and delivery of this Agreement --------- and each other document to be delivered by the Company from time to time in connection herewith and with the Loans hereunder, the consummation of the transactions herein contemplated or compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent (other than action by the board of directors of the Company that has already been taken) under, (a) the charter or by-laws of the Company, (b) any applicable law or regulation, (c) any agreement or instrument to which the Company or any of its Material Subsidiaries is a party, or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument or (d) any judgment, order, injunction or decree of any Credit Agreement ---------------- -37- Governmental Authority by which the Company or any of its Material Subsidiaries or any of their Property is bound or to which any of them is subject. 7.05 Action. The Company has all necessary corporate power, authority ------ and legal right to execute, deliver and perform its obligations under this Agreement and each other document to be delivered by the Company from time to time in connection herewith and with the Loans hereunder, the execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action on its part: and this Agreement has been duly and validly executed and delivered by the Company and constitutes its legal, valid and binding obligation, enforceable under the law of the State of New York against the Company in accordance with its terms, except as such enforceability may be limited (a) by bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights or (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or law). 7.06 Approvals. No authorizations, approvals or consents of, and no --------- filings or registrations with any Governmental Authority are necessary for the execution, delivery or performance by the Company of this Agreement or for the legality, validity or enforceability hereof. 7.07 Use of Credit. No part of the proceeds of the Loans hereunder ------------- will be used to buy or carry any Margin Stock. 7.08 ERISA. Neither the Company nor any of its Subsidiaries ----- maintains, or has incurred any material obligation in connection with, an ERISA Plan. Neither the Company nor any of its Subsidiaries is, or has been within the preceding five years, an ERISA Affiliate of any Person. All contributions required to be made by the Company or any of its Subsidiaries with respect to a Foreign Benefit Plan have been timely made. Each Foreign Benefit Plan has been maintained in substantial compliance with its terms and with the requirements of any and all applicable laws and has been maintained, where required, in good standing with applicable Governmental Authorities. Neither the Company nor any of its Subsidiaries has incurred any material obligation in connection with the termination, withdrawal from, or payment of benefits under any Foreign Benefit Plan. 7.09 Taxes. The Company and its Subsidiaries have filed all income tax ----- returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries, except for any such tax being contested in good faith and by proper proceedings and against which adequate reserves are being maintained. The charges, accruals Credit Agreement ---------------- -38- and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. 7.10 Investment Company Act. Neither the Company nor any of its ---------------------- Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 7.11 Public Utility Holding Company Act. Neither the Company ---------------------------------- nor any of its Subsidiaries is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.12 Environmental Matters. Each of the Company and its Material --------------------- Subsidiaries has obtained all environmental, health and safety permits, licenses and other authorizations required under all Environmental Laws from time to time in effect to carry on its business as now being or as proposed to be conducted, except to the extent failure to have any such permit, license or authorization would not (either individually or in the aggregate) have a Material Adverse Effect. 7.13 Subsidiaries, Etc. ------------------ (a) Set forth in Schedule I hereto is a complete and correct list, as of the date of this Agreement, of all of the Material Subsidiaries of the Company, 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 nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Schedule I hereto, as of the date of this Agreement (x) each of the Company 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 I hereto, (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) there are no outstanding Equity Rights with respect to such Person. (b) None of the Subsidiaries of the Company is, on the date hereof, subject to any indenture, agreement instrument or other arrangement that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence or payment of Indebtedness, the declaration or payment of dividends, or the making of loans, advances or investments. 7.14 Stamp Taxes. To ensure the legality, validity, enforceability or ----------- admissibility in evidence of this Agreement or any promissory notes evidencing Loans made Credit Agreement ---------------- -39- (or to be made), it is not necessary that this Agreement or such promissory notes or any other document be filed or recorded with any Governmental Authority or that any stamp or similar tax be paid on or in respect of this Agreement or such promissory notes, or any other document other than such filings and recordations that have already been made and such stamp or similar taxes that have already been paid. 7.15 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 Company Jurisdiction for the admissibility thereof in the courts of such Company Jurisdiction. 7.16 True and Complete Disclosure. The information reports, ---------------------------- financial statements, exhibits and schedules furnished in writing by or on behalf of the Company to the Administrative Agent or any Bank in connection with the negotiation, preparation or delivery of this Agreement or included herein or delivered pursuant hereto, when taken as a whole do not contain any statement of material fact that is materially untrue or omit to state any material fact necessary to make the statements herein, in light of the circumstances under which they were made, not materially misleading. 7.17 Withholding of Taxes. As of the date of this Agreement, the -------------------- payments of the principal of and interest of the Loans, the fees under Section 2.04 hereof and all other amounts payable hereunder will not be subject, by withholding or deduction, to any Taxes imposed by any Company Jurisdiction. Section 8. Covenants of the Comnany. The Company covenants and ------------------------ agrees with the Banks and the Administrative Agent that, so long as any Commitment is outstanding and until payment in full of all of the principal of and interest on each Loan and all fees payable under Section 2.04 hereof: 8.01 Financial Statements, Etc. The Company shall deliver to each ------------------------- of the Banks: (a) as soon as available and in any event within 50 days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Company, consolidated statements of operations and cash flows of the Company and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheet of the Company and its Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the corresponding period (except, in the case of the balance sheet, to the last day of) in the preceding fiscal year (it being understood that delivery to the Banks of the Company's Report on Form l0-Q filed with the SEC shall satisfy the financial statement delivery requirements of this Section 8.01(a) so long as the financial information Credit Agreement ---------------- -40- required to be contained in such Report is substantially the same as the financial information required under this Section 8.01(a)), accompanied by an Officer's Certificate, which certificate shall state that said consolidated financial statements present fairly, in all material respects, the consolidated financial condition and results of operations of the Company and its Subsidiaries in accordance with generally accepted accounting principles (except for the absence of footnotes), consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 95 days after the end of each fiscal year of the Company, consolidated statements of operations us and cash flows of the Company and its Subsidiaries for such fiscal year and the related consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year (it being understood that delivery to the Banks of the Company's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this Section 8.01(b) so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this Section 8.01(b)), and accompanied by a report thereon of KPMG Peat Marwick or any other independent certified public accountants of recognized national standing, which report shall state (without a "going concern" or like qualification or exception and without qualification or exception as to the scope of its audit) that said consolidated financial statements present fairly, in all material respects, the consolidated financial condition and results of operations of the Company and its Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles in the United States of America, and a certificate of such accountants addressed to the Banks stating that, in making the examination necessary for their opinion, nothing came to their attention that caused them to believe that the Company had failed to comply with any of its obligations under Sections 8.04 to 8.07 (inclusive) or that any Default specified in paragraph (b) or (e) through (i), inclusive, of Section 9 hereof had occurred, except as specifically stated (which certificate may be limited to the extent required by accounting rules and guidelines); (c) within 5 days after filing with the Applicable Insurance Regulatory Authority and in any event within 55 days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Company the quarterly Statutory Statement of each Material Insurance Subsidiary for such fiscal period, together with a certificate of a senior financial officer of the Company or of such Subsidiary stating that such Statutory Statement fairly presents, in all Material respects, the financial condition of each Material Insurance Subsidiary, respectively, for such quarterly fiscal period in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority. Credit Agreement ---------------- -41- (d) within 5 days after filing with the Applicable Insurance Regulatory Authority and in any event within 55 days after the end of each fiscal year of the Company the annual Statutory Statement of each Material Insurance Subsidiary for such year, together with an Officer's Certificate stating that such annual Statutory Statement fairly presents, in all material respects, the financial condition of each Material Insurance Subsidiary, respectively, for such fiscal year in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority. (e) promptly upon their becoming available, copies of all registration statements (other than those on Form S-8) and regular periodic reports, if any, which the Company shall have filed with the SEC or any national securities exchange; (f) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly after the Company knows that any Default has occurred and is continuing, a notice of such Default specifying that such notice is a "Notice of Default" and describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto; (h) the Company will promptly give to each Bank notice of any legal or arbitral proceedings, or any proceedings before any Governmental Authority, pending or (to the knowledge of the Company) threatened, against the Company or any of its Subsidiaries that, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect; and (i) from time to time such other information regarding the financial condition, operations or business of the Company or any of its Subsidiaries as the Administrative Agent may reasonably request. The Company will furnish to each Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, an Officer's Certificate (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 8.05(g), 8.05(h) and 8.06 hereof as of the end of the respective quarterly fiscal period or fiscal year. Credit Agreement ---------------- -42- 8.02 Existence. Etc. The Company will, and will cause each of its --------------- Material Subsidiaries to: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this -------- Section 8.02 shall prohibit any transaction permitted under Section 8.04 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements is reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect; (c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which, in the opinion of the Company, adequate reserves are being maintained in accordance with GAAP; (d) keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied; (e) maintain all of its material Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; and (f) permit representatives of any Bank of the Administrative Agent during normal business hours to examine or inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Bank of the Administrative Agent (as the case may be). 8.03 Insurance. The Company will, and will cause each of its Material --------- Subsidiaries to, (a) maintain fidelity and liability insurance with financially sound and reputable insurance companies (or through self-insurance programs so long as such self-insurance is administered in accordance with sound business practices), and with respect to risks of a character (other than insurance written or reinsurance assumed by the Company or its Subsidiaries) usually maintained by corporations engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such corporations and carry such other insurance as is usually carried by such corporations and (b) furnish to the Administrative Agent, upon written request, full information as to such insurance carried. Credit Agreement ---------------- -43- 8.04 Prohibition of Fundamental Changes. The Company will not. nor ---------------------------------- will it permit any of its Material Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, nor will it permit any of its Material Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of any capital stock of any of its Material Insurance Subsidiaries, whether now owned or hereafter acquired, unless, after giving effect to such Disposition, at least 95% of the capital stock of such Material Insurance Subsidiary is directly or indirectly owned and controlled by the Company. Notwithstanding the foregoing provisions of this Section 8.04: (a) any Material Subsidiary may be merged or consolidated with or into: (i) the Company if the Company shall be the continuing or surviving corporation or (ii) any other Subsidiary of the Company; provided that (x) -------- if any such transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation, and (b) the Company or any Material Subsidiary may merge or consolidate with any other Person if (i) in the case of a merger or consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving corporation is, after giving effect to such merger or consolidation, a Wholly-Owned Subsidiary of the Company and (ii) after giving effect thereto no Default would exist hereunder. 8.05 Limitation on Liens. ------------------- The Company will not, nor will it permit Mid Ocean Reinsurance, any Affiliate or Subsidiary of the Company having direct or indirect ownership of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance to, create, incur, assume or suffer to exist any Lien upon any of their respective Properties, whether now owned or hereafter acquired, except: (a) Liens in existence on the date hereof and listed on Schedule III hereto; (b) Liens imposed by any Governmental Authority for taxes, assessments or charges not yet due or which are being contested in good faith and by appropriate proceedings, unless the amount thereof is material with respect to it or its financial condition, if adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; Credit Agreement ---------------- -44- (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 9(h) hereof; (d) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company; (g) Liens upon real and/or tangible personal Property acquired after the date hereof (by purchase, construction or otherwise) by the Company, each of which Liens either existed on such Property before the time of its acquisition and was not created in anticipation thereof or was created solely for the purpose of securing Indebtedness incurred to finance, refinance, or refund the cost (including the cost of construction) of such Property; provided that (i) no -------- such Lien shall extend to or cover any Property of the Company other than the Property so acquired and improvements thereon and (ii) the principal amount of Indebtedness secured by any such Lien shall not exceed 80% of the fair market value (as determined in good faith by a senior financial officer of the Company) of such Property at the time it was acquired (by purchase, construction or otherwise); (h) Liens to secure reimbursement obligations of Mid Ocean Reinsurance or any such Subsidiary or Affiliate of the Company or any Subsidiary of Mid Ocean Reinsurance in respect of letters of credit caused to be issued in the ordinary course of business; (i) additional Liens created after the date hereof so long as the Indebtedness secured thereby and incurred after the date hereof does not exceed S5,000,000 in the aggregate at any one time outstanding; and -45- (j) any extension, renewal or replacement of the foregoing; provided -------- that the Liens permitted by this paragraph shall not extend to or cover any additional Indebtedness or Property (other than a substitution of like Property). Notwithstanding anything contained herein to the contrary the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien on any of the capital stock of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance. 8.06 Certain Financial Covenants. --------------------------- (a) Tangible Net Worth. The Company will not, at any time, permit ------------------ Tangible Net Worth to be less than $800,000,000. (b) Total Debt to Total Capital. The Company shall, at all times, --------------------------- maintain a ratio of Total Debt to Total Capital of not more than 0.30 to 1. 8.07 Ratings. The Company will not allow the Standard and Poor's ------- Rating or the Best Rating to be less than A. 8.08 Use of Proceeds. The Company will use the proceeds of the --------------- Loans hereunder for general corporate purposes (in compliance with all applicable legal and regulatory requirements, including, without limitation, Regulations G, U and X and the Securities Act of 1933 and the Securities Exchange Act of 1934 and the regulations thereunder); provided that neither the Administrative Agent nor any Bank shall have any responsibility as to the use of any of such proceeds. 8.09 Transactions with Affiliates. The Company will not, and ---------------------------- will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any Property to, or purchase, lease or otherwise acquire any Property from, or otherwise engage in any other transactions with, any of its Affiliates, except at prices and on terms and conditions not less favorable to the Company or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties. 8.10 Compliance with Laws. The Company will, and will cause each of -------------------- Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to 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. 8.11 Payment of Obligations. The Company will, and will cause each of ---------------------- its Subsidiaries to, pay its obligations that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount Credit Agreement ---------------- -46- thereof is being contested in good faith by appropriate proceedings, (b) the Company or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect 8.12 Indebtedness. The Company will not permit Mid Ocean Reinsurance, ------------ any Affiliate or Subsidiary of the Company having direct or indirect ownership of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance to, create, incur or suffer to exist any Debt or any Guarantee of Indebtedness of any other Person, except for Debt or Guarantees of Indebtedness outstanding on the date hereof and listed in Schedule IV hereto. 8.13 Capital and Surplus of Mid Ocean Reinsurance. The Company will -------------------------------------------- not permit the Capital and Surplus of Mid Ocean Reinsurance to be less than $800,000,000 at any time. Section 9. Events of Default. If one or more of the following events ----------------- (herein called "Events of Default") shall occur and be continuing: (a) The Company shall: (i) default in the payment of any principal of any Loan when due (whether at stated maturity or at mandatory or optional prepayment or otherwise); or (ii) default in the payment of any interest on any Loan or any facility fee or utilization fee payable under Section 2.04 hereof and such default shall continue unremedied for two or more Business Days or (iii) default in the payment of any other amount payable by it hereunder when due and such default shall have continued unremedied for five or more days; or (b) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any Indebtedness aggregating $5,000,000 or more, or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or to have the interest rate thereon reset to a level so that securities evidencing such Indebtedness trade at a level specified in relation to the par value thereof; or any Obligor shall default in the payment when due of any amount in excess of $5,000,000 under any Derivative Transaction; or any event specified in any Derivative Transaction to which any Obligor is a party shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to Credit Agreement ---------------- -47- permit, termination or liquidation payment or payments in excess of $5,000,000 to become due; or (c) Any representation, warranty or certification made or deemed made herein or in any other document to be delivered by the Company in connection herewith and with the Loans hereunder (or in any modification or supplement hereto or thereto) by the Company, or any certificate furnished to any Bank or the Administrative Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or deemed made or furnished in any material respect; or (d) The Company shall default in the performance of its obligations under Sections 8.01(g), 8.04 through 8.07, 8.12, or 8.13 hereof (inclusive); or the Company shall default in the performance of any of its other obligations in this Agreement or in any other document to be delivered by the Company in connection herewith and with the Loans hereunder and such default shall continue unremedied for a period of thirty or more days after notice thereof to the Company by the Administrative Agent or any Bank (through the Administrative Agent); or (e) The Company or any of its Material Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of its Material Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) file, or consent by answer or otherwise fail to controvert in a timely and appropriate manner the filing against it of, a petition seeking relief or to take advantage of any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts or (iv) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Material Subsidiaries, in any court or governmental regulatory authority of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or such Subsidiary or of all or any substantial part of its Property or (iii) similar relief in respect of the Company or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall Credit Agreement ---------------- -48- continue undismissed for a period of 60 or more days, or an order, judgment or decree approving or ordering any of the foregoing shall be entered: or (h) A judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company or any of its Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed. appeal therefrom and cause the execution thereof to be stayed during such appeal: or (i) A Change of Control shall occur; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Section 9 with respect to the Company (A) the Administrative Agent may and, upon request of the Majority Banks, shall, by notice to the Company, terminate the Commitments and they shall thereupon terminate, and (B) the Administrative Agent may and, upon request of Banks holding more than 50% of the aggregate unpaid principal amount of the Loans, shall, by notice to the Company declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder (including, without limitation, any amounts payable under Section 5.04 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Section 9 with respect to the Company, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder (including, without limitation, any amounts payable under Section 5.04 hereof) shall automatically become immediately due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. Section 10. The Administrative Agent ------------------------ 10.01 Appointment; Powers and Immunities. Each Bank hereby appoints ---------------------------------- and authorizes the Administrative Agent to act as its agent hereunder with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Administrative Agent Credit Agreement ---------------- -49- (which term as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under this Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other document referred to or provided for herein or for any failure by the Company to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys- in-fact selected by it in good faith. The Administrative Agent may deem and treat the payee of any promissory note evidencing any Loans hereunder as the holder thereof for all purposes hereof unless and until an Assignment and Acceptance relating to such Loans shall have been filed with the Administrative Agent, together with the consent of the Company thereto (to the extent provided in Section 11.06(b) hereof). 10.02 Reliance by Administrative Agent. The Administrative Agent shall -------------------------------- be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions given by the Majority Banks (or, if so provided in Section 11.04 hereof, all of the Banks), and such instructions of the Credit Agreement ---------------- -50- Majority Banks (or all of the Banks, as the case may be) and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 10.03 Defaults. The Administrative Agent shall not be deemed to have -------- knowledge or notice of the occurrence of a Default unless the Administrative Agent has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall (subject to Sections 10.01 and 10.07 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, provided that, unless and until the Administrative Agent shall have -------- received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 10.04 Rights as a Bank. With respect to its Commitment and the Loans ---------------- made by IT, Chase (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Chase (and any successor acting as Administrative Agent)-and its Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Company (and any of its Subsidiaries or Affiliates) as if it were not acting as the Administrative Agent, and Chase (and any other successor acting as Administrative Agent) and its Affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 10.05 Indemnification. The Banks agree to indemnify the Administrative --------------- Agent (to the extent not reimbursed under Section 11.03 hereof, but without limiting the obligations of the Company under said Section 11.03) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Bank) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Section 11.03 hereof but excluding (i) normal Credit Agreement ---------------- -51- administrative costs and expenses incident to the performance of its agency duties hereunder and (ii) the costs and expenses of the Administrative Agent in connection with the negotiation and preparation of this Agreement) or the enforcement of any of the terms hereof or of any such other documents, provided -------- that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 10.06 Non-Reliance on Administrative Agent and Other Banks. Each Bank ---------------------------------------------------- agrees that it has, independently and without reliance on the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent, or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition, operations, business, Properties, liabilities or prospects of the Company or any of its Subsidiaries (or any of their Affiliates) that may come into the possession of the Administrative Agent or any of its Affiliates. 10.07 Failure to Act. Except for action expressly required of the -------------- Administrative Agent hereunder, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 10.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 10.08 Resignation of Administrative Agent. Subject to the appointment ----------------------------------- and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Banks and the Company. Upon any such resignation, the Majority Banks shall have the right (with, so long as no Default shall have occurred and be continuing, the consent of the Company, which consent shall not be unreasonably withheld or delayed) to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation of the retiring Administrative Agent, then the retiring Credit Agreement ---------------- -52- Administrative Agent may, on behalf of the Banks, (with, so long as no Default shall have occurred and be continuing, the consent of the Company, which consent shall not be unreasonably withheld or delayed) appoint a successor Administrative Agent, that shall be a Bank that has an office in New York, New York with a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. Section 11. Miscellaneous. ------------- 11.01 Waiver. No failure on the part of the Administrative ------ Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. All notices, requests and other communications ------- provided for herein (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telecopy) to the intended recipient at (a) if to any Company or the Administrative Agent, the "Address for Notices" specified below its name on the signature pages hereof or (b) if to any Bank, the address (or telecopy number) set forth in its Administrative Questionnaire; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03 Expenses, Etc. The Company agrees to pay or reimburse ------------- each of the Banks and the Administrative Agent for: (a) all reasonable out-of- pocket costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase) in connection with the negotiation or preparation of any modification, supplement or waiver of any of the terms of this Agreement (whether or not consummated); (b) all reasonable out-of-pocket costs and expenses of the Banks and the Administrative Agent (including, without limitation, the reasonable fees and expenses of legal counsel) in connection with (i) any Default and any Credit Agreement ---------------- -53- enforcement or collection proceedings resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 11.03; and (c) all transfer, stamp, documentary, recording or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any other document referred to herein. The Company hereby agrees to indemnify the Administrative Agent and each Bank and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses (without duplication of anything covered by Section 5 hereof) incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Administrative Agent to any Bank, whether or not the Administrative Agent or any Bank is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the Loans hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the Loans hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 11.04 Amendments, Etc. Except as otherwise expressly provided --------------- in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Company and the Majority Banks, or by the Company and the Administrative Agent acting with the consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks or by the Administrative Agent acting with the consent of the Majority Banks; provided that (a) no such modification, supplement or waiver shall: (i) increase, or (except as provided in Section 2.10 hereof) extend the term of the Commitment of any Bank, or extend the time or waive any requirement for the reduction or termination of such Commitment, without the written consent of such Bank; (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fee hereunder, without the written consent of each Bank affected thereby; (iii) reduce the amount of any such payment of principal, without the written consent of each Bank affected thereby; (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, without the written consent of each Bank affected thereby; (v) alter the rights or obligations of the Company to prepay Loans, without the written consent of each Bank affected thereby; (vi) alter the terms of Sections 4.02 or 4.07(b) hereof or this Section 11.04, without the written consent of each Bank; or (vii) modify the definition of the terms "Agreed Foreign Credit Agreement ---------------- -54- Currency" or "Majority Banks" or modify in any other manner the number or percentage of the Banks required to make any determinations or waive any rights hereunder or to modify any provision hereof, without the written consent of each Bank; and (b) any modification of any of the rights or obligations of the Administrative Agent hereunder shall require the consent of the Administrative Agent. 11.05 Successors and Assigns. This Agreement shall be binding ---------------------- upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Assignments and Participations. ------------------------------ (a) The Company may not assign any of its rights or obligations hereunder without the prior consent of all of the Banks and the Administrative Agent. (b) Any Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) subject to the following: (i) except in the case of an assignment to a Bank or an affiliate of a Bank, each of the Company and the Administrative Agent shall have given their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Bank or an affiliate of a Bank or an assignment of the entire remaining amount of the assigning Bank's Commitment, the amount of the Commitment of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Company and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Bank's rights and obligations under this Agreement, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,000, and (v) the assignee, if it shall not be a Bank, shall (x) be entitled to an exemption from withholding or deduction by the Company of Taxes on all amounts to be received by it hereunder at least the same extent as the assignor and (y) deliver to the Administrative Agent an Administrative Questionnaire; provided further that any ---------------- consent of the Company otherwise required under this Section shall not be required if an Event of Default under paragraph (f) or (g) of Section 9 has occurred and is continuing with respect to the Company. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Bank under this Agreement, and the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Bank's rights Credit Agreement ---------------- -55- and obligations under this Agreement, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 5.01, 5.04, 5.05 and 11.03). Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Bank of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Company, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to, each Bank pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be -------- conclusive, and the Company and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Company and any Bank, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Bank and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Bank hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Bank may, without the consent of the Company, sell participations to one or more banks or other entities (a "Participant") in all ----------- or a portion of such Bank's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Bank's obligations under this Agreement shall remain - - -------- unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Company and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Bank sells such a participation shall provide that such Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that -------- such Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the proviso to Section 11.04 that affects such Participant Subject TO paragraph (f) of this Section, the Company agrees that each Participant shall be entitled to the Credit Agreement ---------------- -56- benefits of Sections 5.01, 5.04 and 5.05 to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 4.07(a) as though it were a Bank, provided that any exercise by any Participant of any such benefits shall constitute the agreement of such Participant to be subject to Section 4.07(b) as though it were a Bank. (f) A Participant shall not be entitled to receive any greater payment under Section 5.01 or 5.05 than the applicable Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Company's prior written consent. A Participant shall not be entitled to the benefits of Section 5.05 unless the Company is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Company, to bound by Section 5.05 as though it were a Bank. (g) In addition to the assignments and participations permitted under the foregoing provisions of this Section 11.06, any Bank may (without notice to the Company, the Administrative Agent or any other Bank and without payment of any fee) pledge or grant a security interest in all or any portion of its Loans to secure any obligations of such Bank (including, without limitation, to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank). No such assignment shall release the assigning Bank from its obligations hereunder. (h) A Bank may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.12(b) hereof. (i) Anything in this Section 11.06 to the contrary notwithstanding, no Bank may assign or participate any interest in any Loan held by it hereunder to the Company or any Affiliate or Subsidiary of the Company without the prior consent of each Bank. 11.07 Survival. The obligations of the Company to any Bank -------- under Sections 5.01, 5.04, 5.05, and 11.03 hereof, and the obligations of any Bank under Sections 10.05 and 11.12 hereof, shall survive the repayment of the Loans made by such Bank and the termination of the Commitment of such Bank (including, with respect to any Bank that does not agree to the extension of the Commitment Termination Date in accordance with Section 2.10 hereof, the repayment of the Loans made by such Bank and the termination of the Commitment of such Bank on the applicable Existing Commitment Termination Date before giving effect to such extension) and, in the case of any Bank that may assign any interest in its Commitment or Loans hereunder, shall survive the making of such assignment, Credit Agreement ---------------- -57- notwithstanding that such assigning Bank may cease to be a "Bank" hereunder. In addition, each representation and warranty made, or deemed to be made by a notice of any Loan, herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any Loan, any Default that (i) may arise by reason of such representation or warranty proving to have been false or misleading or (ii) exists at the time such Loan was made, notwithstanding that such Bank or the Administrative Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading, or that such Default was existing, at the time such Loan was made. 11.08 Captions. The table of contents and captions and section -------- headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.09 Counterparts. This Agreement may be executed in any ------------ number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10 Governing Law: Submission to Jurisdiction. This ----------------------------------------- Agreement shall be governed by, and construed in accordance with, the law of the State of New York. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York County (and any appellate court from any thereof) for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company hereby irrevocably agrees and consents that service of process in any such legal proceeding in any such court may be made on the Company by the mailing thereof by registered mail postage prepaid, or by transmitting the same by telecopier, to the Company in the manner specified in Section 11.02 hereof, and any such service shall be deemed good and effective when transmitted by telecopier or, in the case of mail, upon receipt; provided that nothing herein will affect the right of any Bank or the Administrative Agent to serve process in any other manner permitted by law. To the extent that the Company 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. Credit Agreement ---------------- -58- 11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE -------------------- ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.12 Confidentiality. Each of the Banks and the --------------- Administrative Agent agrees (on behalf of itself and each of its Affiliates, directors, officers, employees and representatives' to use reasonable precautions to keep confidential, in accordance with its customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement that is identified by the Company as being confidential at the time the same is delivered to the Banks or the Administrative Agent; provided that nothing herein shall limit the disclosure of -------- any such non-public information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Banks or the Administrative Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Administrative Agent or any other Bank (or to Chase Securities Inc.), (v) in connection with any litigation to which any one or more of the Banks or the Administrative Agent is a party, (vi) to a subsidiary or Affiliate of such Bank as provided in paragraph (a) above or (vii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank a Confidentiality Agreement substantially in the form of Exhibit C hereto; and provided, further, that in no event shall any Bank or the -------- Administrative Agent be obligated or required to return any materials furnished by the Company. The obligations of any assignee that has executed a Confidentiality Agreement in the form of Exhibit C hereto shall be superseded by this Section 11.12 upon the date upon which such assignee becomes a Bank hereunder pursuant to Section 11.06 hereof. 11.13 Judgment Currency. This is an international loan ----------------- transaction in which the specification of Dollars or any Foreign Currency, as the case may be (the "Specified Currency") and any payment in New York County or ------------------ the country of the Specified Currency, as the case may be (the "Specified --------- Place"), is of the essence, and the Specified Currency shall be the currency of - - ----- account in all events relating to Loans denominated in the Specified Currency. The payment obligations of the Company under this Agreement shall not be discharged by an amount paid in another currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on conversion to the Specified Currency and transfer to the Specified Place under normal banking procedures does not yield the amount of the Specified Currency at the Specified Place due hereunder. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in the Specified Currency into another currency (the "Second Currency"), the rate of exchange --------------- which Credit Agreement ---------------- -59- shall be applied shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the Specified Currency with the Second Currency on the Business Day next preceding that on which such judgment is rendered. The obligation of the Company in respect of any such sum due from it to the Administrative Agent or any Bank hereunder shall, notwithstanding the rate of exchange actually applied in rendering such judgment, be discharged only to the extent that on the Business Day following receipt by the Administrative Agent or such Bank, as the case may be, of any sum adjudged to be due hereunder in the Second Currency to the Administrative Agent or such Bank, as the case may be, the Administrative Agent or such Bank, as the case may be, may in accordance with normal banking procedures purchase and transfer to the Specified Place the Specified Currency with the amount of the Second Currency so adjudged to be due; and the Company hereby, as a separate obligation and notwithstanding any such judgment. agrees to indemnify the Administrative Agent or such Bank, as the case may be, against, and to pay the Administrative Agent or such Bank, as the case may be, on demand in the Specified Currency, any difference between the sum originally due to the Administrative Agent or such Bank, as the case may be, in the Specified Currency and the amount of the Specified Currency so purchased and transferred. 11.14 European Monetary Union. (a) If, as a result of the ----------------------- implementation of European monetary union, (i) any European Currency ceases to be lawful currency of the nation issuing the same and is replaced by a European common currency (the Euro"), or (ii) any European Currency and the Euro are at ---- the same time recognized by any Governmental Authority of the nation issuing such European Currency as lawful currency of such nation and the Administrative Agent or the Majority Banks shall so request in a notice delivered to the Company, then any amount payable hereunder by any party hereto in such European Currency shall instead be payable in the Euro and the amount so payable shall be determined by translating the amount payable in such European Currency to the Euro at the exchange rate recognized by the European Central Bank for the purpose of implementing European monetary union. Prior to the occurrence of the event or events described in clause (i) or (ii) of the preceding sentence, each amount payable hereunder in any European Currency will, except as otherwise provided herein, continue to be payable only in that Currency. (b) The Company agrees, at the request of any Bank, to compensate such Bank for any loss, cost, expense or reduction in return that such Bank shall reasonable determine shall be incurred or sustained by such Bank as a result of the implementation of European monetary union and that would not have been incurred or sustained but for the transactions provided for herein. A certificate of a Bank setting forth such Bank's determination of the amount or amounts necessary to compensate such Bank shall be delivered to the Company and shall be conclusive absent manifest error so long as such determination is made on a reasonable basis. The Company shall pay such Bank the amount shown as due on any such certificate within 10 days after receipt thereof. Credit Agreement ---------------- -60- (c) The parties hereto agree, at the time of or at any time following the implementation of European monetary union, to use reasonable efforts to enter into an agreement amending this Agreement in order to reflect the implementation of such monetary union, to permit (if feasible) the Euro to qualify as an Agreed Foreign Currency under the terms and conditions of the definition of such term and to place the parties hereto in the position with respect to the settlement of payments of the Euro as they would have been with respect to the settlement of the Currencies it replaced. Credit Agreement ---------------- -61- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. MID OCEAN LIMITED By: /s/ Charles F. Hays --------------------- Name: Charles F. Hays, Title: Senior Vice President, Chief Financial and Administrative Officer Address for Notices: Mid Ocean Limited 6th Floor, Richmond House 12 Par-La-Ville Road Hamilton, HM 08, Bermuda Attention: Charles F. Hays Telecopier No.: (441) 292-0876 Telephone No.: (441) 292-1358 BANKS ----- THE CHASE MANHATTAN BANK By______________________ Title: CITIBANK N.A. By______________________ Title: By______________________ Title: Credit Agreement ---------------- -61- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. MID OCEAN LIMITED By_________________________ Name: Title: Address for Notices: Mid Ocean Limited 6th Floor, Richmond House 12 Par-La-Ville Road Hamilton, HM 08, Bermuda Attention: Charles F. Hays Telecopier No.: (441) 292-0876 Telephone No.: (441) 292-1358 BANKS ----- THE CHASE MANHATTAN BANK By /s/ Heather Lindstrom ------------------------- Title: Vice President CITIBANK N.A. By /s/ Andrew C.Fowler ----------------------- Title: V.P. By_________________________ Title: Credit Agreement ---------------- -62- DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /s/ John S. McGill -------------------------- Title: Vice President By /s/ Gayma Z. Shivnarain -------------------------- Title: Vice President MELLON BANK, N.A. By /s/ [SIGNATURE ILLEGIBLE]^^ --------------------------- Title: [ILLEGIBLE] ROYAL BANK OF CANADA By /s/ [SIGNATURE ILLEGIBLE]^^ -------------------------- Title: Senior Manager THE BANK OF BERMUDA LIMITED By /s/ [SIGNATURE ILLEGIBLE]^^ -------------------------- Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By /s/ [SIGNATURE ILLEGIBLE]^^ -------------------------- Title: Senior Vice President Credit Agreement ---------------- -63- STATE STREET BANK AND TRUST COMPANY By /s/ [SIGNATURE ILLEGIBLE]^^ -------------------------- Title: Vice President By__________________________ Title: BANQUE NATIONALE DE PARIS By /s/ Phil Truesdale -------------------------- Title: Vice President By /s/ Frances Melville -------------------------- Title: Assistant Treasurer THE BANK OF NOVA SCOTIA NY AGENCY By /s/ J. R. Trimble -------------------------- Title: Senior Relationship Manager Credit Agreement ---------------- -64- THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ Heather Lindstrom -------------------------- Title: Vice President Address for Notices to Chase as Administrative Agent (except as noted below for Eurocurrency Loans denominated in a Foreign Currency): The Chase Manhattan Bank Agent Bank Services Group 1 Chase Manhattan Plaza 8th Floor New York, New York 10081 Attention: Laura A. Rebecca Telecopier No.: 212-552-7490 Telephone No.: 212-552-7253 Address for Notices to Chase as Administrative Agent for borrowings of or prepayment of, or duration of Interest Periods for Eurocurrency Loans denominated in a Foreign Currency: The Chase Manhattan Bank Woolgate House Coleman Street London, England Attention: Stephen Hurford Telecopier No.: 44-171-777-2360 Telephone No.: 44-171-777-2347 Credit Agreement ---------------- Schedule I Subsidiaries
% Beneficial Jurisdiction Ownership by of Immediate Parent Incorporation ---------------- -------------- Mid Ocean Limited - Cayman Islands Mid Ocean Reinsurance Company Ltd 100 Bermuda Baltusrol Holdings Limited 100 Bermuda Dornoch Limited 100 United Kingdom County Down Limited 100 United Kingdom Brockbank Holdings Limited 100 United Kingdom Brockbank Underwriting Limited 100 United Kingdom Brockbank Syndicate Management Limited 100 United Kingdom Admiral Insurance Services Limited 100 United Kingdom Admiral Services (Europe) Limited 100 United Kingdom Able Insurance Services Limited 100 United Kingdom Brockbank Personal Lines Limited 100 United Kingdom Zenith Policy Services Limited 100 United Kingdom Cassidy Brockbank Limited 100 United Kingdom Brockbank Dedicated Insurance Limited 100 United Kingdom Brockbank Financial Services Limited 100 United Kingdom Mid Ocean Reinsurance Consulting GmbH 100 Germany
Schedule I ---------- Schedule II Commitments -----------
========================================================================= Bank Commitment - - ---- ---------- - - ------------------------------------------------------------------------- The Chase Manhattan Bank $ 15,000.000 - - ------------------------------------------------------------------------- Citibank N.A. S 12.500.000 - - ------------------------------------------------------------------------- Deutsche Bank AG $ 12.500.000 - - ------------------------------------------------------------------------- Mellon Bank, N.A. $ 12,500.000 - - ------------------------------------------------------------------------- Royal Bank of Canada $ 12,500.000 - - ------------------------------------------------------------------------- The Bank of Bermuda Limited $ 7,500.000 - - ------------------------------------------------------------------------- Credit Lyonnais New York Branch $ 7,500.000 - - ------------------------------------------------------------------------- State Street Bank and Trust Company $ 7,500.000 - - ------------------------------------------------------------------------- Banque National De Paris $ 6,250.000 - - ------------------------------------------------------------------------- Bank of Nova Scotia N.Y. Agency $ 6,250.000 - - ------------------------------------------------------------------------- Total $100,000,000 =========================================================================
Schedule II ----------- Schedule III Liens As of July 31, 1997 LETTERS OF CREDIT - Secured by lien on a portion of the investment portfolio & cash balances of the Subsidiary or office listed below in the respective amounts listed below:
S EQUIVALENT FX rate - July 31 BROCKBANK GBP 8,500,000 $ 13,948,500 LONDON BRANCH USD 764,114 $ 764,114 OF MID OCEAN REINSURANCE BALTUSROL County Down GBP 19,263,319 $ 31,611,106 Dornoch GBP 45,827,981 $ 75,203,717 MID OCEAN R.EINSURANCE GBP 16,874,245 $ 27,690,636 USD 56,027,807 $ 56,027,807 ------------- $ 205,245,880 =============
Schedule III ------------ Schedule IV Indebtedness [None] EXHIBIT A-1 [Form of Opinion of Conyers Dill & Pearman, Cayman Islands Counsel to the Company) CONYERS DILL & PEARMAN DATE To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Dear Sirs Mid Ocean Limited/US$100.000.000 Loan - - ------------------------------------- We have acted as special legal counsel in the Cayman Islands to Mid Ocean Limited (the "Company") in connection with a loan of up to US$100,000,000 (or equivalent in other currencies) proposed to be made to the Company by the Banks (as defined in the Credit Agreement referred to below). For the purpose of giving this opinion we have examined and relied upon an executed copy of a Credit Agreement (364-Day) dated September 2, 1997 executed by the Company and the Banks named therein and The Chase Manhattan Bank, as Administrative Agent (the "Agreement"). We also have reviewed a copy of the Memorandum and Articles of Association of the Company, minutes of a meeting of the Company's Board of Directors held on 5th June 1997 certified as a true copy thereof by the Secretary of the Company on 13th August 1997 (the "Resolutions"), and such other documents and made enquiries as to questions of law as we have deemed necessary in order to render the opinions set forth below. A Certificate of Good Standing for the Company dated [ ] 1997 issued by the Cayman Islands Registry in respect of the Company as an exempted company under the laws of the Cayman Islands is attached. We have conducted a search of the Cause Book of the Grand Court in the Cayman Islands and have discovered no legal proceedings against the Company within the Cayman Islands as at [ ]. We do not provide registered office facilities in the Cayman Islands to the Company. We have not acted generally as its legal adviser, we are not familiar with its operations or financial affairs and we have not acted in regard to the transaction referred to in the Agreement save for the purpose of giving this opinion. -2- For the purpose of the provision of this opinion we have assumed without enquiry: (1) the genuineness and authenticity of all signatures and seals and the conformity to the originals of all copies of documents (whether or not certified) submitted to us and the authenticity and completeness of the originals from which such copies were taken; (2) the capacity, power and authority of each of the parties to the Agreement (other than the Company) to enter into and perform its respective obligations under the Agreement; (3) the due execution and delivery of the Agreement by each of the parties thereto (other than the Company); (4) the accuracy and completeness of all factual statements, representations and warranties, in each case as to factual matters, made in the Agreement which we have relied on without further enquiry; (5) that there were no representations or warranties made other than as set out in the Agreement; (6) that the Resolutions of the Directors of the Company are a full and accurate record of the Resolutions passed at the meeting, duly convened and held by the Directors of the Company in accordance with the Articles of Association of the Company at which the Directors declared in writing any interest they had in the matters in issue and that such Resolutions have not been amended or rescinded and are in full force and effect; (7) that the Board of Directors of the Company, when passing the resolutions referred to in this opinion acted in good faith and having regard to all relevant matters, reasonably and honestly believed that the responsibility to be assumed by the Company pursuant to the Agreement would be in the commercial interest of the Company; (8) that there is no provision of the law of any jurisdiction, other than the Cayman Islands, which would have any implication in relation to the opinions expressed herein; (9) the legality, validity and enforceability under the laws of the State of New York (the "Foreign Laws") of the Agreement; and (10) that the choice of the Foreign Laws to govern the Agreement and the submission by the Company to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York and any New York State court sitting in New York County (and any appellate court from any thereof) (the "Foreign Courts") is a valid choice and submission under the Foreign Laws. The obligations of the Company under the Agreement: -3- (i) will be subject to the laws from time to time in effect relating to bankruptcy, insolvency, liquidation, possessory liens, rights of set-off, reorganization, amalgamation, moratorium or any other laws or legal procedures, whether of a similar nature or otherwise, generally affecting the rights of creditors; (ii) will be subject to statutory limitation of the time within which proceedings may be brought; (iii) will be subject to general principles of equity and, as such, specific performance and injunctive relief, being equitable remedies, may not be available; and (iv) may not be given effect to by a Cayman Islands Court whether or not it was applying the Foreign Laws, if and to the extent they constitute the payment of an amount which is in the nature of a penalty and not in the nature of liquidated damages, and a Cayman Islands Court may stay any proceedings commenced in the Cayman Islands against the Company under the Agreement if there are other proceedings in respect of the Agreement simultaneously under way against the Company in another jurisdiction. We have made no investigation of and express no opinion in relation to the laws of any jurisdiction other than the Cayman Islands. This opinion is limited to and is given on the basis of the current law and practice in the Cayman Islands. This opinion is issued solely for your benefit with respect to the matters referred to herein and is not to be relied upon by any other person, firm or entity or in respect of any other matter. Based upon and subject to the foregoing we are of the opinion that: I. The Company is duly incorporated and validly existing under the laws of the Cayman Islands and in good standing pursuant to the provisions of the Companies Law (1995 Revision). 2. The Company has the necessary corporate power and authority to enter into and perform its obligations under the Agreement and to borrow under the Agreement 3. The Company has taken all corporate action necessary to authorize its execution, delivery and performance of the Agreement including the borrowing thereunder. 4. The Agreement has been duly executed and delivered by or on behalf of the Company and constitutes the legal, valid and binding obligations of the Company in accordance with the terms thereof. 5. The execution and delivery of the Agreement by the Company thereunder and the performance by the Company of its obligations thereunder and the borrowings by the Company thereunder will not violate the Memorandum and Articles of Association of the Company nor any applicable law, regulation, order or decree in the Cayman Islands. No provision in the Agreement would appear to constitute a penalty. -4- 6. No order, consent, approval, license, authorization or validation of or exemption by any governmental or public body or authority of the Cayman Islands or any subdivision thereof is required to authorize or is required in connection with the execution, delivery, performance or enforcement of the Agreement or the borrowing thereunder. 7. It is not necessary or desirable to ensure the enforceability in the Cayman Islands of the Agreement that it be registered in any register kept by, or filed with, any governmental or regulatory body in the Cayman Islands. 8. Subject to the payment of nominal stamp duty of $2 if the Agreement is executed in or brought into the Cayman Islands, the Agreement is in proper legal form under the laws of the Cayman Islands for the admissability thereof into evidence in the courts of the Cayman Islands. 9. There is no income or other tax of the Cayman Islands imposed by withholding or otherwise on any payments to be made to or by the Company under the Agreement. 10. The Company is not entitled to sovereign immunity under the laws of the Cayman Islands, from any legal proceedings, whether in the Cayman Islands or elsewhere, to enforce or to collect upon the Agreement, including, without limitation, immunity from service, immunity from jurisdiction of any court or tribunal or immunity of any of its property from attachment prior to entry of judgment or from attachment in aid of execution upon a judgment in respect of itself or its property. 11. The Company has the legal capacity to sue and to be sued in its own name under the laws of the Cayman Islands. 12. The choice of the Foreign Laws as the governing law of the Agreement will be recognized and applied by the Cayman Islands courts provided that such choice was made for bona fides purposes and is effective as a matter of the Foreign Laws. 13. The submission by the Company under the Agreement to the non-exclusive jurisdiction of the Foreign Courts is valid and binding upon the Company under the laws of the Cayman Islands. 14. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the Foreign Courts, the courts of the Cayman Islands will recognize and enforce a foreign judgment of a court recognized as having jurisdiction based on the principle that a judgment of a foreign court imposes upon a judgment debtor an obligation to pay the sum for which the judgment has been given, and provided such judgment is final and conclusive, for a liquidated sum not in respect of taxes or a fine or penalty, and which was not obtained by a fraud or in a manner, and is not of a kind the enforcement of which is, contrary to the public of the policy of the Cayman Islands, nor obtained in proceedings which were opposed to natural justice. -5- 15. We believe that in the event of any proceedings being brought in the Cayman Islands courts in respect of a monetary obligation expressed to be payable in a currency other than Cayman Islands dollars, a Cayman Islands court would give judgment expressed as an order to pay such currency or its Cayman Islands dollar equivalent at the time of the payment or enforcement of the judgment. With respect to winding up proceedings, Cayman Islands law may require that all claims or debts are converted either into Cayman Islands dollars or the Company's functional currency of account at the exchange rate ruling at the date of commencement of the winding up. Yours faithfully CONYERS DILL & PEARMAN EXHIBIT A-2 [Form of Opinion of Conyers, Dill & Pearman. Bermuda Counsel to the Company] CONYERS DILL & PEARMAN DATE To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Dear Sirs Mid Ocean Limited/USS100.000.000 Loan - - ------------------------------------- We have acted as special legal counsel in Bermuda to Mid Ocean Limited (the "Company") in connection with a loan of up to US$100,000,000 (or equivalent in other currencies) proposed to be made to the Company by the Banks (as defined in the Credit Agreement referred to below). For the purpose of giving this opinion we have examined and relied upon an executed copy of a Credit Agreement (364-Day) dated September 2, 1997 executed by the Company and the Banks named therein and The Chase Manhattan Bank. as Administrative Agent (the "Agreement"). We also have reviewed a copy of the Memorandum and Articles of Association of the Company, minutes of a meeting of the Company's Board of Directors held on 5th June 1997 certified as a true copy thereof by the Secretary of the Company on 13th August 1997 (the "Resolutions"), and such other documents and made enquiries as to questions of law as we have deemed necessary in order to render the opinions set forth below. A Certificate of Compliance for the Company dated 11th August 1997 issued by the Registrar of Companies of Bermuda in respect of the Company as an overseas company with a permit to carry on business in Bermuda is attached. We have conducted a search of the Cause Book of the Supreme Court of Bermuda and have discovered no legal proceedings against the Company pending in Bermuda as at [ ]. We do not provide the principal office of the Company in Bermuda or act as its principal representative in Bermuda. We have not acted generally as its legal adviser, we are not familiar with its operations or financial affairs and we have not acted in regard to the transaction referred to in the Agreement save for the purpose of giving this opinion. Opinion of Cayman Islands Counsel to the Company ------------------------------------------------ -2- For the purpose of the provision of this opinion we have assumed without enquiry: (1) the genuineness and authenticity of all signatures and seals and the conformity to the originals of all copies of documents (whether or not certified) submitted to us and the authenticity and completeness of the originals from which such copies were taken; (2) the capacity, power and authority of each of the parties to the Agreement to enter into and perform its respective obligations under the Agreement; (3) the due execution and delivery of the Agreement by each of the parties thereto; (4) the accuracy and completeness of all factual statements, representations and warranties, in each case as to factual matters, made in the Agreement which we have relied on without further enquiry; (5) that there were no representations or warranties made other than as set out in the Agreement; (6) that there is no provision of the law of any jurisdiction, other than Bermuda. which would have any implication in relation to the opinions expressed herein; (7) the legality, validity and enforceability under the laws of the State of New York (the "Foreign Laws") of the Agreement; and (8) that the choice of the Foreign Laws to govern the Agreement and the submission by the Company to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York and any New York State court sitting in New York County (and any appellate court from any thereof) (the "Foreign Courts") is a valid choice and submission under the Foreign Laws. We have made no investigation of and express no opinion in relation to the laws of any jurisdiction other than Bermuda. This opinion is limited to and is given on the basis of the current law and practice in Bermuda. This opinion is issued solely for your benefit with respect to the matters referred to herein and is not to be relied upon by any other person, firm or entity or in respect of any other matter. Based upon and subject to the foregoing we are of the opinion that: 1. The Company is in good standing (meaning that it has not failed to make any filing with any Bermuda governmental authority or to pay any Bermuda government fee or tax which might make it liable to be struck off the Register of Companies and thereby cease to exist under the laws of Bermuda) under the laws of Bermuda. Opinion of Cayman Islands Counsel to the Company ------------------------------------------------ -3- 2. The execution and delivery of the Agreement by the Company thereunder and the performance by the Company of its obligations thereunder and the borrowing thereunder will not violate any applicable law, regulation, order or decree in Bermuda. 3. No order, consent, approval, license, authorization or validation of or exemption by any governmental or public body or authority of Bermuda or any subdivision thereof is required to authorize or is required in connection with the execution, ???????^ of the Agreement or the borrowing thereunder. 4. It is not necessary or desirable to ensure the enforceability in Bermuda of the Agreement that it be registered in any register kept by, or filed with, any governmental or regulatory body in Bermuda. 5. There is no income or other tax of Bermuda imposed by withholding or otherwise on any payments to be made to or by the Company under the Agreement. The Agreement ???????^ duty in Bermuda and no registration, documentary, recording, transfer ?????^ fee or charge is payable in Bermuda in connection with the execution, delivery, filing, registration or performance of the Agreement. 6. The Company is not entitled to sovereign immunity under the laws of Bermuda, from any legal proceedings, whether in Bermuda or elsewhere, to enforce or to collect upon the Agreement, including, without limitation, immunity from service, immunity from jurisdiction of any court or tribunal or immunity of any of its property from attachment prior to entry of judgment or from attachment in aid of execution upon a judgment in respect of itself or its property. 7. The Agreement is in proper legal form under the laws of Bermuda for the admissability thereof into evidence in the courts of Bermuda. 8. The choice of the Foreign Laws as the governing law of the Agreement will be recognized and applied by Bermuda courts provided that such choice was made for bona fides purposes and is effective as a matter of the Foreign Laws. 9. The submission by the Company to the non exclusive jurisdiction of the Foreign Courts will be recognized and applied by the Bermuda courts. 10. The courts of Bermuda would recognize as a valid judgment, a final and conclusive ???????????^ obtained in the Foreign Courts against the Company based upon the Agreement under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of Bermuda, (c) such judgment was Opinion of Cayman Islands Counsel to the Company ------------------------------------------------ -4- not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy of Bermuda, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of Bermuda and (0 there is due compliance with the correct procedures under the laws of Bermuda. Yours faithfully CONYERS DILL & PEARMAN Opinion of Cayman Islands Counsel to the Company ------------------------------------------------ EXHIBIT A-3 [Form of Opinion of Special New York Counsel to the Company] September [_], 1997 To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: We have acted as special New York counsel to Mid Ocean Limited (the "Company"), a Cayman Islands corporation, in connection with the Credit Agreement (364-Day) (the "Credit Agreement") dated as of September 2, 1997, between the Company, the Banks named therein, and The Chase Manhattan Bank, as Administrative Agent providing for loans to be made by said lenders to the Company in an aggregate principal amount not to exceed $100,000,000. Terms defined in the Credit Agreement are used herein as defined therein. This opinion is being delivered pursuant to Section 6.01(b) of the Credit Agreement. In rendering the opinions expressed below, we have examined the Credit Agreement. In our examination, we have assumed the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon representations made in or pursuant to the Credit Agreement. In our examination, we have assumed, with respect to the Credit Agreement that: (i) the Credit Agreement has been duly authorized by, has been duly executed and delivered by, and (except, to the extent expressly set forth in the opinions expressed below, as to the Company) constitutes the legal, valid, binding and enforceable obligations of, all of the parties thereto; (ii) all signatures to the Credit Agreement have been duly authorized; and (ill) all of the parties to the Credit Agreement are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform the Credit Agreement. Opinion of Special New York Counsel to the Company -------------------------------------------------- -2- Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that the Credit Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally (including the judicial application of similar laws of any Company Jurisdiction) and except as the enforceability of the Credit Agreement is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. The foregoing opinions are subject to the following comments and qualifications: (A) The enforceability of Section 11.03 of the Credit Agreement may be limited by laws limiting the enforceability of provisions exculpating or exempting a party, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves gross negligence, recklessness, willful misconduct or unlawful conduct (B) The enforceability of provisions in the Credit Agreement to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. (C) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Bank is located (other than the State of New York) that limit the interest, fees or other charges such Bank may impose, (ii) Section 4.07(c) of the Credit Agreement, (iii) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to the Credit Agreement, (iv) the waiver of inconvenient forum set forth in Section 11.10 of the Credit Agreement with respect to proceedings in the United States District Court for the Southern District of New York, (v) Section 11.13 or 11.14(c) of the Credit Agreement and (vi) Section 11.10 of the Credit Agreement to the extent it purports to be a waiver of immunity acquired after the execution and delivery of the Credit Agreement. (D) We point out with reference to obligations stated to be payable in a currency other than Dollars that (i) a New York statute provides that a judgment rendered by a court of the State of New York in respect of an obligation denominated in any such other currency would be rendered in such other currency and would be converted into Dollars at the rate of exchange prevailing on the date of entry of the judgment and (ii) a judgment rendered by a Federal court sitting in the State of New York in respect of an obligation Opinion of Special New York Counsel to the Company -------------------------------------------------- -3- denominated in any such other currency may be expressed in Dollars, but we express no opinion as to the rate of exchange such Federal court would apply. The foregoing opinions are limited to matters involving the Federal laws of the United States of America and the law of the State of New York, and we do not express any opinion as to the laws of any other jurisdiction. At the request of our clients, this opinion letter is, pursuant to Section 6.01(b) of the Credit Agreement, provided to you by us in our capacity as special New York counsel to the Company may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent. Very truly yours, Opinion of Special New York Counsel to the Company -------------------------------------------------- EXHIBIT B [Form of Opinion of Special New York Counsel to Chase] September [_], 1997 To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: We have acted as special New York counsel to The Chase Manhattan Bank ("Chase") in connection with the Credit Agreement (364-Day) dated as of ----- September 2, 1997 (the "Credit Agreement") between Mid Ocean Limited (the --------------- "Company"), the Banks named therein, and Chase, as Administrative Agent, ------- providing for loans to be made by said lenders to the Company in an aggregate principal amount not to exceed $100,000,000. Terms defined in the Credit Agreement are used herein as defined therein. This opinion is being delivered pursuant to Section 6.01(c) of the Credit Agreement. In rendering the opinions expressed below, we have examined the Credit Agreement. In our examination, we have assumed the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon representations made in or pursuant to the Credit Agreement. In rendering the opinions expressed below, we have assumed that: (i) the Credit Agreement has been duly authorized by, has been duly executed and delivered by, and (except to the extent expressly set forth in the opinions below as to the Company) constitutes the legal, valid, binding and enforceable obligations of, all of the parties thereto; (ii) all signatories to the Credit Agreement have been duly authorized; and (iii) all of the parties to the Credit Agreement are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform the Credit Agreement Opinion of Special Counsel to Chase ----------------------------------- EXHIBIT C [Form of Confidentiality Agreement] CONFIDENTIALITY AGREEMENT [Date] [Insert Name and Address of Prospective Participant or Assignee] Re: Credit Agreement (364-Day) dated as of September 2, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement"), between Mid Ocean Limited (the "Company"), the lenders named therein, and The Chase Manhattan Bank, as Administrative Agent, providing for Loans in an aggregate principal amount not to exceed $100,000,000. Dear Ladies and Gentlemen: As a Bank party TO the Credit Agreement, we have agreed with the Company pursuant to Section 11.12 of the Credit Agreement to use reasonable precautions to keep confidential, except as otherwise provided therein, all non- public information identified by the Company as being confidential at the time the same is delivered TO us pursuant to the Credit Agreement. As provided in said Section 11.12, we are permitted to provide you, as a prospective [holder of a participation in the Loans (as defined in the Credit Agreement)] [assignee Bank], with certain of such non-public information subject to the execution and delivery by you, prior TO receiving such non-public information, of a Confidentiality Agreement in this form. Such information will not be made available to you until your execution and return to us of this Confidentiality Agreement Accordingly, in consideration of the foregoing, you agree (on behalf of yourself and each of your Affiliates, directors, officers, employees and representatives and for the benefit of us and the Company) that (A) such information will not be used by you except in connection with the proposed [participation][assignment] mentioned above and (B) you agree TO keep confidential, in accordance with your customary procedures for handling confidential information and in accordance with safe and sound banking practices, to keep such information confidential, provided that nothing herein -------- shall limit the disclosure of any such non-public information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to your counsel or to Confidentiality Agreement ------------------------- -2- counsel for any of the Banks or the Administrative Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Administrative Agent or any other Bank (or to Chase Securities Inc.), (v) in connection with any litigation to which you or any one or more of the Banks or the Administrative Agent are a party, (vi) to a subsidiary or Affiliate of yours as provided in Section 11.12(a) of the Credit Agreement or (vii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to you a Confidentiality Agreement substantially in the form hereof; provided, further, -------- ------- hat in no event shall you be obligated to return any materials furnished to you pursuant to this Confidentiality Agreement. If you are a prospective assignee, your obligations under this Confidentiality Agreement shall be superseded by Section 11.12 of the Credit Agreement on the date upon which you become a Bank under the Credit Agreement pursuant to Section 11.06 thereof. Please indicate your agreement to the foregoing by signing as provided below the enclosed copy of this Confidentiality Agreement and returning the same to us. Very truly yours, [INSERT NAME OF BANK] By______________________ The foregoing is agreed to as of the date of this letter. [INSERT NAME OF PROSPECTIVE PARTICIPANT OR ASSIGNEE] By____________________ Confidentiality Agreement ------------------------- -3- denominated in any such other currency may be expressed in Dollars, but we express no opinion as to the rate of exchange such Federal court would apply. The foregoing opinions are limited to matters involving the Federal laws of the United States of America and the law of the State of New York, and we do not express any opinion as to the laws of any other jurisdiction. This opinion letter is pursuant to Section 6.01(c) of the Credit Agreement, provided to you by us in our capacity as special New York counsel to Chase and may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent. Very truly yours, CDP/WJM Opinion of Special Counsel to Chase ----------------------------------- EXHIBIT D [Form of Assignment and Acceptance] ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement (364-Day) dated as of September 2, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement") among Mid Ocean Limited, the lenders the named therein ---------------- and The Chase Manhattan Bank, as Administrative Agent. Terms defined in the Credit Agreement are used herein as defined therein. _____________________ (the "Assignor") and _____________________ (the "Assignee") agree as follows: 1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date as set forth in Schedule 1 hereto (the "Effective Date"), an -------------- interest (the "Assigned Interest") in and to the Assignor's rights and ----------------- obligations under the Credit Agreement in an amount as set forth on Schedule 1 hereto. 2. The Assignor (i) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other instrument or document furnished pursuant thereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that it has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; and (ii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or any other obligation or the performance or observance by the Company of its respective obligations under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto. 3. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 7.02 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other instrument or document finished pursuant hereto or thereto; (iv) appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers and discretion under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereto together with such powers as are incidental thereto; Assignment and Acceptance ------------------------- -2- and (v) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. 4. Following the execution of this Assignment and Acceptance. it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent pursuant to Section 11.06(b) of the Credit Agreement, effective as of the Effective Date (which date shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance and recording by the Administrative Agent, provided -------- that in no event shall the Effective Date be earlier than the date of delivery of this Assignment and Acceptance to the Administrative Agent). 5. Upon such acceptance and recording, from and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignee which accrue subsequent to the Effective Date. 6. From and after the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and shall be bound by the provisions thereof and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement except as provided in Section 11.07 of the Credit Agreement. 7. This Assignment and Acceptance shall be governed by and construed in accordance with the law of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Assignment and Acceptance by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule I hereto. Assignment and Acceptance ------------------------- Schedule 1 to Assignment and Acceptance relating to the Credit Agreement (364-Day) dated as of September 2, 1997 among Mid Ocean Limited, the lenders named therein and The Chase Manhattan Bank, as Administrative Agent Name of Assignor: Name of Assignee: Effective Date of Assignment: Amount of Commitment Assigned: The outstanding principal amount of Loans made to the Company being assigned hereby and the respective names of the Currencies in which such Loans are denominated: Outstanding Principal Name of Currency Amount of Loans or Currencies of Assigned ($) Loans Assigned ------------ -------------- _________________________ Total: Assignment and Acceptance ------------------------- -2- [ASSIGNEE] [ASSIGNOR] By______________________ By_____________________ Title: Title: Consented to and Accepted: THE CHASE MANHATTAN BANk, as Administrative Agent By__________________________ Title: Consented to: MID OCEAN LIMITED By__________________________ Title: By__________________________ Title: Assignment and Acceptance ------------------------- EXHIBIT E [Form of Promissory Note] PROMISSORY NOTE __________ 1997 FOR VALUE RECEIVED, Mid Ocean Limited, a corporation organized under the laws of the Cayman Islands (the "Company"), hereby promises to pay to ------- ___________________ (the "Bank), for account of its respective Applicable ---- Lending Offices provided for by the Credit Agreement referred to below, at the Administrative Agent's Account for the respective Currencies of the Loans evidenced hereby, such amount as shall equal the aggregate unpaid principal -------------------- amount of the Loans made by the Bank to the Company under the Credit Agreement, in the respective Currencies in which such Loans are denominated and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such account, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, Currency, interest rate and duration of Interest Period (if applicable) of each Loan made by the Bank to the Company, and each payment made on account of the principal thereof, shall be recorded by the Bank on its books and endorsed by the Bank on the schedule attached hereto or any continuation thereof, provided that the failure of the Bank to make any -------- such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Loans made by the Bank. This Note evidences Loans made by the Bank to the Company under the Credit Agreement (364-Day) dated as of September 2, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement") between ---------------- Mid Ocean Limited, the lenders named therein (including the Bank), and The Chase Manhattan Bank, as Administrative Agent, providing for Loans in an aggregate principal amount not to exceed $100,000,000. Terms used but not defined in this Note have the respective meanings assigned to them in the Credit Agreement. Promissory Note --------------- -2- The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 11.06 of the Credit Agreement, this Note may not be assigned by the Bank to any other Person. This note shall be governed by, and construed in accordance with, the law of the State of New York. MID OCEAN LIMITED By____________________ Title: By____________________ Title: Promissory Note --------------- -3- SCHEDULE OF LOANS This Note evidences Loans made under the within-described Credit Agreement to the Company, on the dates, in the principal amounts, of the Types, bearing interest at the rates and having Interest Periods (if applicable) of the durations set forth below, subject to the payments and prepayments of principal set forth below:
Principal Maturity Unpaid Amount Type Date Amount Prin- Notation Date of of Interest of Paid or cipal Made Made Loan Loan Currency Rate Loan Prepaid Amount by - - ----- ------ ----- -------- --------- ------- ------- ------ ---
Promissory Note --------------- EX-10.14.4 18 AMENDMENT NO. 1 CREDIT AGREEMENT (364-DAY) Exhibit 10.14.4 AMENDMENT NO. 1 TO CREDIT AGREEMENT (364-DAY) AMENDMENT NO. 1 dated as of August 5, 1998, between MID OCEAN LIMITED, a corporation duly organized and validly existing under the laws of the Cayman Islands (the "Company"); each of the lenders that is a signatory hereto ------- (individually, a "Bank" and collectively, the "Banks"); and THE CHASE MANHATTAN ---- ----- BANK, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). -------------------- The Company, the Banks and the Administrative Agent are parties to a Credit Agreement (364-Day) dated as of September 2, 1997 (the "Credit ------ Agreement"), providing, subject to the terms and conditions thereof, for loans - - --------- to be made by said Banks to the Company in an aggregate principal amount not exceeding $100,000,000. The Company, the Banks and the Administrative Agent wish to amend the Credit Agreement in certain respects, and accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this ----------- Amendment No. 1, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Upon the execution of this Amendment No. 1 by ---------- the Company and the Majority Banks, the Credit Agreement shall be amended as follows (except for the amendment to the definition of the term Commitment Termination Date in Section 2.02 below, which amendment shall be effective only if this Amendment is executed by all of the Banks): 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement shall be amended by adding the following new definitions (to the extent not already included in said Section 1.01) and inserting the same in the appropriate alphabetical locations and amending the following definitions (to the extent already included in said Section 1.01), as follows: "Applicable Facility Fee Rate" and "Applicable Margin" shall ---------------------------------------------------- mean, during any period when any Rating Group set forth below is applicable, with respect to any facility fee payable hereunder or any Type of Loan outstanding hereunder, the percentage set forth below opposite such fee or Type of Loan under such Rating Group: Rating Rating Fee or Loan Group Group I II -------------------------------------------------------- Facility Fee 0.05% 0.07% -------------------------------------------------------- Eurocurrency Loans 0.20% 0.25% -------------------------------------------------------- Base Rate Loans 0.00% 0.00% -------------------------------------------------------- Amendment No. 1 to Credit Agreement (364-Day) --------------------------------------------- -2- For the purposes of this Agreement, any change in the Applicable Facility Fee Rate or Applicable Margin for any facility fee or any outstanding Loans by reason of (a) a change in the Standard & Poor's Rating shall become effective on the date of the announcement or publication of a change in such rating or, in the absence of such announcement or publication, on the effective date of such changed rating and (b) any other change in the Rating Group shall become effective on the date of the occurrence of the event that resulted in such change in the Rating Group. "Change of Control" shall mean (a) the acquisition of ownership, ----------------- directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof), other than Exel or Exel Holdings, of shares representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (b) occupation of a majority of the seats (other than vacant seats) on the Board of Directors by Persons who were not (i) nominated by the Board of Directors, (ii) appointed by directors so nominated or (iii) elected by EXEL or Exel Holdings in their capacities as shareholders of the Company. "Commitment Termination Date" shall mean August 4, 1999, subject to --------------------------- extension as provided in Section 2.10 hereof; provided that, if such date is not -------- a Business day, the Commitment Termination Date shall be the next preceding Business Day. "EXEL" shall mean EXEL Limited, a corporation duly organized and ---- validly existing under the laws of the Cayman Islands. "Exel Holdings" shall mean any Person that owns directly or indirectly ------------- all or substantially all of the aggregate ordinary voting power represented by the issued and outstanding capital stock of EXEL. "Exel Group" shall mean EXEL; Exel Holdings and, at any time, each ---------- Subsidiary of either Exel or Exel Holdings that as of such time meets the definition of a "significant subsidiary" contained as of the date hereof in Regulation S-X of the SEC. "Mid Ocean Reinsurance" shall mean Mid Ocean Reinsurance Company --------------------- Limited, a Wholly-Owned Insurance Subsidiary of the Company, any successor thereto, and from and after the XL Reinsurance Amalgamation, the resulting Person. "Rating Group" shall mean either Rating Group I or Rating Group II. ------------ "Rating Group I" shall mean (a) no Event of Default has occurred and is -------------- continuing and (b) the Standard & Poor's Rating is at or above AA-; Rating Group ------------ II shall mean that Rating Group I is not in effect. - - -- "XL Insurance" shall mean XL Insurance Company, Ltd., a corporation ------------ duly organized and validly existing under the laws of Bermuda, all of whose capital stock is owned by EXEL. "XL Reinsurance Amalgamation" shall mean the amalgamation of XL. --------------------------- Global Reinsurance Company, Ltd. with Mid Ocean Reinsurance in accordance with Bermuda law. Amendment No. 1 to Credit Agreement (364-Day) --------------------------------------------- -3- 2.03. The definition of "Indebtedness" in Section 1.01 of the Credit Agreement is hereby amended by replacing "and" at the end of clause (i) thereof with a comma and by replacing the period at the end of clause (ii) thereof with the following: "and (iii) liabilities arising in the ordinary course of business of an insurance Subsidiary as an insurance company or a corporate member of Lloyd's and not arising in connection with the borrowing of money or other financing activities of such Insurance Subsidiary or an Affiliate thereof." 2.04. Clause (b) of Section 2.04 of the Credit Agreement is hereby amended to read in its entirety as follows: "(b) Utilization Fee. The Company shall pay to the Administrative --------------- Agent for account of each Bank, (a) during any period that the aggregate outstanding principal amount of Loans is greater than 33% but less than or equal to 66% of the aggregate amount of the Commitments, a utilization fee on the daily average aggregate outstanding principal amount of such Bank's Loans at a rate per annum equal to 0.025% per annum and (b) during any period that the aggregate outstanding principal amount of Loans exceeds 66% of the aggregate amount of the Commitments, a utilization fee on the daily average aggregate outstanding principal amount of such Bank's Loans at a rate per annum equal to 0.050% per annum. Accrued utilization fee shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and the Commitment Termination Date interest on such Bank's Loans are payable." 2.05. Section 6.02 of the Credit Agreement is hereby amended by replacing "; and", and by inserting a new clause (c) after clause (b) thereof as follows: "(c) the Company has delivered to the Administrative Agent for each Bank with the notice of borrowing, Federal Reserve Forms U-1 duly completed and, if the Company fails to deliver such Federal Reserve Forms U-1, it shall be deemed to have represented and warranted that immediately after giving effect to such Loan, not more than 25% of the value (as determined by any reasonable method) of the Property subject to Section 8.04 or 8.05 hereof consists of Margin Stock." 2.06. Section 7.07 of the Credit Agreement is hereby amended to read in its entirety as follow: "7.07 Use of Credit. No part of the proceeds of the Loans hereunder ------------- will be used to buy or carry any Margin Stock; provided that at any time that -------- at any time that the Company is a Wholly-Owned Subsidiary of Exel Holdings, proceeds of Loans hereunder may be used to buy or redeem capital stocl of EXEL or Exel Holdings or to make payments of cash in lieu of shares of Exel Holdings to holders of common stock of EXEL or of the Company who would otherwise be entitled to receive shares of common stock of Exel Holdings in connection with the acquisition by EXEL Holdings of the capital stock of the Company if, immediately after giving effect to the making of any such Loan hereunder, not more than 25% of the value (as determined by any Amendment No.1 to Credit Agreement (364-Day) -------------------------------------------- -4- reasonable method) of the Property subject to Section 8.04 or 8.05 hereof consists of Margin Stock." 2.07. Section 8.04(b) of the Credit Agreement is hereby amended to read in its entirety as follows: "(b) the Company or any Material Subsidiary may merge, amalgamate or consolidate with any other Person if (i) in the case of a merger, amalgamation or consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving or resulting corporation is, immediately after giving effect to such merger, amalgamation or consolidation, a Wholly-Owned Subsidiary of the Company and (ii) immediately after giving effect thereto no Default would exist hereunder." 2.08. Section 8.12 of the Credit Agreement is hereby amended to read in its entirety as follows: "8.12 Indebtedness. The Company will not permit Mid Ocean ------------ Reinsurance, any Affiliate or Subsidiary of the Company having direct or indirect ownership of Mid Ocean Reinsurance or any Subsidiary of Mid Ocean Reinsurance to, create, incur or suffer to exist any Debt or any Guarantee of Indebtedness of any other Person, except for: (i) Debt or Guarantees of Indebtedness outstanding on the date hereof and listed in Schedule IV hereto; (ii) Indebtedness of X.L. Global Reinsurance Company, Ltd. outstanding on the date of the XL Reinsurance Amalgamation to the extent that such Indebtedness was outstanding before the XL Reinsurance Amalgamation and not created in anticipation thereof; and (iii) from and after the XL Reinsurance Amalgamation, Indebtedness of Mid Ocean Reinsurance incurred pursuant to (a) the certain Revolving Credit Agreement (364-Day) dated as of June 6, 1997, as amended in contemplation of the XL Reinsurance Amalgamation, between XL Insurance and X.L. Reinsurance Company, Ltd., as Borrowers, XL Insurance and Exel Acquisition Ltd., as Guarantors, the Banks party thereto and Mellon Bank N.A., as Agent, in an aggregate principal amount not to exceed $50,000,000 and (b) that certain Revolving Credit Agreement (5-Year) dated as of June 6, 1997, as amended in contemplation of the XL Reinsurance Amalgamation, between XL Insurance and X.L. Reinsurance Company, Ltd., as Borrowers, XL Insurance and Excel Acquisition Ltd., as Guarantors, the Banks party thereto and Mellon Bank N.A., as Agent, in an aggregate principal amount not to exceed $50,000,000. 2.09. Sections 8.01(c) and 8.01(d) of the Credit Agreement are hereby amended to read in their entirety as follows: "(c) within 5 days after filing with the Applicable Insurance Regulatory Authority and in any event no later than 5 days after the date by which it is required to be filed by the Applicable Amendment No. 1 to Credit Agreement (364-Day) --------------------------------------------- -5- Insurance Regulatory Authority the quarterly Statutory Statement of each Material Insurance Subsidiary, together with a certificate of a senior financial officer of the Company or of such Subsidiary stating that such Statutory Statement fairly presents, in all material respects, the financial condition of each Material Insurance Subsidiary, respectively, for the period covered thereby in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority; (d) within 5 days after filing with the Applicable Insurance Regulatory Authority and in any event no later than 5 days after the date by which it is required to be filed by the Applicable Insurance Regulatory Authority the annual Statutory Statement of each Material Insurance Subsidiary, together with an Officer's Certificate stating that such annual Statutory Statement fairly presents, in all material respects, the financial condition of each Material Insurance Subsidiary, respectively, for the period covered thereby in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority." 2.10. Section 9(b) of the Credit Agreement is hereby amended by replacing "The Company or any of its Subsidiaries" with "The Company or any of its Subsidiaries or any member of the Exel Group" therein. 2.11. Sections 9(e), 9(f) and 9(g) of the Credit Agreement are hereby amended by (i) replacing "The Company or any of its Material Subsidiaries" with "The Company or any of its Material Subsidiaries or any member of the Exel Group" therein and (ii) replacing "Company or such Subsidiary" with "Company, such Subsidiary of the Company or such member of the Exel Group" in 9(f) and 9(g) therein. 2.12. Section 9 of the Credit Agreement is hereby amended by replacing ";" in clause (i) thereof with ";or" and by adding a new clause (j) after clause (i) follows: "(j) Exel Holding shall, at any time, enter into a Guarantee ("EXEL Guarantee") of any Indebtedness of EXEL or XL Insurance without also -------------- Guaranteeing the Indebtedness of the Company hereunder pursuant to a guaranty agreement substantially similar to the EXEL Guarantee." Section 3. Miscellaneous. Except as herein provided, the Credit ------------- Agreement shall remain unchanged and in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of New York. Amendment No. 1 to Credit Agreement (364-Day) -------------------------------------------- -6- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. MID OCEAN LIMITED By /s/ Michael A. Butt ---------------------------- Michael A. Butt President and Chief Executive Officer BANKS ----- THE CHASE MANHATTAN BANK By /s/ ---------------------------- Title: Vice President CITIBANK N.A. By /s/ Malcolm Constable ---------------------------- Title: Malcolm Constable, VP Vice President Citibank, N.A. DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /s/ John S. McGill ---------------------------- Title: John S. McGill Vice President By /s/ Eckhard Osenberg ---------------------------- Title: Eckhard Osenberg Vice President Amendment No. 1 to Credit Agreement (364-Day) -7- MELLON BANK, N.A. By /s/ ----------------------------- Title: Vice President ROYAL BANK OF CANADA By /s/ ----------------------------- Title: Service Manager THE BANK OF BERMUDA LIMITED By /s/ ----------------------------- Title: Assistant Vice President, Corporate Banking CREDIT LYONNAIS NEW YORK BRANCH By /s/ Sebastian Rocco ----------------------------- Sebastian Rocco Title: Senior Vice President STATE STREET BANK AND TRUST COMPANY By /s/ Edward M. Anderson ----------------------------- Edward M. Anderson Title: Amendment No. 1 to Credit Agreement (364-Day) -8- BANQUE NATIONALE DE PARIS By /s/ Frances Melville -------------------------------- Title: Frances Melville Assistant Treasurer By /s/ Veronique Marcus -------------------------------- Title: Veronique Marcus Assistant Vice President THE BANK OF NOVA SCOTIA By /s/ Todd Miller -------------------------------- Title: Todd Miller Senior Relationship Manager Amendment No. 1 to Credit Agreement (364-Day) EX-10.14.5 19 LOAN AGREEMENT Exhibit 10.14.5 LOAN AGREEMENT between X.L. AMERICA, INC. as Borrower, and X.L. INSURANCE COMPANY, LTD. and X.L. INVESTMENTS LTD., as Guarantors, and THREE RIVERS FUNDING CORPORATION, as Lender, dated as of December 22, 1998 Table of Contents ----------------- ARTICLE I DEFINITIONS: CONSTRUCTION...........................................1 1.01. Certain Definitions.................................................1 1.02. Construction........................................................7 1.03. Accounting Principles...............................................8 ARTICLE II THE LOANS..........................................................8 2.01. The Loans...........................................................8 2.02. The Note............................................................8 2.03. Loan Request........................................................9 2.04. Commitment..........................................................9 2.05. Mandatory and Optional Prepayments..................................9 2.06. Interest; Fees.....................................................10 2.07. Proceeds...........................................................10 2.08. Taxes..............................................................10 2.09. Increased Cost and Reduced Return..................................11 ARTICLE III REPRESENTATIONS AND WARRANTIES...................................12 3.01. Organization and Qualification.....................................12 3.02. Corporate Power and Authorization..................................12 3.03. Financial Information..............................................12 3.04. Litigation.........................................................12 3.05. No Adverse Changes.................................................12 3.06. No Conflicting Laws or Agreements; Consents and Approvals..........12 3.07. Execution and Binding Effect.......................................13 3.08. Taxes..............................................................13 3.09. Use of Proceeds....................................................13 3.10. Permits, Licenses and Rights.......................................13 3.11. Accurate and Complete Disclosure...................................13 3.12. Absence of Violations..............................................13 3.13. Environmental Matters..............................................13 3.14. Not an Investment Company..........................................14 ARTICLE IV CONDITIONS OF LENDING.............................................14 4.01. Effectiveness......................................................14 4.02. Borrowings.........................................................14 ARTICLE V AFFIRMATIVE COVENANTS..............................................15 5.01. Reporting and Information Requirements.............................15 5.02. Preservation of Existence and Franchises...........................16 5.03. Insurance..........................................................16 5.04. Maintenance of Properties..........................................16 5.05. Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities......................16 5.06. Financial Accounting Practices.....................................17 5.07. Compliance with Applicable Laws....................................17 5.08. Use of Proceeds....................................................17 5.09. Continuation Of and Change In Business.............................17 5.10. Visitation.........................................................17 i ARTICLE VI NEGATIVE COVENANTS................................................17 6.01. Mergers and Acquisitions...........................................17 6.02. Dispositions of Assets.............................................18 6.03. Liens..............................................................18 6.04. Transactions With Affiliates.......................................19 6.05. Business...........................................................19 6.06. Ratio of Total Funded Debt to Consolidated Tangible Net Worth......19 6.07. Consolidated Net Worth.............................................19 6.08. Indebtedness.......................................................19 6.09. Operating Leverage.................................................20 6.10. Private Act........................................................20 ARTICLE VII EVENTS OF TERMINATION............................................20 7.01. Events of Termination..............................................20 7.02. Remedies...........................................................21 ARTICLE VIII GUARANTEE.......................................................22 8.01. The Guarantee......................................................22 8.02. Obligations Unconditional..........................................22 8.03. Reinstatement......................................................23 8.04. Remedies...........................................................23 8.05. Continuing Guarantee...............................................23 8.06. No Restrictions....................................................23 ARTICLE IX MISCELLANEOUS.....................................................24 9.01. Amendments and Waivers.............................................24 9.02. Notices............................................................24 9.03. Survival of Representations and Warranties.........................24 9.04. Payment of Expenses and Taxes......................................24 9.05. Successors and Assigns; Participations.............................25 9.06. Set-Off............................................................26 9.07. Counterparts.......................................................26 9.08. Severability.......................................................26 9.09. Integration........................................................26 9.10. Governing Law......................................................26 9.11. Submission To Jurisdiction Waivers.................................26 9.12. Acknowledgments....................................................27 9.13. Waiver Of Jury Trial...............................................27 9.14. No Bankruptcy Petition Against Lender..............................27 9.15. No Recourse........................................................27 9.16. Holidays...........................................................27 9.17. Judgment Currency..................................................28 9.18. Records............................................................28 9.19. Confidentiality....................................................28 Exhibit A Form of Promissory Note Exhibit B Form of Loan Request Exhibit C Contents of Opinions of Counsel Schedule 3.01 Subsidiaries Schedule 6.03(a) Liens Schedule 6.08(d) Indebtedness ii LOAN AGREEMENT, dated as of December 22, 1998, by and between X.L. AMERICA, INC., a Delaware corporation (the "Borrower"), X.L. INSURANCE COMPANY, LTD. ("X.L. Insurance"), a Bermuda limited liability corporation, and X.L. INVESTMENTS LTD. ("X.L. Investments"), a Bermuda limited liability corporation, (X.L. Insurance and X.L. Investments are referred to herein individually as "Guarantor" and collectively as the "Guarantors"), and THREE RIVERS FUNDING CORPORATION a Delaware corporation (the "Lender"). PRELIMINARY STATEMENT WHEREAS, the Lender has agreed to make Loans available to the Borrower upon all of the terms and conditions herein set forth; and WHEREAS, the Lender intends to fund the Loan by (a) the issuance of Commercial Paper or (b) if the Lender is unable for any reason to issue Commercial Paper, by borrowings under the Funding Agreements. NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Borrower and the Lender agree as follows. ARTICLE I --------- DEFINITIONS: CONSTRUCTION ------------------------- 1.01. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Affected Party" means the Lender and each Person providing liquidity or credit support to the Lender pursuant to the Funding Agreement and each of their respective Affiliates and assigns. "Affiliate" means, with respect to any specified Person, any other Person which directly or indirectly, controls, or which is controlled by, or which is under common control with, such specified Person. "Agreement" shall mean this Agreement as amended, modified or supplemented from time to time. "Assets" at any time shall mean the assets of a Credit Party, as the context requires, at such time, determined in accordance with GAAP or SAP, as appropriate. "Bermuda Companies Law" shall mean The Companies Act of 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "Bermuda Insurance Law " shall mean The Insurance Act of 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania, of the State of New York or of Bermuda or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania or New York, New York or Bermuda. (The parties contemplate that on or shortly after the Closing Date they will exchange and agree upon a list of public holidays for 1999). "Capitalized Lease Obligation" shall mean any lease obligation which is required to be capitalized in accordance with GAAP. 1 "Change in Control" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the Securities & Exchange Commission) of more than 40% of the voting securities of EXEL Limited; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of EXEL Limited; or (c) a majority of the members of EXEL Limited'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 EXEL Limited's shareholders. "Closing Date" shall mean December 23, 1998 or such later date as may be specified by the Borrower by one day's written notice to the Lender. "Collateral" shall have the meaning given that term in the Pledge Agreement. "Collateral Agent" means Bankers Trust Company, a New York state bank, in its capacity as Collateral Agent under the Third Amended and Restated Security Agreement, dated as of September 10, 1998, between the Lender and such Collateral Agent. "Commercial Paper" means the commercial paper notes of the Lender issued in the United States commercial paper market. "Commitment" means the obligation of the Lender to make Loans to the Borrower under this Agreement in a maximum principal amount outstanding at any time equal to $150,000,000, as such amount may be reduced in accordance with the provisions of Section 2.04 hereof. "Commitment Expiration Date" means the earliest of (i) December 21, 1999, which may be extended from time to time for an additional period or periods commencing on the then scheduled Commitment Expiration Date, by written notice of request given by the Borrower to the Lender, specifying the duration of the period of extension requested, at least 120 days before such scheduled Commitment Expiration Date, and by written notice of acceptance (which acceptance may be given or withheld by the Lender in its sole discretion) by the Lender to the Borrower not later than ninety (90) days prior to such scheduled Commitment Expiration Date, provided, that the new scheduled Commitment Expiration Date shall in no event result in a remaining term of the commitment that exceeds 360 days, (ii) the date that the Lender shall give notice of the termination of the Commitment pursuant to Article VII of this Agreement, and (iii) the first date on which there shall no longer be the Funding Agreement in effect (as to which the Lender shall promptly notify the Borrower after obtaining notice of such termination); provided, further, that if any Commitment Expiration Date is not a Business Day it shall occur on the next preceding Business Day. "Consolidated Net Worth" shall mean at any date the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries. "Consolidated Tangible Net Worth" shall mean at any date the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to November 30, 1997, in the book value of any asset owned by the Borrower or a consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. 2 "Control Agreement" means the Control and Consent Acknowledgement and Agreement Concerning Pledged Accounts, dated of even date herewith, by and between X.L. Investments, the Lender, Mellon Bank, N. A., in its capacity as Custodian under the Custody Agreement (as defined therein) and Mellon Bank, N. A., in its capacity as Referral Agent for the Lender. "Cost of Funds" means, with respect to any Settlement Period, an amount, as notified in writing by the Lender to the Borrower on or prior to the related Determination Date, equal to the interest, discount or carrying cost for funding the Loans hereunder during such Settlement Period, either from the issuance of Commercial Paper, the taking of loans, the sale of interests in the Loans made hereunder or otherwise, computed by reference to the weighted average Cost of Funds Rate for such Settlement Period. "Cost of Funds Amount" means, with respect to each Settlement Period, the sum of (a) the Cost of Funds for such Settlement Period, plus (b) the product of (1) the Program Fee Rate times the average Outstanding Principal Amount during such Settlement Period times (2) a fraction, the numerator of which is the actual number of days in such Settlement Period and the denominator of which is 360, plus (c) the product of (1) the Facility Fee Rate times the average Commitment in effect during such Settlement Period and (2) a fraction, the numerator of which is the actual number of days in such Settlement Period and the denominator of which is 360. "Cost of Funds Rate" means, with respect to the computation of the Cost of Funds for a Settlement Period, (i) to the extent the funding for the Loans during such Settlement Period is obtained through the issuance of Commercial Paper, the effective yield of such Commercial Paper (including any dealer's discount or fees) during such Settlement Period, (ii) to the extent funding for the Loans during such Settlement Period is obtained through the sale of interests in the Loans pursuant to the Funding Agreement, the sum of the LIBOR Rate for such Settlement Period plus .625% per annum, and (iii) to the extent funding for the Loans during such Settlement Period is obtained through the taking of loans or otherwise or pursuant to any Program Support Agreement, the rate provided in the operative documents governing the same during such Settlement Period. "Credit Parties" means the Borrower and the Guarantors and "Credit Party" means any of them. "Determination Date" means, with respect to any Settlement Date, the second Business Day immediately preceding such Settlement Date. "Dollar," "Dollars" and the symbol $ shall mean lawful money of the United States of America. "Dollar Equivalent" of an amount of a currency other than Dollars shall mean the amount of Dollars which such amount of such currency could purchase at 11:00 o'clock A.M., New York City time on the date of determination, based upon the quoted spot rates of Mellon at which its applicable branch or office offers to exchange Dollars for such currency in the foreign exchange market and "Dollar Equivalent" of an amount denominated in Dollars shall mean such amount of Dollars. "Dollar Equivalent Amount" of any Pledged Security shall mean (i) with respect to any Pledged Security denominated in a currency other than Dollars, the Dollar Equivalent of the market value of such Pledged Security as most recently determined at the time in question in accordance with the Pledge Agreement and (ii) with respect to a Pledged Security denominated in Dollars, the market value of such Pledged Security as most recently determined at the time in question in accordance with the Pledge Agreement. "Environmental Concern Materials" shall mean (a) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in CERCLA or any similar Law), (b) any toxic chemical or other substance from or related to 3 industrial, commercial or institutional activities, and (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea formaldehyde. "Environmental Law" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Environmental Concern Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (d) regulation of the manufacture, use or introduction into commerce of Environmental Concern Materials, including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. "Event of Termination" shall mean any of the Events of Termination described in Section 7.01 hereof. "Excluded Taxes" shall have the meaning given such term in Section 2.08 hereof. "EXEL Limited" shall mean EXEL Limited, a corporation organized under the laws of the Cayman Islands, British West Indies. EXEL Limited is the indirect sole shareholder of X.L. Insurance Company, Ltd., except for a nominal number of shares owned by two nominee shareholders required by the Bermuda Companies Law. "Facility Fee" means, with respect to any Settlement Date, the monthly fee payable by the Borrower to the Lender on such Settlement Date computed on the basis of the Facility Fee Rate and the Commitment with respect to the related Settlement Period. "Facility Fee Rate" means the rate per annum set forth in a separate letter agreement between the Borrower and the Lender. "Funding Agreement" means the Funding Agreement dated as of December 21, 1998 between Mellon and the Lender. "GAAP" shall have the meaning set forth in Section 1.03 hereof. "Guaranteed Obligations" shall have the meaning given that term in Section 8.01 hereof. "Guarantor" and "Guarantors" shall have the meaning given those terms in the preamble to this Agreement. "Guaranteed Obligations" shall have the meaning given that term in Section 8.01 hereof. "Guaranty Equivalents" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Equivalent hereunder shall (subject to any limitations set -forth therein) be deemed to be an amount equal to 4 the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Equivalent is made. "Indebtedness" of a Person shall mean (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 company or corporate member of Lloyds (other than in connection with the financing activities of 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 Capitalized 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 Capitalized 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 Guaranty Equivalents of such Person. "Insurance Subsidiary" means any, present or future, direct or indirect Subsidiary of the Borrower that offers insurance products, including but not limited to X.L. Europe Insurance. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "LIBOR Rate" means, with respect to any date of determination, the rate at which deposits in dollars for a period of thirty (30) days are offered to the Referral Agent in the London Interbank market on such date in an amount approximately equal to the principal amount of the Loan or Loans being funded by a "funding institution" under the Funding Agreement. "Lien" shall mean 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. "Loan" or "Loans" shall have the meaning given such terms in Section 2.01 hereof. "Loan Documents" shall mean this Agreement, the Note, the Pledge Agreement and the Control Agreement and any other documents or instruments executed and delivered in connection herewith or therewith. "Loan Request" shall have the meaning given that term in Section 2.03 hereof. 5 "Material Adverse Effect" shall mean the occurrence of an event (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), which has or could reasonably be expected to have a materially adverse effect on: (a) the assets, business, financial condition or operations of a Credit Party and its Subsidiaries taken as a whole; or (b) the ability of a Credit Party to perform any of its payment or other material obligations under this Agreement or the Note; or (c) the legality, validity, binding effect or enforceability against a Credit Party of any Loan Document that by its terms purports to bind such Credit Party. "Mellon" shall mean Mellon Bank, N.A., a national banking association. "Note" shall have the meaning set forth in Section 2.02 hereof. "Obligations" shall mean the obligation of the Borrower to repay the aggregate unpaid principal amount of all loans, and pay all interest accrued thereon, all Facility Fees and Program Fees accruing and all other liabilities of the Borrower arising pursuant to the terms of this Agreement or the other Loan Documents. "Office," when used in connection with the Lender, shall mean its office located at Global Securitization Services, LLC, 25 West 43rd Street, Suite 704, New York, New York 10036, or at such other office or offices of the Lender or subsidiary or affiliate thereof as may be designated in writing from time to time by the Lender to the Borrowers. "Official Body" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Outstanding Principal Amount" means, with respect to any day, the aggregate principal amount of the Loans outstanding on such day. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), official body or agency, or any other entity. "Pledge Agreement" shall mean the Pledge Agreement, dated of even date herewith, between X.L. Investments and the Lender. "Pledged Securities" shall have the meaning given that term in the Pledge Agreement. "Pledged Securities Available Amount" at any time shall mean the amount which is equal to the lesser of (i) 66 2/3% of the value of the Qualifying Pledged Securities (as determined as a Dollar Equivalent Amount) and (ii) 100% of the value of the Qualifying AA Pledged Securities (as determined as a Dollar Equivalent). "Private Act" shall mean separate legislation enacted in Bermuda with the intention that such legislation applies specifically to a Borrower in whole or in part. "Program Fee" means, with respect to any Settlement Date, the monthly fee payable by the Borrower to the Lender on such Settlement Date computed on the basis of the Program Fee Rate and the Outstanding Principal Amount with respect to the related Settlement Period. "Program Fee Rate" means the rate per annum set forth in a separate letter agreement between the Borrower and the Lender. 6 "Program Support Agreement" means, collectively, all liquidity agreements, funding agreements (other than the Funding Agreement), credit agreements, letter of credit agreements, surety agreements, letter of credit and all other agreements which may be in effect from time to time and which provide liquidity or credit support in respect of the Commercial Paper. "Qualifying Pledged Securities" means: (i) cash (including credit balances treated as cash) and (b) debt securities rated at least A (or, in the case of short-term debt securities A-1) or the equivalent by S&P (and not rated lower than A (or, in the case of short-term debt securities P-1) by Moody's) or at least A (or, in the case of short-term debt securities, P-1) or the equivalent by Moody's (and not rated lower than A (or, in the case of short-term securities, A-1) by S&P). "Qualifying AA Pledged Securities" shall mean (a) cash (including credit balances treated as cash) and (b) debt securities rated at least AA (or, in the case of short-term debt securities, A-1) or the equivalent by S&P (and not rated lower than Aa (or, in the case of short-term debt securities, P-1) by Moody's) or at least Aa (or, in the case of short-term debt securities, P-1) or the equivalent by Moody's (and not rated lower than AA (or, in the case of short-term debt securities, A-1) by S&P). "SAP" shall mean, as to the Borrower and each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Official Body for the Borrower's or such Insurance Subsidiary's domicile for the preparation of Annual Statements and other Default reports by insurance corporations of the same type as such Borrower or such Insurance Subsidiary in effect on the date such statements or reports are to be prepared. "Settlement Date" means the 3rd day of each calendar month or, if such day is not a Business Day, the next succeeding Business Day. "Settlement Period" means, with respect to a Settlement Date, the calendar month (or portion thereof in the case of the first settlement period) most recently ended. "Subsidiary" of the Borrower at any time shall mean any corporation of which a majority (by number of shares or number of votes) of any class of outstanding capital stock normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights of such class) is at such time owned directly or indirectly by the Borrower or one or more Subsidiaries. "Taxes" shall have the meaning set forth in Section 2.08 hereof. "Total Funded Debt" of a Person at any time shall mean all Indebtedness of such person which would at such time be classified in whole or in part as a liability on the balance sheet of such person in accordance with GAAP. "Unmatured Event" means an event or condition which, with the giving of notice or the lapse of time or both, would be an Event of Termination. 1.02. Construction. Unless the context of this Agreement otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or. " References in this Agreement to "determination" by the Lender include good faith estimates by the Lender (in the case of quantitative determinations) and good faith belief of the Lender (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 7 1.03. Accounting Principles. (a) As used herein, "GAAP" shall mean generally accepted accounting principles as such principles shall be in effect in the United States of America at the Relevant Date, subject to the provisions of this Section 1.03. As used herein, "Relevant Date" shall mean the date a relevant computation or determination is to be made or the date of relevant financial statements, as the case may be. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP or SAP, as the context requires (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP or SAP, as appropriate. (c) If any change in GAAP or SAP after the date of this Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more provisions of this Agreement shall have occurred (or in the opinion of the Lender would be likely to occur) which would not have occurred or be likely to occur if no change in accounting principles had taken place, the parties agree in such event to negotiate in good faith an amendment of this Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in GAAP or SAP, as appropriate. (d) Without in any manner limiting the provisions of this Section 1.03, if any change in GAAP or SAP occurs after the date of this Agreement and such change in GAAP or SAP could or would materially change the Borrower's financial results or position from that reflected in such Borrower's financial statements prior to such change, such Borrower shall notify the Lender as soon as practicable. ARTICLE II ---------- THE LOANS --------- 2.01. The Loans. Subject to the terms and conditions hereof, the Lender hereby agrees that it will, from time to time prior to the Commitment Expiration Date, make one or more loans (each a "Loan" and, collectively, the "Loans") to the Borrower subject to the immediately succeeding sentence. Notwithstanding anything contained in this Agreement to the contrary, the Lender shall not be obligated to make any Loan if, after such Loan is made, the Outstanding Principal Amount exceeds the lesser of (a) the Commitment and (b) the Pledged Securities Available Amount. The Lender shall remit the proceeds of each Loan to the Borrower at the principal office of Mellon in immediately available funds. 2.02. The Note. The Loans shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A hereto (the "Note"). The Note shall be payable to the order of the Lender and shall mature on the Commitment Expiration Date. The Note shall be dated the Closing Date and provide for the payment of principal and interest in accordance with Section 2.06. The Borrower hereby authorizes the Lender to make the appropriate notations on the schedule annexed to the Note for purposes of recording any Loan made thereon and any payments or prepayments made with respect thereto (provided that any failure by the Lender to make any such notation shall not affect the obligations of the Borrower hereunder or under the Note in respect of such Loan). The Borrower agrees that each notation made by the Lender on the schedule annexed to the Note shall be final and conclusive absent demonstrable error. The Outstanding Principal Amount at any time shall constitute the principal amount of the Note at such time. 2.03. Loan Request. Whenever the Borrower desires the Lender to make a Loan, the Borrower shall deliver to the Lender a written request, in substantially the form of Exhibit B (a "Loan Request"), to the Borrower, no later than 11:00 A.M., New York City time, at least two Business Days prior to the date of such Loan. Each Loan Request shall specify the principal amount of the Loan to be made on the such date (which shall be no less than $10,000,000 or such lesser amount which the Lender shall have 8 approved). Each Loan Request submitted by the Borrower shall be an affirmation by the Borrower that (x) the representations and warranties of the Borrower set forth in Article III of this Agreement are on the date of such Loan Request, and will be on the date of such Loan, true and correct in all material respects as if made on and as of such dates, except to the extent any such representation or warranty relates specifically to an earlier date, and (y) no Unmatured Event or Event of Termination shall have occurred and be continuing on either of such dates. Each Loan Request given pursuant hereto shall be irrevocable. 2.04. Commitment. (a) The Borrower may, upon at least thirty (30) days' prior written notice to the Lender, terminate in whole or permanently reduce in part the unused portion of the Commitment; provided, that (i) such termination shall not be effective unless and until the Outstanding Principal Amount has been reduced to zero and all Cost of Funds Amount and all other fees or amounts due to the Lender hereunder have been paid in full, (ii) each partial reduction shall be in the amount of at least $10,000,000 or an integral multiple thereof, and (iii) any partial reduction of the Commitment which would result in the remaining Commitment being less than $25,000,000 shall be deemed to be a termination in whole of the Commitment. (b) If any bank or financial institution which is a party to the Funding Agreement does not consent to the extension of the expiration date of its commitment under the Funding Agreement or its commitment thereunder expires or is terminated for any reason, to the extent such bank or financial institution is not replaced on or prior to such expiration date, then the Commitment shall be reduced by such amount as shall be necessary to cause the Commitment to be equal to the aggregate of all commitments of banks and/or financial institutions under the Funding Agreement(s) after giving effect to such termination or expiration. (c) The Lender will not: (i) without the consent of the Borrower, voluntarily agree to any termination of the Funding Agreement prior to its stated expiration date; (ii) without the consent of the Borrower, voluntarily agree to any reduction in the amount of any commitment under the Funding Agreement; or (iii) without the consent of the Borrower, which will not be unreasonably withheld, amend the Funding Agreement. 2.05. Mandatory and Optional Prepayments. (a) The Borrower may on a Settlement Date prepay the Loans, in whole or in part, without premium or penalty, upon at least 30 days' irrevocable prior written notice to the Lender in the case of a prepayment in whole or at least three (3) Business Days' irrevocable prior written notice to the Lender in the case of a partial prepayment; provided, that each partial prepayment shall be in the amount of at least $10,000,000 or an integral multiple thereof; provided, further, that the Borrower shall (i) simultaneously pay to the Lender, and indemnify the Lender and hold the Lender harmless from, all costs and expenses incurred by the Lender in connection with such prepayment, and (ii) indemnify the Lender and hold the Lender harmless from any funding loss (in an amount equal to the amount of interest the Lender would have received (calculated with respect to the applicable fixed interest, discount or carrying cost period with respect to the relevant Cost of Funds) but for such prepayment less the interest earned on investing such funds) and expense which the Lender may sustain or incur as a consequence of such prepayment. Any such prepayment of the Loans shall be accompanied by, without duplication of the preceding sentence, a payment of all accrued but unpaid interest on the Loans through the date of prepayment, plus all accrued but unpaid fees, expenses and other amounts due to the Lender arising under or in connection with this Agreement and the Note through the date of prepayment. (b) If, after giving effect to any reduction of the Commitment pursuant to Section 2.04(b) above, the Outstanding Principal Amount shall exceed the Commitment, the Borrower shall, within one Business Day of its receipt of written notice of the reduction of the Commitment, make a prepayment in respect of the principal of the Loans in an amount equal to the excess of the Outstanding Principal Amount over the Commitment as so reduced, accompanied by a payment of all accrued but unpaid interest on such amount through the date of such prepayment. (c) If at any time the Pledged Securities Available Amount is less than the Outstanding Principal Amount, the Borrower shall, within one Business Day of its receipt of written notice thereof, make a 9 prepayment in respect of the principal of the Loans in an amount equal to the excess of the Outstanding Principal Amount over the Pledged Securities Available Amount accompanied by a payment of all accrued but unpaid interest on such amount through the date of such prepayment. 2.06. Interest; Fees. On each Settlement Date, the Borrower shall make the following cash payments: (i) to the Lender as interest on the Loans, all accrued and unpaid Cost of Funds Amount; and (ii) to the Lender, all accrued and unpaid amounts due and payable to the Lender under this Agreement not described in clause (i) above, including without limitation, the Program Fee and the Facility Fee. 2.07. Proceeds. The proceeds of each Loan shall be used by the Borrower solely for general corporate purposes. 2.08. Taxes. All payments made by the Borrower under this Agreement and the Note shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, hereafter imposed, levied, collected, withheld or assessed by the Government of the United States or any political subdivision thereof having taxing authority, excluding (i) income and withholding taxes (including, without limitation, branch profits taxes, minimum taxes and taxes computed under alternative methods, at least one of which is based on net income) and franchise taxes (imposed in lieu of income taxes) imposed on the net income of the Lender as a result of any present or former connection between the jurisdiction imposing such tax or any political subdivision or taxing authority thereof or therein and the Lender other than a connection resulting solely from this Agreement and the transactions contemplated hereby; and (ii) any Taxes that would not have been imposed but for the failure of the Lender to provide and keep current any certification or other documentation required to qualify for an exemption from or reduction in the rate of any Tax (all such excluded taxes described in clause (i) or (ii) above being hereinafter called "Excluded Taxes" and all such non-Excluded Taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"). If any Taxes are required to be deducted or withheld from any amounts payable to or under the Note, the amounts so payable to the Lender shall be increased to the extent necessary to yield to the Lender (after payment of all Taxes on such increased amounts) the amount that would have been otherwise been received by the Lender had not such deduction or withholdings been imposed. Whenever any Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Lender a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Lender the required receipts or other required documentary evidence, the Borrower shall indemnify the Lender for any incremental Taxes, interest or penalties that the Lender is legally required to pay as a result of any such failure. Such indemnification shall be made within 30 days from the date the Lender makes written demand therefor. If the Lender receives any refund or credit in respect of any Taxes with respect to which the Borrower has made full payment to the Lender pursuant to this Section 2.08, it shall pay over such refund and remit such credit to the Borrower, net of all out-of-pocket expenses incurred by the Lender in obtaining such refund or credit and without interest. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Note. 2.09. Increased Cost and Reduced Return. (a) If any Affected Party shall be charged any fee, expense or increased cost other than relating to Taxes or Excluded Taxes on account of the adoption after the date hereof of any applicable law, rule, regulation or guideline (including any applicable law, rule, regulation or guideline regarding capital adequacy) or any change therein after the date hereof, or any change after the date hereof in the interpretation or administration thereof by any Official Body, central bank or comparable agency: (i) which subjects such Affected Party to any charge or withholding on or with respect to the Funding Agreement or a Program Support Agreement, as the case may be, or such Affected 10 Party's obligations under the Funding Agreement or Program Support Agreement, as the case may be, or on or with respect to this Agreement or the Loans, or changes the basis of taxation to any Affected Party of any amounts payable under the Funding Agreement, a Program Support Agreement or this Agreement (except for changes in the rate of tax on the overall net income of such Affected Party), or (ii) which imposes, modifies or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, an Affected Party under the Funding Agreement or a Program Support Agreement, as the case may be, or (iii) which imposes any other condition the result of which is (x) to increase the cost to such Affected Party of performing its obligations, or (y) to reduce the rate of return on such Affected Party's capital as a consequence of its obligations, in each case under the Funding Agreement or a Program Support Agreement, as the case may be, or to reduce the amount of any sum received or receivable by such Affected Party, or to require any payment calculated by reference to the amount of interests or loans held or interest received by it, in each case under the Funding Agreement or a Program Support Agreement, as the case may be, then, upon demand by the Lender, the Borrower shall be obligated to immediately pay to the Lender, for the benefit of such Affected Party, such amounts charged to such Affected Party or to compensate such Affected Party for such increase, reduction or imposition; provided, however, that, to the extent that any such amount with respect to an Affected Party under a Program Support Agreement (other than Mellon Bank, N. A.) exceeds the amount the Borrower would have been obligated to pay to Mellon Bank, N. A. if Mellon Bank, N. A. had taken the place of such Affected Party under such Program Support Agreement, the Borrower shall not be obligated to pay to the Lender the amount of such excess. (b) The Lender agrees that it shall use reasonable efforts to take any action that will avoid the need to pay, or reduce the amount of, any increased amounts referred to in this Section 2.09; provided that the Lender shall not be obligated to take any actions that would, in the Lender's sole discretion, be materially disadvantageous to the Lender. In the event that any Affected Party claims any increased costs referred to in this Section 2.09, the Lender will furnish to the Borrower a certificate setting forth the basis and amount of each request by such Affected Party for any such increased amounts referred to in paragraph (a) of this Section 2.09. Determinations by the Lender of any increased amounts referred to in paragraph (a) of this Section 2.09 shall be conclusive, absent manifest error. In the event that any Affected Party claims any increased costs referred to in this Section 2.09 or payments under Section 2.08, the Borrower may, upon payment of such amounts and prepayment of Loans equal to all amounts owing to such Affected Party with respect to its funding under the Funding Agreement, and upon reduction of the Lender's commitment hereunder by an amount equal to such Affected Party's commitment under the Funding Agreement, and subject to the second proviso of Section 2.05(a) hereof, require the Lender to cause such Affected Party to cease to be a party to the Funding Agreement. ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES. ------------------------------- Each Credit Party represents and warrants that: 3.01. Organization and Qualification. Such Credit Party and each of its Subsidiaries are corporations duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation; each of such Credit Party and its Subsidiaries have the power and authority to own its properties and assets, and to carry on its business as presently conducted and is qualified to do business in those jurisdictions in which its ownership of property or the nature of its business activities is such that failure to receive or retain such qualification would have a Material Adverse Effect. A list of such Credit Party's Subsidiaries setting forth their respective jurisdictions of incorporation is set forth in Schedule 3.01 hereto. Such Credit Party is not subject to any Private Act other than the X.L. Insurance Company, Ltd. Act, 1989, a copy of which has been provided to Lender. 11 3.02. Corporate Power and Authorization. Such Credit Party has corporate power and authority to make and carry out this Agreement and any other Loan Document to which it is a party, in the case of the Borrower, to make the borrowings provided for herein, to execute and deliver this Agreement and, in the case of the Borrower, the Note, and to perform its obligations hereunder and under any such Loan Documents and all such action has been duly authorized by all necessary corporate proceedings on its part. 3.03. Financial Information. Such Credit Party has furnished to the Lender copies of the audited consolidated financial statements and the consolidating financial statements of such Credit Party and its consolidated Subsidiaries including a consolidated and consolidating balance sheet and related statements of income and retained earnings for the fiscal year ending November 30, 1997. Such financial statements fairly present the financial position of such Credit Party and its consolidated Subsidiaries as of the date of such reports and the consolidated and consolidating results of their operations and cash flows for the fiscal period then ended in conformity with GAAP applied on a consistent basis, and such consolidated financial statements have been examined and reported upon by independent, certified public accountants. 3.04. Litigation. Except as disclosed to the Lender in writing prior to the Closing Date (including by disclosure in the financial statements delivered to the Lender referred to in Section 3.03 hereof), there is no litigation or governmental proceeding by or against such Credit Party or any of its Subsidiaries pending or, to its knowledge, threatened, which could reasonably be expected (in light of reserves, and total shareholders' equity of such Credit Party and after taking into account the nature of such Credit Party's business and activities) to have a Material Adverse Effect if adversely determined. 3.05. No Adverse Changes. Since November 30, 1997, there has been no occurrence or event which has had a Material Adverse Effect. 3.06. No Conflicting Laws or Agreements; Consents and Approvals. (a) Neither the execution and delivery of this Agreement or any other Loan Document, the consummation of the transactions herein or therein contemplated nor compliance with the terms and provisions hereof or thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws of such Credit Party or of any applicable Law or of any material agreement or instrument to which such Credit Party is a party or by which it is bound or to which it is subject, or constitute a default thereunder or result in the creation or imposition of any Lien of any nature whatsoever upon any of the property of such Credit Party pursuant to the terms of any such agreement or instrument. (b) No authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Official Body is or will be necessary or advisable in connection with (i) execution and delivery of this Agreement or any other Loan Document, (ii) the consummation of the transactions herein or therein contemplated, or (iii) the performance of or compliance with the terms and conditions hereof or thereof. 3.07. Execution and Binding Effect. This Agreement has been duly and validly executed and delivered by such Credit Party. This Agreement constitutes, and the Note when duly executed and delivered by such Credit Party pursuant to the provisions hereof will constitute, legal, valid and binding obligations of such Credit Party enforceable in accordance with the terms thereof except, as to the enforcement of remedies, for limitations imposed by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally (excluding Laws with respect to fraudulent conveyance), (ii) Laws limiting the right of specific performance or (iii) general principles of equity. 3.08. Taxes. All tax returns required to be filed by such Credit Party have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon such Credit Party or upon its properties, income or sales which are due and payable have been paid. The reserves and provisions for taxes, if any, on the books of such Credit Party are adequate for all open years and for its current fiscal period as determined in accordance with GAAP. 12 3.09. Use of Proceeds. The Borrower will use the proceeds from any borrowing hereunder for general corporate purposes (which may include acquisitions). The Borrower will make no borrowing hereunder for the purpose of buying or carrying any "margin stock" as such term is used in Regulation U of the Board of Governors of the Federal Reserve System in violation of such regulation. The Borrower is not engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 3.10. Permits, Licenses and Rights. Such Credit Party and each Subsidiary of such Credit Party own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties and to carry on their respective businesses as presently conducted and presently planned to be conducted without, to the best knowledge of such Credit Party, conflict with the rights of others. 3.11. Accurate and Complete Disclosure. All information provided by or on behalf of such Credit Party to Lender pursuant to or in connection with the Loan Documents and the transactions contemplated thereby is true and accurate in all material respects on the date such information is dated (or, if not dated, on the date such information was received by Lender) and such information, taken as a whole, which was provided on or prior to the time this representation is made or remade, does not, to the best knowledge of such Credit Party, omit to state any material fact necessary to make such information not misleading at such time in light of the circumstances in which it was provided. 3.12. Absence of Violations. Such Credit Party and each Affiliate of such Credit Party is not in violation of a any charter document, corporate minute or resolution, any instrument or agreement, in each case binding on it or affecting its property, or any Law, in a manner which could have a Materially Adverse Effect. 3.13. Environmental Matters. Such Credit Party and each of its Subsidiaries is and has been in full compliance with all applicable Environmental Laws. Such Credit Party and each of its Subsidiaries have all Approvals by Official Bodies charged with the enforcement of Environmental Laws that are necessary or desirable for the ownership and operation of their respective properties, facilities and businesses as presently owned and operated and as presently proposed to be owned and operated. 3.14. Not an Investment Company. Such Credit Party is not an Investment Company required to be registered under the Investment Company Act of 1940. ARTICLE IV ---------- CONDITIONS OF LENDING --------------------- 4.01. Effectiveness. The effectiveness of this Agreement and the closing of the transactions contemplated hereby shall be subject to the following conditions: (a) Proceedings and Incumbency. There shall have been delivered to Lender a certificate with respect to each Credit Party in form and substance satisfactory to Lender dated the Closing Date and signed on behalf of such Credit Party by the Secretary or an Assistant Secretary of such Credit Party, certifying as to: (a) true copies of all corporate action taken by such Credit Party relative to this Agreement, and the other Loan Documents applicable to it, including but not limited to that described in Section 3.02 hereof and (b) the names, true signatures and incumbency of the officer or officers of such Credit Party authorized to execute and deliver this Agreement and the other Loan Documents applicable to it. Lender may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to Lender. (b) Organizational Documents. There shall have been delivered to Lender (i) certified copies of the articles of incorporation and by-laws for each Credit Party, (ii) a certificate of good standing for each 13 Credit Party certified by the appropriate Official Body and (iii) a certificate of good standing certified by the appropriate Official Body. (c) Opinions of Counsel. There shall have been delivered to Lender written opinions addressed to Lender, dated the Closing Date, of Cahill Gordon & Reindel, Conyers, Dill & Pearman and Paul S. Giordano, Esq., respectively, the Borrower's and Guarantors' counsel, which together are substantially to the effects set forth in Exhibit C. (d) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory to Lender, and Lender shall have received all such counterpart originals or certified or other copies of the Loan Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as Lender has reasonably requested. (e) Fees and Expenses. The Borrower shall have paid all fees and other compensation to be paid by it hereunder on or prior to the Closing Date. (f) Representations and Warranties. The representations and warranties contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (g) Pledge Agreement. The Pledge Agreement shall have been entered into by the parties thereto. (h) Funding Agreement. A funding agreement shall have been entered into between the Lender and Mellon with respect to the transactions contemplated by this Agreement. 4.02. Borrowings. The obligations of Lender to make any Loan hereunder are subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the satisfaction of the condition set forth in the second sentence of Section 2.01 hereof, to the performance by the Borrower of its obligations to be performed hereunder on or before the date of such Loans and to the satisfaction of the following further conditions: (a) Representations and Warranties; Events of Termination and Unmatured Events. The representations and warranties contained in Article III hereof shall be true on and as of the date of each Loan hereunder with the same effect as though made on and as of each such date (except to the extent they are expressly stated to relate only to a prior date), and on the date of each Loan hereunder no Event of Termination and no Unmatured Event shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Loans to be made on such date. Failure of Lender to receive notice from the Borrower to the contrary before any Loan is made or deemed made hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the date of such Loan with the same effect as though made on and as of such date (except to the extent they are expressly stated to relate only to a prior date) and (ii) on the date of such Loan no Event of Termination or Unmatured Event has occurred and is continuing or exists or will occur or exist after giving effect to such Loan. (b) Commitment. The fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitment. 14 ARTICLE V --------- AFFIRMATIVE COVENANTS --------------------- Each Credit Party hereby covenants to the Lender as follows: 5.01. Reporting and Information Requirements. Such Credit Party shall deliver to the Lender: (a) Annual Reports. (i) As soon as practicable and in any event within 100 days after the close of each fiscal year of X. L. Insurance, audited consolidated statements and unaudited consolidating statements of income, retained earnings and cash flows of such Credit Party and its consolidated Subsidiaries, for such fiscal year and a consolidated audited and consolidating balance sheet of such Credit Party and its consolidated Subsidiaries, as of the close of such fiscal year, and notes to each, all in accordance with GAAP, setting forth in comparative form the corresponding figures for the preceding fiscal year, with such consolidated statements and balance sheets to be certified by independent public accountants of recognized national standing in the United States selected by such Credit Party and not unacceptable to the Lender, and the certificate or report of such accountants to be free of exceptions or qualifications not reasonably acceptable to the Lender. (b) Quarterly Statements. Within sixty days after the end of the first, second and third quarterly accounting periods in each fiscal year of such Credit Party, copies of the unaudited consolidated and consolidating balance sheets of such Credit Party and its consolidated Subsidiaries as of the end of such accounting period and of the consolidated and consolidating income statements of such Credit Party and its consolidated Subsidiaries for the elapsed portion of the fiscal year ended with the last day of such accounting period, all in accordance with GAAP subject to year-end audit adjustments and certified by the principal financial officer of such Credit Party to have been prepared in accordance with generally accepted accounting principles consistently applied by such Credit Party except as explained in such certificate. (c) Compliance Certificates. Within 100 days after the end of each fiscal year of such Credit Party and within sixty days after the end of each of the first three quarters of each fiscal year, a certificate dated as of the end of such fiscal year or quarter, signed on behalf of such Credit Party by a principal financial officer thereof, (i) stating that as of the date thereof no Event of Termination or Unmatured Event has occurred and is continuing or exists, or if an Event of Termination or Unmatured Event has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by such Credit Party, (ii) stating in reasonable detail the information and calculations necessary to establish compliance with the provisions of Article VI hereof, and (iii) stating that the signer has reviewed this Agreement and that such certificate is based on an examination made by or under the supervision of the signer sufficient to assure that such certificate is accurate. (d) Further Information. All such other information and in such form as the Lender may reasonably request in writing. (e) Notice of Event of Termination. Immediately upon becoming aware of any Event of Termination or Unmatured Event, written notice thereof, together with a written statement of the president or a principal financial officer of such Credit Party setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by such Credit Party. (f) Notice of Material Adverse Change. Promptly upon becoming aware thereof, written notice of any event or occurrence constituting or which could reasonably be expected to have a Material Adverse Effect. (g) Notice of Material Proceedings. Promptly upon becoming aware thereof, written notice of the commencement, existence or threat of any proceeding or a material change in any existing material proceeding by or before any Official Body against or affecting such Credit Party which, if adversely decided, could have a Material Adverse Effect. 15 (h) Notice of Certain Material Changes. Promptly upon adoption thereof, notice of each material change in such Credit Party's investment policy, underwriting policy or other business policy. 5.02. Preservation of Existence and Franchises. Such Credit Party shall, and shall cause each of its Subsidiaries to, maintain its corporate existence, rights and franchises in full force and effect in its jurisdiction of incorporation. Such Credit Party shall, and shall cause each of its Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. 5.03. Insurance. Such Credit Party shall, and shall 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 a similar business having similar properties similarly situated. 5.04. Maintenance of Properties. Such Credit Party shall, and shall 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 shall 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, provided, however, that the foregoing shall not impose on such Credit Party or any Subsidiary of such Credit Party any obligation in respect of any property leased by such Credit Party or such Subsidiary in addition to such Credit Party 's obligations under the applicable document creating such Credit Party 's or such Subsidiary's lease or tenancy. 5.05. Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities. Such Credit Party shall, and shall 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 6.03 hereof) or which, if unpaid, might give rise to a claim entitled to priority over general creditors of such Credit Party in any proceeding under the Bermuda Companies Law or Bermuda Insurance Law, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Credit Party or such Subsidiary; provided that, unless and until foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Credit Party need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP and SAP shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. 5.06. Financial Accounting Practices. Such Credit Party shall, and shall cause each of its Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Section 5.01 hereof in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. 16 5.07. Compliance with Applicable Laws. Such Credit Party shall, and shall cause each of its Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; provided that such Credit Party or any Subsidiary of such Credit Party shall not be deemed to be in violation of this Section 5.07 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 Materially Adversely Effect or (ii) otherwise impair the ability of such Credit Party to perform its obligations under this Agreement or the Note. 5.08. Use of Proceeds. Such Credit Party shall use the proceeds of all Loans hereunder for its general corporate purposes (including to fund acquisitions). 5.09. Continuation Of and Change In Business. Such Credit Party and its Subsidiaries shall continue to engage in substantially the same business and activities it currently engages in on the date of this Agreement. 5.10. Visitation. Such Credit Party shall permit such Persons as the Lender may reasonably designate to visit and inspect any of the properties of such Credit Party, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Credit Party at such times as the Lender may reasonably request. Such Credit Party hereby authorizes its financial management to discuss with the Lender the affairs of such Credit Party. ARTICLE VI ---------- NEGATIVE COVENANTS ------------------ Each Credit Party covenants to the Lender as follows: 6.01. Mergers and Acquisitions. (a) Such Credit Party shall not merge with or into or consolidate with any other Person, or agree to do any of the foregoing, except that if no Event of Termination or Potential Event of Termination shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto: (i) such Credit Party may merge with any other corporation, including a Subsidiary, if such Credit Party shall be the surviving corporation; and (ii) if the written consent of the Lender is obtained, such Credit Party may merge into or consolidate with any other corporation if the corporation into which such Credit Party is merged or which is formed by such consolidation shall expressly assume all obligations of such Credit Party under this Agreement. (b) Such Credit Party shall not acquire the stock or other equity interests, or all or any substantial portion of the properties or assets of any other Person, or agree to do any of the foregoing, unless such Person is engaged primarily in the insurance business or the financial services business. 6.02. Dispositions of Assets. Such Credit Party shall not , and nor shall it permit any Subsidiary 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 6.02 as a "transaction" and any series of related transactions constituting but a single transaction), 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) Transactions in the ordinary course of business involving current assets or other assets classified on such Credit Party's balance sheet as available for sale. 17 (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, exceed $50,000,000 in any calendar year; or (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Credit Party or its Subsidiaries. 6.03. Liens. Such Credit Party shall not, nor shall it permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Lien on any of its property or assets, tangible or intangible, now owned or hereafter acquired or agree or become liable to do so, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, provided the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Schedule 6.03(a) hereto; (b) Liens arising from taxes, assessments, charges, levies or claims described in Section 5.05 hereof that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of such Section 5.05; (c) Liens on property securing all or part of the purchase price thereof to such Credit Party and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Credit Party (and extension, renewal and replacement Liens upon the same property), provided -- (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Credit Party, as applicable, shall not exceed 100% (if such obligations are not subject when created to United States income taxes) or 90% (in all other cases) 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 Credit Party; (e) Liens securing Indebtedness permitted by Section 6.08 (c) hereof 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 such Credit Party or its Subsidiaries incurred as part of the management of its investment portfolio in accordance with customary portfolio management practice and not in violation of such Credit Party's investment policy as in effect on the date of this Agreement; or (g) Liens created under the Pledge Agreement. 6.04. Transactions With Affiliates. Such Credit Party shall not, nor shall it permit any Subsidiary to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Credit Party, or directly or indirectly agree to do any of the foregoing, except transactions among such Credit Party and its wholly-owned Subsidiaries and transactions with Affiliates in good faith in the ordinary course of such Credit Party's business consistent with past 18 practice and on terms no less favorable to such Credit Party or any Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 6.05. Business. Such Credit Party will not, nor will it permit any Subsidiary to, engage (directly or indirectly) in any businesses other than the businesses substantially the same as those in which such Credit Party and its Subsidiaries are engaged on the Closing Date and any businesses reasonably related thereto or in the financial services industry. X.L. Insurance will not permit, at any time, its net premiums earned from insurance operations to comprise less than 50% of its gross revenues (on a consolidated basis exclusive of net gains and losses from investments and investment income). 6.06. Ratio of Total Funded Debt to Consolidated Tangible Net Worth. X.L. Insurance will not permit its ratio of Total Funded Debt to Consolidated Tangible Net Worth to be greater than 0.35 at any time. 6.07. Consolidated Net Worth. X.L. Insurance will not permit its Consolidated Net Worth to be less than $1,200,000,000 at any time. 6.08. Indebtedness. X.L. Insurance shall not, nor shall it permit any Subsidiary to, at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness to the Lender pursuant to this Agreement and the other Loan Documents; (b) Indebtedness of such Credit Party or any Subsidiary in an aggregate principal amount not exceeding $300,000,000 at any time outstanding; (c) Reimbursement obligations or guaranty obligations with respect to letters of credit not exceeding $500,000,000 in the aggregate, of which not more than $500,000,000 may be secured; (d) Indebtedness described on Schedule 6.08(d); (e) Accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by such Credit Party or any Subsidiary of such Credit Party; and (f) Indebtedness incurred in transactions described in Section 6.03(f). 6.09. Operating Leverage. X.L. Insurance will not permit its ratio of net premiums written to statutory capital and surplus, in each case as reflected in the notes to its consolidated financial statements, to be greater than 1.2 to 1.0 at any time. 6.10. Private Act. Such Credit Party shall not become subject to a Private Act other than the X.L. Insurance Company, Ltd. Act, 1989. ARTICLE VII ----------- EVENTS OF TERMINATION --------------------- 7.01. Events of Termination. An Event of Termination shall mean the occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) The Borrower shall default in the payment when due of the principal of any Loan; 19 (b) The Borrower shall default in the payment when due of any interest, Facility Fee, Program Fee, or any other fee or amount payable hereunder which default shall continue for a period of three days from the due date thereof; (c) A Credit Party shall default in the observance, performance or fulfillment of any covenant contained in Article VI hereof; (d) A Credit Party shall default in the observance, performance or fulfillment of any other covenant, condition or provision hereof and such default shall not be remedied for a period of twenty days after written notice thereof to the Borrower from the Lender or the holder of the Note; (e) A Credit Party, or any Subsidiary of a Credit Party or EXEL Limited shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $10,000,000 or more 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 under which any such obligation in principal amount of $ 10,000,000.00 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; (f) One or more judgments for the payment of money shall have been entered against a Credit Party which judgments exceed $50,000,000 in the aggregate and such judgments shall remain undischarged or uncontested or appealed in good faith for a period of thirty consecutive days; (g) Any representation or warranty herein made by a Credit Party, or 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 furnished; (h) X.L. Insurance shall cease to own, beneficially and of record, directly or indirectly, 100% of the voting shares of common stock of each other Credit Party. (i) EXEL Limited shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of capital stock of X.L. Insurance, except for a nominal number of shares owned by two nominee shareholders required by the Bermuda Companies Law; (j) A Change in Control shall occur; (k) The guarantee contained in Article VIII hereof shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of X.L. Insurance or X.L. Investments , or the Borrower or any Person acting for or on its behalf contests such validity or binding nature of such guarantee itself or the transactions contemplated by this Agreement and the Note, or any other Person shall assert any of the foregoing, or the Pledge Agreement shall terminate or cease, in whole or in part, to be a legally valid and binding obligation of X.L. Investments, or any Credit Party or any Person acting for or on behalf of any such parties contests such validity or binding nature of the Pledge Agreement itself or the transactions contemplated thereby (including the security interest granted thereunder); (l) A decree or order by a court having jurisdiction in the premises shall have been entered adjudging a Credit Party a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Credit Party under the Bermuda Companies Law, or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of sixty days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Credit 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 remained in force undischarged and unstayed for a period of sixty days; or 20 (m) A Credit Party or EXEL Limited 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 any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of 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 action shall be taken by such Credit Party in furtherance of any of the aforesaid purposes. 7.02. Remedies. At any time after the occurrence of an Event of Termination and so long as such Event of Termination is continuing, the Lender may, in accordance with applicable law, take one or more of the following actions: (i) give notice (which may be telephone notice confirmed in writing) to the Borrower of the occurrence of such Event of Termination, and the Lender's election to terminate the Commitment under this Agreement, whereupon the Lender's obligation to make Loans shall be terminated (except that in the case of the occurrence of any Event of Termination described in Section 7.01(l) or (m) hereof, no such notice shall be required and such termination shall be automatic), (ii) by notice to the Borrower declare the unpaid principal amount and interest under the Note, the Loans and all other amounts payable to the Lender by the Borrower hereunder to be forthwith due and payable, whereupon such amounts shall become forthwith due and payable, both as to principal and interest, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Note to the contrary notwithstanding (except that in the case of the occurrence of any Event of Termination described in Section 7.01(l) or (m) hereof, no such notice shall be required and such termination and acceleration shall be automatic), and (iii) to do any and all other and further acts and actions which the Lender may take pursuant to this Agreement or under applicable law. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition, or other judicial proceeding relative to the Borrower or either Guarantor, the obligations secured hereby or relating to the property of the Borrower, the Lender (irrespective of whether the Obligations shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Lender shall have made any demand on the Borrower or either Guarantor for the payment of overdue principal or interest or any such other obligation) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal, interest, if any, owing and unpaid in respect of the Obligations and any other obligation secured hereby and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Lender (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lender, its agents and counsel) and of the Lender allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator, or other similar official in any such judicial proceeding is hereby authorized by the Borrower to make such payments to the Lender and to pay to the Lender any amount due it for the reasonable compensation, expenses, disbursements and advances of the Lender, its agents and counsel. ARTICLE VIII ------------ GUARANTEE --------- 8.01. The Guarantee. Each of the Guarantors guarantee to the Lender as hereinafter provided the prompt payment of the Obligations of the Borrower (the "Guaranteed Obligations") in full when due 21 (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each Guarantor hereby further agrees that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise), the Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Loan Documents, to the extent the obligations of either Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 8.02. Obligations Unconditional. The obligations of each Guarantor under this Article are absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Loan Documents, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower for amounts paid under his Guarantee until such time as the Lender has been paid in full, the Commitment under the Credit Agreement has been terminated and no Person or Official Body shall have any right to request any return or reimbursement of funds from the Lender in connection with monies received under the Loan Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of either Guarantor 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 any of the Loan Documents, or any other agreement or instrument referred to in the Loan Documents shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Loan Documents, or any other agreement or instrument referred to in the Loan Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Lender as security for any of the Guaranteed Obligations shall be void or violable, or shall fail to attach or be perfected; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of either Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of either Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and 22 any requirement that the Lender exhaust any right, power or remedy or proceed against any Person under any of the Loan Documents, or any other agreement or instrument referred to in the Loan Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 8.03. Reinstatement. The obligations of the Guarantors under this Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Lender on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Lender in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 8.04. Remedies. Each Guarantor agrees that, to the fullest extent permitted by applicable law, as between such Guarantor, on the one hand, and the Lender, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 8.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 8.01. 8.05. Continuing Guarantee. The guarantee in this Article is a continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 8.06. No Restrictions. Except for restrictions under the Loan Documents, neither Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to the Borrower, or (y) make loans or advances to the Borrower, or (z) transfer any of its properties or assets to the Borrower. ARTICLE IX ---------- MISCELLANEOUS ------------- 9.01. Amendments and Waivers. None of this Agreement or the Note or any other Loan Document to which the Lender, the Guarantors or the Borrower is a party, nor any terms hereof or thereof, may be amended, supplemented or modified except in accordance with the provisions of this subsection. Subject to obtaining the consent of any other party required hereunder or thereunder, the Lender, the Guarantors and the Borrower may, from time to time, enter into written amendments, supplements or modifications hereto and to the Note and any other Loan Document to which they are parties for the purpose of adding any provisions to this Agreement or the Note or such other Loan Document or changing in any manner the rights of Lender or the Borrower or the Guarantors hereunder or thereunder and, in addition, waiving, on such terms and conditions as Lender may specify in such instrument, any of the requirements of this Agreement or the Note or such other Loan Document or any Unmatured Event or Event of Termination and its consequences. Any such waiver and any such amendment, supplement or modification shall be binding upon the Lender and all future holders of the Note. In the case of any waiver, 23 the Lender and the Borrower and the Guarantors shall be restored to their former position and rights hereunder and under the Note and any other Loan Document to which they are parties, and any Unmatured Event or Event of Termination waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Unmatured Event or Event of Termination, or impair any right consequent thereon. 9.02. Notices, etc. Any notice or other communication in connection with this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to the Lender, at the Lender's address on the signature pages hereof; and if to the Borrower, at Cumberland House, One Victoria Street, P.O. Box HM 2245, Hamilton HMJX Bermuda, Attention: Chief Financial Officer, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. 9.03. Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Note. 9.04. Payment of Expenses and Taxes. The Borrower agrees, on demand, to(a) pay or reimburse the Lender for all its reasonable out-of-pocket costs and expenses incurred in connection with the preparation and execution of any amendment, supplement or modification to, this Agreement, the Note and the other Loan Documents and any other agreements prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, any and all reasonable collateral audit fees, and the reasonable fees and disbursements of counsel to the Lender, (b) pay or reimburse the Lender for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the Note and the other Loan Documents, including, without limitation, the reasonable fees and disbursements of counsel to the Lender and (c) pay, indemnify, and hold the Lender harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, any registration tax, stamp, duty and other similar taxes or duties, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Note and the other Loan Documents, and (d) pay, indemnify, and hold the Lender harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent arising from the execution, delivery and administration of, and the enforcement against the Borrower of, this Agreement, the Note and the other Loan Documents (all the foregoing, collectively, the "indemnified liabilities"), provided that the Borrower shall not have any obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender. Without limitation of the generality of this Section 9.04(d), the Borrower shall pay on demand to the Lender any and all amounts necessary to indemnify the Lender from and against any and all indemnified liabilities relating to or resulting from any of the following: (i) reliance on any representation or warranty made or deemed made by the Borrower (or any of its officers) under or in connection with this Agreement, any Loan Document, any Loan Request or any other information or report delivered by the Borrower pursuant hereto, which, in any such case, shall have been false or incorrect in any material respect when made or deemed made or delivered, except to the extent it specifically relates to an earlier date: (ii) the failure by the Borrower to comply with any term, provision or covenant contained in this Agreement or any Loan Document. The agreements in this subsection shall survive repayment of the Loans, the Note and all other amounts payable hereunder. Notwithstanding anything in this Section 9.04 to the contrary, the Borrower shall not 24 have any obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender. 9.05. Successors and Assigns; Participations. -------------------------------------- (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lender, the Guarantors and all future holders of the Note and their respective successors and assigns, except that neither the Borrower nor any Guarantor may assign or transfer any of its rights or obligations under this Agreement without the prior consent of the Lender, and the Lender may not assign or transfer any of its rights or obligations under this Agreement without the prior consent of the Borrower (which consent shall not be unreasonably withheld). The parties to this Agreement acknowledge that the Lender has assigned and shall be permitted to continue to assign (without consent) to the Collateral Agent, as collateral agent for the benefit of the holders of any debt instruments issued by the Lender, its rights under this Agreement and the other Loan Documents (including its rights in the Collateral under the Pledge Agreement). (b) The Borrower and the Lender agree that the Lender may, from time to time, with the prior consent of the Borrower (which consent shall not be unreasonably withheld), sell a portion of the Lender's obligation to make Loans hereunder and of the Lender's rights hereunder and under the Loans and the Note, or grant participations herein and in the Loans and the Note. Any such assignee or participant may have the same rights as the Lender in respect of the rights granted to the Lender hereunder. In such connection, it is agreed that the Lender shall not be responsible for a failure by any such assignee or participant, and that each such assignee or participant shall not be responsible for a failure by the Lender (or another such assignee or participant), to make or fund, as the case may be, its pro rata portion of any Loan. (c) Every participant or assignee of the Lender shall provide the Borrower (A) prior to becoming a participant or assignee (i) if the participant or assignee is incorporated or established under the laws of a jurisdiction outside of the United States, two duly completed copies of the United States Internal Revenue Form 4224 or 1001 (or, if the assignee or participant is not a bank, Form W-8) or successor applicable or required forms, in each case entitling the participant or assignee to receive payments under this Agreement without deduction or withholding of any United States Federal income taxes and demonstrating the participant's or assignee's exemption from backup withholding tax, (ii) a duly completed copy of the Internal Revenue Service Form W-8 or W-9 or successor applicable or required forms, and (iii) such other forms and information as may be reasonably required to confirm the availability of any applicable exemption from United States Federal, state or local withholding taxes, and (B) to the extent possible, each potential participant or assignee must also agree to provide the Borrower on or before the date that any such form expires or becomes obsolete, or upon the occurrence of any event requiring an amendment, resubmission or change in the most recent form previously delivered by it, and such extensions or renewals as may be reasonably requested by the Borrower. Notwithstanding any provision of this Agreement to the contrary, the Borrower shall be entitled to withhold or cause withholding, and no amount shall be payable under Section 2.8, to the extent such amount would otherwise be payable as the result of such participant's or assignee's failure to deliver the forms required by this paragraph (c) on a timely basis. (d) The Lender shall not grant to any assignee or participant the right to consent to any amendment or waiver entered into in accordance with subsection 9.01 except for any such amendment or waiver which would reduce the amount or extend the due date of any principal of or interest on the Note. 9.06. Set-Off. In case any one or more of the Events of Termination described in Article VII hereof shall occur, the holder of the Note shall have the right, in addition to all other rights and remedies available to it, to set-off against the unpaid balance of the Note any debt owing by such holder to the Borrower, including without limitation any funds in any deposit account maintained by the Borrower with such holder, and such holder shall have and there is hereby created in favor of such holder a security interest in all deposit accounts maintained by the Borrower with such holder. Any sums obtained by the holder of the Note issued hereunder by way of counterclaim, set-off, banker's lien or other lien for application upon the Note shall be shared pro rata with the holders of an interest in the Note or this 25 Agreement. Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.07. Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 9.08. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.09. Integration. This Agreement represents the agreement of the Borrower and the Lender with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 9.10. GOVERNING LAW. THIS AGREEMENT AND THE NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF PENNSYLVANIA. 9.11. SUBMISSION TO JURISDICTION WAIVERS. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS AS PROVIDED IN SECTION 9.02 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; AND (d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 9.12. Acknowledgments. The Borrower hereby acknowledges that: 26 (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the Note and the other Loan Documents; (b) the Lender has no fiduciary relationship to the Borrower, and the relationship between the Lender and the Borrower is solely that of debtor and creditor; and (c) no joint venture exists between the Borrower and the Lender. 9.13. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE NOTE OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 9.14. No Bankruptcy Petition Against Lender. The Borrower covenants and agrees that it will not institute against, or join any other Person in instituting against, the Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any federal or state bankruptcy or similar law. 9.15. No Recourse. The obligations of the Lender under this Agreement are solely the corporate obligations of the Lender. No recourse shall be had for the payment of any amount owing in respect to this Agreement or for the payment of any fee hereunder or for any other obligation or claim arising out of or based upon this Agreement against any stockholder, employee, officer, director or incorporator of the Lender or against Mellon or any stockholder, employee, officer, director, incorporator or affiliate thereof. 9.16. Holidays. Unless otherwise specified herein, whenever any payment or action to be made or taken hereunder or under the Note shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania or Bermuda, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. 9.17. Judgment Currency. In the event of a judgment or order being rendered by any court or tribunal for the payment of any amounts owing to the Lender under this Agreement or any other Loan Document or for the payment of damages in respect of any breach of this Agreement or any other Loan Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Lender harmless against any deficiency in terms of Dollars in the amounts received by the Lender arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which the Lender is able to purchase Dollars with the amount of the Judgment Currency actually received by the Lender on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Borrower hereunder and shall apply irrespective of any indulgence granted by the Lender. 9.18. Records. The unpaid principal amount of the Loans owing to the Lender, the unpaid interest accrued thereon, the interest rate or rates applicable to such unpaid principal amount, the duration of such applicability, the Lender's Commitment and the accrued and unpaid Facility Fees and Program Fees shall at all times be ascertained from the records of the Lender, which shall be conclusive absent manifest error. 9.19. Confidentiality. The Lender agrees to keep confidential any information relating to the Borrower received by it pursuant to or in connection with this Agreement which is (a) information which the Lender reasonably expect that the Borrower would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.19 shall not be construed to prevent the Lender from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Borrower to be bound by this obligation of confidentiality, (ii) upon the order of any court or 27 administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over the Lender which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by the Lender, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that the Lender does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the Borrower (vi) in connection with the exercise of any right or remedy hereunder or under any other Loan Document, (vii) as expressly contemplated by this Agreement or any other Loan Document, (viii) to any prospective purchaser of all or any part of the interest of the Lender which shall agree in writing for the benefit of the Borrower to be bound by the obligation of confidentiality in this Agreement or the other Loan Documents if such prospective purchaser is a financial institution or has been consented to by the Borrower, which consent will not be withheld if such purchaser is not a competitor of the Borrower or an affiliate of a competitor of the Borrower or (ix) to its liquidity or credit providers under the Funding Agreement, which agrees in writing to maintain the confidentiality of such information in accordance with this Section 9.19, or a rating agency rating the securities of the Lender. 28 IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. X.L. AMERICA, INC., as Borrower By: _______________________________ (Signature) Name: _____________________________ Title: ____________________________ X.L. INSURANCE COMPANY, LTD., as a Guarantor By: _______________________________ (Signature) Name: _____________________________ Title: ____________________________ X.L. INVESTMENTS LTD., as a Guarantor By: _______________________________ (Signature) Name: _____________________________ Title: ____________________________ THREE RIVERS FUNDING CORPORATION, as Lender By: _______________________________ (Signature) Name: _____________________________ Title: ____________________________ Notice Address: c/o Global Securitization Services, LLC 25 West 43rd Street, Suite 704 New York, New York 10036 Attention: Mr. Bernard J. Angelo Telephone: (212) 302-5151 Facsimile: (212) 302-8767 29 EXHIBIT "A" PROMISSORY NOTE $______________________ December , 1998 FOR VALUE RECEIVED, the undersigned, X.L. America, Inc., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of Three Rivers Funding Corporation, (the "Lender") on the Commitment Expiration Date for each Loan made by the Lender to the Borrower pursuant to the Agreement described below the lesser of (i) the principal sum of ________________ Dollars ($______________) and (ii) the unpaid principal amount of all such Loans made by the Lender maturing on such Commitment Expiration Date. The Borrowers further promise to pay to the order of the Lender interest on the unpaid principal amount hereof from time to time outstanding at the rate or rates per annum determined pursuant to Section 2.06 of, or as otherwise provided in, the Agreement, payable on the dates set forth in the Agreement. This Promissory Note is the Note referred to in the Loan Agreement dated as of December ,1998 among the Borrower, X.L. Investments Ltd., X.L. Insurance Company, Ltd. and the Lender (as the same may have been or may hereafter be amended or modified, the "Agreement" which Agreement, among other things, contains provisions for prepayments on account of principal hereof prior to the maturity hereof and also for acceleration of the maturity hereof upon the happening of certain stated events, upon the terms and conditions therein specified. Terms defined in the Agreement shall have the same meanings herein. The Borrower hereby expressly waive presentment, demand, protest, and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Agreement, and an action for amounts due hereunder or thereunder shall immediately accrue upon the expiration of any grace period. This Note shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania, without regard to conflict of laws principles. X.L. AMERICA, INC. By: _____________________________ (Signature) Name: ___________________________ Title: __________________________ [REVERSE OF NOTE OR SCHEDULE THERETO] This Note evidences Loans made by the Lender under Section 2.1 of the Loan Agreement dated as of December 22, 1998, as from time to time amended, between X.L. America, Inc. and the Lender, in the principal amounts and on the dates set forth below, subject to the payments and prepayments of principal set forth below: Principal Principal Amount Principal Balance Date Amount Loaned Paid or Prepaid Outstanding - - ---- ------------- --------------- ----------- 2 EX-10.14.6 20 LETTER OF CREDIT FACILITY EXHIBIT 10.14.6 LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT BETWEEN X.L. INSURANCE COMPANY, LTD., X.L. EUROPE INSURANCE, X.L. GLOBAL REINSURANCE COMPANY, LTD., and VENTON UNDERWRITING GROUP LIMITED, as Account Parties, AND X.L. INSURANCE COMPANY, LTD. and X.L. INVESTMENTS LTD., as Guarantors, AND THE BANKS PARTIES HERETO FROM TIME TO TIME AND MELLON BANK, N.A., as Issuing Bank and as Agent DATED AS OF February 27, 1998 Table of Contents -----------------
Section Title Page - - ------- ----- ---- ARTICLE I DEFINITIONS; CONSTRUCTION........................................ 1 1.01 Certain Definitions.............................................. 1 1.02 Construction..................................................... 9 1.03 Accounting Principles............................................ 10 ARTICLE II THE LETTER OF CREDIT FACILITY.................................... 10 2.01 Letters of Credit................................................ 10 2.02 Commitment Fee; Reduction of the Committed Amounts............... 12 2.03 Procedure for Issuance and Amendment of Letters of Credit........ 12 2.04 Letter of Credit Participating Interests......................... 13 2.05 Letter of Credit Drawings and Reimbursements..................... 14 2.06 Equalization..................................................... 15 2.07 Obligations Absolute............................................. 15 2.08 Further Assurances............................................... 16 2.09 Letter of Credit Applications.................................... 16 2.10 Certain Provisions Relating to the issuing Bank.................. 16 2.11 Payments Generally; Interest and Interest on Overdue Amounts..... 17 2.12 Additional Compensation in Certain Circumstances................. 18 2.13 Taxes............................................................ 19 2.14 Extensions of Expiration Date.................................... 20 2.15 Tranches......................................................... 21 ARTICLE III REPRESENTATIONS AND WARRANTIES................................... 24 3.01 Organization and Qualification................................... 24 3.02 Corporate Power and Authorization................................ 24 3.03 Financial Information............................................ 24 3.04 Litigation....................................................... 24 3.05 No Adverse Changes............................................... 25 3.06 No Conflicting Laws or Agreements; Consents and Approvals........ 25 3.07 Execution and Binding Effect..................................... 25 3.08 Taxes............................................................ 25 3.09 Use of Proceeds.................................................. 25 3.10 Permits, Licenses and Rights..................................... 25 3.11 Accurate and Complete Disclosure................................. 25 3.12 Absence of Violations............................................ 26 3.13 Environmental Matters............................................ 26 3.14 Not an Investment Company........................................ 26 ARTICLE IV CONDITIONS....................................................... 26 4.01 Effectiveness.................................................... 26 4.02 Issuance of Letters of Credit.................................... 27 ARTICLE V AFFIRMATIVE COVENANTS............................................ 28
i 5.01 Reporting and Information Requirements........................... 28 5.02 Preservation of Existence and Franchises......................... 29 5.03 Insurance........................................................ 29 5.04 Maintenance of Properties........................................ 29 5.05 Payment of Taxes and Other Potential Charges and Priority Claims Payment of Other Current Liabilities...................... 29 5.06 Financial Accounting Practices................................... 30 5.07 Compliance with Applicable Laws.................................. 30 5.08 Use of Proceeds.................................................. 30 5.09 Continuation Of and Change In Business........................... 30 5.10 Visitation....................................................... 30 ARTICLE VI NEGATIVE COVENANTS............................................... 31 6.01 Mergers and Acquisitions......................................... 31 6.02 Dispositions of Assets........................................... 31 6.03 Liens............................................................ 31 6.04 Transactions With Affiliates..................................... 32 6.05 Business......................................................... 32 6.06 Ratio of Total Funded Debt to Consolidated Tangible Net Worth.... 33 6.07 Consolidated Net Worth........................................... 33 6.08 Indebtedness..................................................... 33 6.09 Operating Leverage............................................... 33 6.10 Private Act...................................................... 33 ARTICLE VII EVENTS OF DEFAULT................................................ 33 7.01 Events of Default................................................ 33 ARTICLE VIII THE AGENT........................................................ 35 8.01 Appointment...................................................... 35 8.02 General Nature of Agent's Duties................................. 36 8.03 Exercise of Powers............................................... 36 8.04 General Exculpatory Provisions................................... 36 8.05 Administration by the Agent...................................... 37 8.06 Bank Not Relying on Agent or Other Banks......................... 38 8.07 Indemnification.................................................. 38 8.08 Agent in its Individual; Capacity................................ 38 8.09 Successor Agent.................................................. 38 8.10 Additional Agents................................................ 39 8.11 Calculations..................................................... 39 8.12 Agent's Fee...................................................... 39 ARTICLE IX MISCELLANEOUS.................................................... 39 9.01 No Implied Waiver etc............................................ 39 9.02 Set-Off.......................................................... 39 9.03 Survival of Provisions........................................... 40 9.04 Expenses and Fees; Indemnity..................................... 40 9.05 Severability..................................................... 41 9.06 Holidays......................................................... 41 9.07 Notices, etc..................................................... 41
ii 9.08 Forum Selection and Consent to Jurisdiction...................... 41 9.09 Waiver of Jury Trial............................................. 41 9.10 Governing Law.................................................... 42 9.11 Validity and Enforceability...................................... 42 9.12 Counterparts..................................................... 42 9.13 Successors and Assigns; Participations; Assignments.............. 42 9.14 Amendments and Waivers........................................... 44 9.15 Judgment Currency................................................ 45 9.16 Records.......................................................... 46 9.17 Confidentiality.................................................. 46 9.18 Sharing of Collections 46 ARTICLE X GUARANTEE........................................................ 46 10.01 The Guarantee.................................................... 46 10.02 Obligations Unconditional........................................ 47 10.03 Reinstatement.................................................... 48 10.04 Remedies......................................................... 48 10.05 Continuing Guarantee............................................. 48 10.06 No Restrictions.................................................. 48
Exhibit A Form of Continuing Letter of Credit Agreement Exhibit B Form of Transfer Supplement Exhibit C Form of Opinions of Counsel Exhibit D Form of Compliance Certificate Exhibit E List of Currently Outstanding Letters of Credit Exhibit F Letter of Credit Application Schedule 2.01(b) Form of Evergreen Provision Schedule 3.01 Subsidiaries Schedule 6.03(a) Liens Schedule 6.08(d) Indebtedness iii LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated and effective as of February 27, 1998, by and between X.L. INSURANCE COMPANY, LTD., a Bermuda limited liability corporation ("X.L. Insurance"), X.L. EUROPE INSURANCE, a Company incorporated under the laws of Ireland ("X.L. Europe"), X.L. GLOBAL REINSURANCE COMPANY, LTD., a Bermuda limited liability corporation ("X.L. Global"), VENTON UNDERWRITING GROUP LIMITED, an English limited company ("Venton Group") (X.L. Insurance, X.L. Europe, X.L. Global and Venton Group are referred to hereinafter individually as "Account Party" and collectively as the "Account Parties"), X.L. INVESTMENTS LTD., a Bermuda limited liability corporation ("X.L. Investments") (X.L. Insurance and X.L. Investments are referred to herein individually as "Guarantor" and collectively as the "Guarantors"), the Banks (as defined further below) parties hereto from time to time, MELLON BANK, N.A., a national banking association, as Issuing Bank (the "Issuing Bank") and MELLON BANK, N.A., a national banking association, as Agent for the Banks and the Issuing Bank hereunder (in such capacity, together with successors in such capacity, the "Agent"). PRELIMINARY STATEMENT WHEREAS, the Banks have agreed to make available to the Account Parties a Letter of Credit Facility upon all of the terms and conditions herein set forth; NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Account Parties, the Guarantors, the Agent, the Issuing Bank and each Bank agree as follows. ARTICLE I DEFINITIONS: CONSTRUCTION ------------------------- 1.01. Certain Definitions. In addition to other words and terms defined ------------------- elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Account Parties" and "Account Party" shall have the meaning assigned those terms in the preamble hereof. "Affiliate" shall mean an entity which is directly or indirectly controlled by an Account Party or which controls an Account Party or which is under common control with any of the Account Parties. "Aggregate Letter of Credit Undrawn Availability" at any time shall mean the aggregate amount of the Letter of Credit Undrawn Availability for all Letters of Credit at such time. "Aggregate Letter of Credit Unreimbursed Draws" at any time shall mean the aggregate amount of Letter of Credit Unreimbursed Draws for all Letters of Credit at such time. "Agreement" shall mean this Agreement as amended, modified or supplemented from time to time. "Applicable Interest Rate" as used herein, (i) with respect to obligations denominated in Dollars, shall mean the Prime Rate and (ii) with respect to obligations denominated in Pounds, shall mean 0.5% per annum in excess of the rate appearing on the Telerate Screen page 3740 or 3750 or any equivalent successor to such page or other page as appropriate on the Telerate Service or such other service as may, from time to time, display the British Bankers' Association Interest Settlement Rate for deposits in Pounds. "Assets" at any time shall mean the assets of any Credit Party, as the context requires, at such time, determined in accordance with GAAP or SAP, as appropriate. "Bank Parties" shall mean the Banks, the Issuing Bank and the Agent. "Banks" shall mean the parties listed on the signature pages hereof, subject to the provisions of Section 9.13 hereof pertaining to Persons becoming or ceasing to be Banks, and Bank shall mean any of them. "Bermuda Companies Law" shall mean The Companies Act of 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "Bermuda Insurance Law " shall mean The Insurance Act of 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania or of Bermuda or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania or Bermuda. "Capitalized Lease Obligation" shall mean any lease obligation which is required to be capitalized in accordance with GAAP. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. "Change in Control" shall mean the occurrence of any of the following events or conditions: (a) any Person or group of Persons (as used in Sections 13 and 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder) shall have become the beneficial owner (as defined in rules promulgated by the Securities and Exchange Commission) of more than 40% of the voting securities of EXEL Limited; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of EXEL Limited; or (c) a majority of the members of EXEL Limited'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; provided, that consummation of the 1998 Merger shall be deemed not -------- to be a Change in Control. "Closing Date" shall mean March 3, 1998 or such later date as may be specified by X.L. Insurance by one day's written notice to the Agent. "Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "Commitment Fee" shall have the meaning assigned to that term in Section 2.02(a) hereof. 2 "Consolidated Net Worth" shall mean at any date the consolidated stockholders' equity of the applicable Account Party and its Consolidated Subsidiaries. "Consolidated Subsidiaries" of a Person shall mean those Subsidiaries of such Person the accounts of which are consolidated with the accounts of such Person in accordance with GAAP. "Consolidated Tangible Net Worth" shall mean at any date the consolidated stockholders' equity of the applicable Account Party and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to November 30, 1997, in the book value of any asset owned by the applicable Account Party or a consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Continuing Letter of Credit Agreement" shall mean the letter of credit agreement executed and delivered by the Account Parties substantially in the form of Exhibit A hereto. "Conversion to Tranche System" shall have the meaning assigned to that term in Section 2.15 hereof. "Credit Parties" means the Account Parties and the Guarantors and "Credit Party" means any of them. "Credit Subsidiary" shall mean a Person which is Subsidiary of both (i) a Credit Party and (ii) a party to the Syndicated Revolving Credit Agreements. "Current Expiration Date" shall have the meaning assigned to that term in Section 2.14 hereof. "Custodian" shall mean Mellon Bank, N.A., or any successor, in its capacity as Custodian for X.L. Investments pursuant to the Custody Agreement, dated as of April 1, 1991, as amended, restated or otherwise modified from time to time, or any successor custodian appointed in accordance with Section 6.11 of the Pledge Agreement.. "Dollar," "Dollars" and the symbol $ shall mean lawful money of the United States of America. "Dollar Equivalent" of an amount of a currency other than Dollars shall mean the amount of Dollars which such amount of such currency could purchase at 11:00 o'clock A.M., Pittsburgh time on the date of determination, based upon the quoted spot rates of the Issuing Bank at which its applicable branch or office offers to exchange Dollars for such currency in the foreign exchange market and "Dollar Equivalent" of an amount denominated in Dollars shall mean such amount of Dollars. "Dollar Equivalent Amount" of any Pledged Security shall mean (i) with respect to any Pledged Security denominated in a currency other than Dollars, the Dollar Equivalent of the market value of such Pledged Security as most recently determined at the time in question in accordance with the Pledge Agreement and (ii) with respect to a Pledged Security denominated in Dollars, the market value of such Pledged Security as most recently determined at the time in question in accordance with the Pledge Agreement. 3 "Environmental Concern Materials" shall mean (a) any flammable substance, explosive, radioactive material, hazardous material, hazardous waste, toxic substance, solid waste, pollutant, contaminant or any related material, raw material, substance, product or by-product of any substance specified in or regulated or otherwise affected by any Environmental Law (including but not limited to any "hazardous substance" as defined in CERCLA or any similar Law), (b) any toxic chemical or other substance from or related to industrial, commercial or institutional activities, and (c) asbestos, gasoline, diesel fuel, motor oil, waste and used oil, heating oil and other petroleum products or compounds, polychlorinated biphenyls, radon and urea formaldehyde. "Environmental Law" shall mean any Law, whether now existing or subsequently enacted or amended, relating to (a) pollution or protection of the environment, including natural resources, (b) exposure of Persons, including but not limited to employees, to Environmental Concern Materials, (c) protection of the public health or welfare from the effects of products, by-products, wastes, emissions, discharges or releases of Environmental Concern Materials or (d) regulation of the manufacture, use or introduction into commerce of Environmental Concern Materials, including their manufacture, formulation, packaging, labeling, distribution, transportation, handling, storage or disposal. "Event of Default" shall mean any of the Events of Default described in Article VII hereof. "EXEL Limited" shall mean (i) until consummation of the 1998 Merger, EXEL Limited, a corporation organized under the laws of the Cayman Islands, British West Indies which, on the date of this Agreement, is the sole shareholder of X.L. Insurance Company, Ltd., except for a nominal number of shares owned by two nominee shareholders required by the Bermuda Companies Law and (ii) from and after consummation of the 1998 Merger, EXEL Limited, a corporation organized under the laws of the Cayman Islands, British West Indies which is referred to as "New EXEL" in the 8-K Report referred to in the definition of 1998 Merger below. "Existing Letters of Credit" shall mean the letters of credit listed on Exhibit E hereto. "Expiration Date" shall mean the Business Day immediately preceding the first Anniversary of the Closing Date, as the same may be extended in accordance with Section 2.14 hereof. "Extension Request" shall have the meaning set forth in Section 2.14 hereof. "GAAP" shall have the meaning set forth in Section 1.03 hereof. "Guaranteed Obligations" shall have the meaning assigned to that term in Section 10.01 hereof. "Guarantors" and "Guarantor" shall have the meaning assigned to those terms in the preamble to this Agreement. "Guaranty Equivalents" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such 4 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 Guaranty Equivalent hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Equivalent is made. "Indebtedness" of a Person shall mean (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 company or corporate member of Lloyds (other than in connection with the financing activities of such Person or of 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 Capitalized 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 Capitalized 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 Guaranty Equivalents of such Person. "Insurance Subsidiary" means any, present or future, direct or indirect Subsidiary of any Account Party that offers insurance products, including but not limited to certain of the Account Parties. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "Letter of Credit" shall mean each Letter of Credit issued by the Issuing Bank for the account of one or more of the Account Parties pursuant to this Agreement and each of the Existing Letters of Credit, each as amended, modified or supplemented from time to time. "Letter of Credit Application" shall have the meaning given that term in Section 2.03(a)(ii) hereof. "Letter of Credit Exposure" at any time shall mean the sum at such time of (a) the Aggregate Letter of Credit Unreimbursed Draws (determined as a Dollar Equivalent), (b) the Aggregate Letter of Credit Undrawn Availability and (c) the aggregate Stated Amount (determined as a Dollar Equivalent) of Letters of Credit which have been requested by an Account Party to be issued hereunder but are not yet so issued. "Letter of Credit Fee" shall have the meaning given that term in Section 2.01(d) hereof. 5 "Letter of Credit Participating Interest" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Committed Amount" shall have the meaning given that term in Section 2.01(a) hereof. "Letter of Credit Participating Interest Commitment" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Percentage" and "Letter of Credit Participating Interest Commitment Percentage" for each Bank shall mean a fraction, expressed as percentage, the numerator of which is such Bank's Letter of Credit Participating Interest Committed Amount and the denominator of which is the aggregate Letter of Credit Participating Interest Committed Amounts of all of the Banks. "Letter of Credit Reimbursement Obligation" with respect to a Letter of Credit means the obligation of the applicable Account Party to reimburse the Issuing Bank for drawings on a Letter of Credit, together with interest thereon, and "Letter of Credit Reimbursement Obligations" shall mean all such obligations with respect to all Letters of Credit. "Letter of Credit Undrawn Availability" with respect to a Letter of Credit at any time shall mean the maximum amount (determined as a Dollar Equivalent) available to be drawn under such Letter of Credit at such time or thereafter, regardless of the existence or satisfaction of any conditions or limitations on drawing. "Letter of Credit Unreimbursed Draw" with respect to a Letter of Credit at any time shall mean the amount at such time of a payment made by the Issuing Bank under such Letter of Credit, to the extent not repaid by the applicable Account Party. "Level One Day" shall mean each day during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 35% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Two Day" shall mean each day (which is not a Level One Day) during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 50% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Three Day" shall mean each day (which is not a Level Two Day or a Level One Day) during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 75% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Four Day" shall mean each day (which is not a Level Three Day, a Level Two Day or a Level One Day) during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is less than 100% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities; "Level Five Day" shall mean each day during the period from (but not including) a Valuation Date to and including the next succeeding Valuation Date if on the 6 Valuation Date which is the last day of such period the market value (determined as a Dollar Equivalent Amount) of Zero Percent Risk-Capital Securities included in the Pledged Securities is 100% of the market value (determined as a Dollar Equivalent Amount) of the Required Pledged Securities. "Lien" shall mean 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. "Material Adverse Effect" shall mean the occurrence of an event (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), which has or could reasonably be expected to have a materially adverse effect on: (a) the assets, business, financial condition or operations of a Credit Party and its Subsidiaries taken as a whole; or (b) the ability of a Credit Party to perform any of its payment or other material obligations under this Agreement; or (c) the legality, validity, binding effect or enforceability against a Credit Party of any Transaction Document that by its terms purports to bind such Credit Party. "1998 Merger" shall mean consummation of the transactions provided for in the Agreement and Schemes of Arrangements, dated as of March 16, 1998, substantially as described in the Current Report on Form 8-K of EXEL Limited dated such date. "Nonextending Bank" shall have the meaning assigned to that term in Section 2.14 hereof. "Obligations" shall mean, collectively, the Letter of Credit Reimbursement Obligations and the obligations of each and every Account Party to pay all fees, indemnities and all other liabilities of such Account Party arising pursuant to the terms of this Agreement or the other Transaction Documents. "Office," when used in connection with the Agent, shall mean its office located at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, or at such other office or offices of the Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Agent to the Account Parties. "Official Body" shall mean any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Permitted Liens" shall mean the Liens described in paragraphs (a) through (g) of Section 6.03. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), official body or agency, or any other entity. "Pledged Accounts" shall have the meaning given that term in the Pledge Agreement. "Pledge Agreement" shall mean the Pledge Agreement, dated of even date herewith, between the Agent and X.L. Investments. "Pledged Securities" shall have the meaning given that term in the Pledge Agreement. 7 "Pledged Securities Available Amount" at any time shall mean the amount which is equal to 90% of the value of the Qualifying Pledged Securities (as determined as a Dollar Equivalent Amount at such time). "Potential Default" shall mean any event or condition referenced in Article VII hereof which with notice, passage of time or both would constitute an Event of Default. "Pound," "Pounds" and the symbol "(Pounds)" shall mean the lawful money of the United Kingdom. "Prime Rate" shall mean the interest rate per annum announced from time to time by the Agent as its prime rate, such rate to change automatically effective as of the effectiveness of each announced change in such prime rate (it being understood that such Prime Rate may be greater or less than other interest rates charged by the Agent to other borrowers and is not solely based or dependent upon the interest rate which the Agent may charge any particular borrower or class of borrower). "Private Act" shall mean separate legislation enacted in Bermuda with the intention that such legislation applies specifically to a Credit Party in whole or in part. "Pro Rata" shall have the meaning assigned to that term in Section 2.15 hereof. "Purchasing Bank" shall have the meaning assigned to that term in Section 9.13(c) hereof. "Qualifying Pledged Securities" shall mean (i) cash (including credit balances treated as cash); (ii) direct claims (including securities, loans and leases) on, and the portions of claims that are directly and unconditionally guaranteed by, the central government of any OECD country or any U.S. Government Agency, as such terms are used in Appendix A, Section III(C), Category I to Regulation H, as promulgated by the Board of Governors of the Federal Reserve System; and (iii) claims on, and the portions of claims that are guaranteed by, U.S. Government-sponsored agencies and claims on, and the portions of claims guaranteed by, certain multilateral lending institutions in which the U.S. government is a shareholder or contributing member or shares of money market mutual funds investing solely in U.S. Government Securities, as such terms are used in Appendix A, Section III(C), Category II to such Regulation H; provided, however, that those securities or obligations referred to in clauses (i), (ii) and (iii) above shall not be counted towards the Collateral Value Requirement under the Pledge Agreement unless such securities or obligations have a twenty percent or lower risk capital weighting under such Regulation H, as amended from time to time. "Regular Payment Date" shall mean the last day of each March, June, September and December after the date hereof, or, if such last day is not a Business Day, the next succeeding Business Day. "Replacement Bank" shall have the meaning assigned to that term in Section 2.14 hereof. "Required Banks" shall mean at any time Banks which have at least 51% of the aggregate Letter of Credit Participating Interests in Letters of Credit outstanding at such time. "Required Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "Required Pledged Securities" shall mean at any time Qualifying Pledged Securities 90% of the market value of which (expressed as a Dollar Equivalent Amount) is equal to, but not greater 8 than, the sum of the Aggregate Letter of Credit Unreimbursed Draws (determined as a Dollar Equivalent) at such time and the Aggregate Letter of Credit Undrawn Availability at such time. "SAP" shall mean, as to each Account Party and each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Official Body (including, in the case of Venton Group, the Lloyds council) for such Account Party's or such Insurance Subsidiary's domicile for the preparation of Annual Statements and other Default reports by insurance corporations of the same type as such Account Party or such Insurance Subsidiary in effect on the date such statements or reports are to be prepared. "Standard Notice" shall mean an irrevocable notice provided to the Agent at no later than 10:00 o'clock a.m., Pittsburgh time, on a Business Day. Standard Notice shall be in writing (including telex, facsimile or cable communication) or by telephone (to be subsequently confirmed in writing) in any such case, effective upon receipt by the Agent. "Stated Amount" shall mean, with respect to a Letter of Credit, the maximum face or stated amount of such Letter of Credit, irrespective of whether such maximum amount is available for drawing at the time in question. "Subsidiary" of a Person at any time shall mean any corporation of which a majority (by number of shares or number of votes) of any class of outstanding capital stock normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights of such class) is at such time owned directly or indirectly by such Person or one or more Subsidiaries of such Person. "Syndicated Revolving Credit Agreements" shall mean the Revolving Credit Agreement, dated as of June 6, 1997, and the Short Term Revolving Credit Agreement, dated as of June 6, 1997, in each case between X. L. Insurance, X. L. Reinsurance, Exel Acquisition Ltd., the banks parties thereto and Mellon Bank, N. A., as agent., as amended or extended, or as replaced by one or more other agreements providing for credit not exceeding $500,000,000 in the aggregate, from time to time. "Total Funded Debt" of a Person at any time shall mean all Indebtedness of such person which would at such time be classified in whole or in part as a liability on the balance sheet of such person in accordance with GAAP. "Tranche 1 Bank", "Tranche 1 Letter of Credit", "Tranche 1 Letter of Credit Participating Interest", "Tranche 2 Bank", "Tranche 2 Letter of Credit", "Tranche 2 Letter of Credit Participating Interest", "Tranche 2 Letter of Credit Participating Interest Commitment", "Tranche 2 Letter of Credit Participating Interest Committed Amount", "Tranche 2 Letter of Credit Participating Interest Commitment Percentage", "Tranche 3 Letter of Credit", "Tranche 4 Letter of Credit" and "Tranche X" shall have the respective meanings assigned to those terms in Section 2.15 hereof. "Transaction Document" or "Transaction Documents" shall mean this Agreement, the Pledge Agreement, each Letter of Credit and any other documents or instruments executed and delivered in connection herewith or therewith. "Valuation Date" shall mean the last Business Day of each month. "Zero Percent Risk-Capital Securities" means Pledged Securities which have a 0% risk-capital weighting for bank regulatory capital purposes. 9 1.02. Construction. Unless the context of this Agreement otherwise ------------ clearly requires, "or" has the inclusive meaning represented by the phrase "and/or. " References in this Agreement to "determination" by the Agent include estimates by the Agent in good faith, without gross negligence and without manifest error (in the case of quantitative determinations) and beliefs held by the Agent in good faith and without gross negligence (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.03. Accounting Principles. (a) As used herein, "GAAP" shall mean --------------------- generally accepted accounting principles as such principles shall be in effect in the United States of America, or with respect to Venton Group, the United Kingdom, and with respect to X.L. Europe, the Republic of Ireland, at the Relevant Date, subject to the other provisions of this Section 1.03. As used herein, "Relevant Date" shall mean the date a relevant computation or determination is to be made or the date of relevant financial statements, as the case may be. (b) Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with GAAP or SAP, as the context requires (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP or SAP, as appropriate. (c) If any change in GAAP or SAP after the date of this Agreement is or shall be required to be applied to transactions then or thereafter in existence, and a violation of one or more provisions of this Agreement shall have occurred (or in the opinion of the Required Banks would be likely to occur) which would not have occurred or be likely to occur if no change in accounting principles had taken place, the parties agree in such event to negotiate in good faith an amendment of this Agreement which shall approximate to the extent possible the economic effect of the original financial covenants after taking into account such change in GAAP or SAP, as appropriate. (d) Without in any manner limiting the provisions of this Section 1.03, if any change in GAAP or SAP occurs after the date of this Agreement and such change in GAAP or SAP would have materially changed an Account Party's reported financial results or position from that reflected in such Account Party's financial statements most recently prepared prior to such change, such Account Party shall notify the Agent as soon as practicable. ARTICLE II ---------- THE LETTER OF CREDIT FACILITY ----------------------------- 2.01. Letters of Credit. ----------------- (a) Letter of Credit Commitments. Subject to the terms and conditions and ---------------------------- relying upon the representations and warranties herein set forth, the Issuing Bank agrees to issue (or, in the case of Existing Letters of Credit, maintain outstanding) Letters of Credit for the account of an Account Party at any time or from time to time on or after the date hereof and to but not including the Expiration Date (it being understood that Letters of Credit may be outstanding for the account of one or more of the Account Parties at any time). The Issuing Bank shall have no obligation to issue any Letters of Credit if, after such Letters of Credit are issued, the Letter of Credit Exposure upon such issuance 10 would exceed the lesser of (x) the aggregate of the Banks' Letter of Credit Participating Interest Committed Amounts and (y) the Pledged Securities Available Amount. Each Bank's "Letter of Credit Participating Interest Committed Amount" at any time shall be equal to the amount set forth as its "Initial Letter of Credit Participating Interest Committed Amount" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.02(b) hereof at such time, and subject to transfer to another Bank as provided in Section 9.13 hereof. (b) Terms of Letters of Credit. The Account Parties shall not request to -------------------------- be issued, and the Issuing Bank shall have no obligation to issue, any Letter of Credit except within the following limitations (i) each Letter of Credit shall have an expiration date no later than 12 months after the date of issuance thereof; provided, however, that (x) one or more Letters of Credit with ----------------- aggregate Stated Amounts for all such Letters of Credit (determined as a Dollar Equivalent) of up to $200,000,000 may have an expiration date no later than five years from the date of issuance and (y) any Letter of Credit may have an "evergreen" provision having substantially the effect set forth on Schedule 2.01(b) hereof, (ii) each Letter of Credit shall be denominated in Dollars or Pounds and (iii) each Letter of Credit shall be payable only against sight drafts (and not time drafts). (c) Form of Letters of Credit. The Issuing Bank shall have no obligation ------------------------- to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to the Issuing Bank in the exercise of its reasonable judgment consistent with its customary practice. The Issuing Bank may not object to a letter of credit on account of the fact that it may be presented for drawing at the Issuing Bank's branch in London, England (or, if the Issuing Bank no longer maintains such a branch at the time of issuance of a Letter of Credit, at such other location in London, England as may be commercially reasonable). It is contemplated that one or more Letters of Credit which are issued for the account of X.L. Insurance may be stated to be issued for the account of Venton Underwriting Limited, a Bermuda corporation in which X.L. Insurance has an indirect ownership interest provided, that, notwithstanding the fact that the name of X.L. Insurance may not appear on the face of any such Letter of Credit, X.L. Insurance shall be the Account Party with respect to such Letter of Credit and shall have all Letter of Credit Reimbursement Obligations and other obligations hereunder with respect thereto. (d) Letter of Credit Fee. Each Account Party shall pay or cause to be -------------------- paid to the Agent for the account of each Bank, in accordance with its Letter of Credit Participating Interest Commitment Percentage , a fee (the "Letter of Credit Fee") for Letters of Credit (based on a year of 360 days and actual days elapsed), for each Letter of Credit issued for the account of such Account Party for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.15% for each Level Five Day, 0.165% for each Level Four Day, 0.18% for each Level Three Day, 0.23% for each Level Two Day and 0.28% for each Level One Day. Such Letter of Credit Fee shall be due and payable for the preceding period for which such fee has not been paid on each of the following dates: (i) each Regular Payment Date, (ii) the date of each drawing on such Letter of Credit, and (iii) the date of expiration or termination of such Letter of Credit. If any Letter of Credit Fee payment is made on a day which is not a Valuation Date, the amount of such Letter of Credit Fee attributable to the period from the preceding Valuation Date until such day shall be determined by reference to the rate applicable on such preceding Valuation Date, subject to retroactive adjustment on the next succeeding Valuation Date. The Agent shall provide to the Grantor on a monthly basis a certificate, showing in reasonable detail (with reference to the valuation report as of the last business day of the applicable month provided by the Custodian to the Agent pursuant to the Custodian's Acknowledgment (as defined in the Pledge Agreement)) the Agent's calculation of the Letter of Credit Fee. (e) Purpose of Letters of Credit. The Account Parties agree that each ---------------------------- Letter of Credit shall be used by the Account Party for whom it is issued as a standby letter of credit, to provide credit enhancement for contract performance guarantees or for similar bonding requirements, all in the ordinary course of business of such Account Party. The provisions of this Section 2.01(e) represent 11 only an obligation of the Account Parties to the Issuing Bank and the Banks; the Issuing Bank shall have no obligation to the Banks to ascertain the purpose of any Letter of Credit, and, without limiting the generality of the provisions of Section 2.04(b) hereof, the rights and obligations of the Banks and the Issuing Bank among themselves shall not be impaired or affected by a breach of this Section 2.01(e). (f) Administration Fees. Each Account Party shall pay to the Agent, for ------------------- the sole account of the Issuing Bank, such other administration, maintenance, amendment, drawing and negotiation fees as are customarily charged by the Issuing Bank to its customers generally at the time in question (a list of which customary charges as of the date of this Agreement has been provided by the Issuing Bank to X.L. Insurance) or are otherwise agreed between the Issuing Bank and the Account Parties. 2.02. Commitment Fee; Reduction of the Committed Amounts. -------------------------------------------------- (a) Commitment Fee. X.L. Insurance agrees to pay to the Agent for the -------------- account of each Bank a commitment fee (the "Commitment Fee") for each day during the period from the Closing Date to and including the Expiration Date calculated (based on a year of 360 days and actual days elapsed) at a per annum rate equal to 0.05% payable on the unused portion of such Bank's Letter of Credit Participating Interest Committed Amount in effect on such day. Such fee shall be payable on each Regular Payment Date and on the Expiration Date for the preceding period for which such fee has not been paid. (b) Reduction of the Committed Amounts. X.L. Insurance may at any time or ---------------------------------- from time to time reduce Pro Rata the Letter of Credit Participating Interest Committed Amounts of the Banks to an aggregate amount (which may be zero) not less than the Letter of Credit Exposure. Any reduction of the Letter of Credit Participating Interest Committed Amounts shall be in an aggregate minimum amount of $25,000,000 and in an amount which is an integral multiple of $5,000,000. Reduction of the Letter of Credit Participating Interest Committed Amounts shall be made by providing not less than five Business Days' notice (which notice shall be irrevocable) to such effect to the Agent. After the date specified in such notice, the Commitment Fee shall be calculated upon the Letter of Credit Participating Interest Committed Amounts as so reduced. 2.03. Procedure for Issuance and Amendment of Letters of Credit. --------------------------------------------------------- (a) Request for Issuance. An Account Party may from time to time request, -------------------- upon at least three Business Days' notice, the Issuing Bank to issue a Letter of Credit by: (i) delivering to the Issuing Bank and the Agent a written request to such effect, specifying the date on which such Letter of Credit is to be issued, the expiration date thereof, and the Stated Amount thereof, and (ii) delivering to the Issuing Bank a completed application, in the form annexed hereto as Exhibit F, or in such other form as is from time to time be required by the Issuing Bank in accordance with its customary practice with respect to its customers generally (the "Letter of Credit Application"), together with such other certificates, documents and other papers as are specified in such application. Upon receiving any such notice, the Issuing Bank shall promptly notify the Agent (by telephone or otherwise), and furnish the Agent with the proposed form of Letter of Credit to be issued. The Agent shall, promptly upon receiving such notice, notify the Banks of such proposed Letter of Credit (which notice shall specify the Stated Amount and term of such proposed Letter of Credit), and shall determine, as of the close of business on the Business Day before such proposed issuance, whether such proposed Letter of Credit complies with the limitations set forth in Section 2.01 hereof. If such limitations set forth in Section 2.01 are not satisfied or if the Required Banks have given notice to the 12 Agent to cease issuing Letters of Credit pursuant to Section 2.03(c)(ii) hereof, the Agent shall notify the Issuing Bank (in writing or by telephone promptly confirmed in writing) that the Issuing Bank is not authorized to issue such Letter of Credit. If the Issuing Bank issues a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct, and shall promptly notify the Agent thereof and furnish a copy thereof to the Agent. (b) Request for Extension or Increase. An Account Party may from time to --------------------------------- time request the Issuing Bank to extend the expiration date of an outstanding Letter of Credit or increase (or, with the consent of the beneficiary, decrease) the Stated Amount of or the amount available to be drawn on such Letter of Credit. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of a replacement Letter of Credit (except only that the Issuing Bank may, if it elects, issue a notice of extension or increase in lieu of issuing a new Letter of Credit in substitution for the outstanding Letter of Credit). (c) Limitations on Issuance, Extension and Amendment. ------------------------------------------------ (i) As between the Issuing Bank, on the one hand, and the Agent and the Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing such Letter of Credit after receiving authorization from the Agent as provided in Section 2.03(a) hereof, notwithstanding any subsequent notices to the Issuing Bank, any knowledge of an Event of Default (unless the Issuing Bank shall have received a notice specifying that such Event of Default is an "Event of Default" under this Agreement) or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Issuing Bank, or any other event, condition or circumstance whatsoever. The Issuing Bank may amend, modify or supplement Letters of Credit or Letter of Credit Applications, or waive compliance with any condition of issuance or payment, without the consent of, and without liability to, the Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases the Stated Amount of or the amount available to be drawn on an outstanding Letter of Credit shall be subject to Section 2.01. (ii) As between the Agent, on the one hand, and the Banks, on the other hand, the Agent shall not authorize issuance of any Letter of Credit if the Agent shall have received, at least two Business Days before authorizing such issuance, from the Required Banks an unrevoked written notice that any condition precedent set forth in Section 4.02 will not be satisfied as of the time of such issuance and expressly requesting that the Agent direct the Issuing Bank to cease to issue Letters of Credit. Absent such notice, or unless the Agent determines that the applicable limitations set forth in Section 2.01 hereof are not satisfied, the Agent shall be justified and fully protected, as against the Banks, in authorizing the Issuing Bank to issue such Letter of Credit, notwithstanding any subsequent notices to the Agent, any knowledge of an Event of Default or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Agent, or any other event, condition or circumstance whatsoever. 2.04. Letter of Credit Participating Interests. ---------------------------------------- (a) Generally. Concurrently with the issuance of each Letter of Credit, --------- the Issuing Bank automatically shall be deemed, irrevocably and unconditionally, to have sold, assigned, transferred and conveyed to each other Bank, and each other Bank automatically shall be deemed, irrevocably and unconditionally, severally to have purchased, acquired, accepted and assumed from the Issuing Bank, without recourse to, or representation or warranty by, the Issuing Bank, an undivided interest, in a proportion equal to such Bank's Pro Rata share, in all of the Issuing Bank's rights and obligations in, to or under such Letter of Credit, the related Letter of Credit Application, the Letter of Credit Reimbursement Obligations, and all collateral, guarantees and other rights from time to time directly 13 or indirectly securing the foregoing (such interest of each Bank being referred to herein as a "Letter of Credit Participating Interest", it being understood that the Letter of Credit Participating Interest of the Issuing Bank is the interest not otherwise attributable to the Letter of Credit Participating Interests of the other Banks). Each Bank irrevocably and unconditionally agrees to the immediately preceding sentence, such agreement being herein referred to as such Bank's "Letter of Credit Participating Interest Commitment". Amounts other than Letter of Credit Reimbursement Obligations and Letter of Credit Fees payable from time to time under or in connection with a Letter of Credit or Letter of Credit Application shall be for the sole account of the Issuing Bank. On the date that any Purchasing Bank becomes a party to this Agreement in accordance with Section 9.13(c) hereof, Letter of Credit Participating Interests in all outstanding Letters of Credit held by the Bank from which such Purchasing Bank acquired its interest hereunder shall be proportionately reallocated between such Purchasing Bank and such transferor Bank (and, to the extent such transferor Bank is the Issuing Bank, the Purchasing Bank shall be deemed to have acquired a Letter of Credit Participating Interest from the Issuing Bank to such extent). (b) Maximum Amounts of Funding of Participations. -------------------------------------------- (i) This Section 2.04(b)(i) is applicable if the Conversion to Tranche System has not occurred. No Bank will be obligated to fund its Letter of Credit Participating Interest Percentage of a drawing on a Letter of Credit if such funding would cause the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit to exceed such Bank's Letter of Credit Participating Interest Committed Amount, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds, that the Dollar Equivalent of one Pound is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds. (ii) This Section 2.04(b)(ii) is applicable if the Conversion to Tranche System has occurred. No Tranche 1 Bank, Tranche 2 Bank or Tranche X Bank, as the case may be, will be obligated to fund its Letter of Credit Participating Interest Percentage of a drawing on a Tranche 1 Letter of Credit, Tranche 2 Letter of Credit or Tranche X Letter of Credit, as the case may be, if such funding would cause the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit under such applicable Tranche to exceed such Bank's Letter of Credit Participating Interest Committed Amount under such applicable Tranche, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds, that the Dollar Equivalent Amount of one Pound is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds. (c) Obligations Absolute. Notwithstanding any other provision hereof, -------------------- each Bank hereby agrees that its obligation to participate in each Letter of Credit issued in accordance herewith, its obligation to make the payments specified in Section 2.05 hereof, and the right of the Issuing Bank to receive such payments in the manner specified therein, are each absolute, irrevocable and unconditional and shall not be affected by any event, condition or circumstance whatever. The failure of any Bank to make any such payment shall not relieve any other Bank of its funding obligation hereunder on the date due, but no Bank shall be responsible for the failure of any other Bank to meet its funding obligations hereunder. 2.05. Letter of Credit Drawings and Reimbursements. -------------------------------------------- (a) Account Party's Reimbursement Obligation. Each Account Party hereby ----------------------------------------- agrees to reimburse the Issuing Bank, by making payment to the Agent for the account of the Issuing Bank in accordance with Section 2.11(a) hereof on the date of each payment made by the Issuing Bank under any Letter of Credit issued for such Account Party's account (or, if later, the date which is one Business Day after notice of such payment or of the drawing giving rise to such payment is given to X.L. Insurance), without, protest or demand, all of which are hereby waived, and an action therefor 14 shall immediately accrue. Each Account Party agrees that it will make such payment to the Agent for the account of the Issuing Bank in the same currency as the currency of the payment by the Issuing Bank under such Letter of Credit. To the extent such payment is not timely made, such Account Party hereby agrees to pay to the Agent, for the account of the Issuing Bank, on demand, interest on any Letter of Credit Unreimbursed Draws for each day from and including the date of such payment by the Issuing Bank until paid (before and after judgment) in accordance with Section 2.11(a) hereof, at the rate per annum set forth in Section 2.11(b) hereof. (b) Payment by Banks on Account of Unreimbursed Draws. If the Issuing ------------------------------------------------- Bank makes a payment under any Letter of Credit and is not reimbursed in full therefor on such payment date in accordance with Section 2.05(a) hereof, the Issuing Bank will promptly notify the Agent thereof (which notice may be by telephone), and the Agent shall forthwith notify each Bank (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Agent's close of business on the date such notice is given (if notice is given by 2:00 o'clock P.M.) or 10:00 o'clock A.M. the following day (if notice is given after 2:00 o'clock P.M.) , each such Bank will pay to the Agent, for the account of the Issuing Bank, in immediately available funds, an amount equal to such Bank's Pro Rata share of the unreimbursed portion of such payment by the Issuing Bank, provided such notice is given no later than 2:00 o'clock P.M., Pittsburgh time. - - -------- Each Bank agrees that such payment to the Agent for the account of the Issuing Bank shall be in the same currency as the currency of the payment by the Issuing Bank under the Letter of Credit. If and to the extent that any Bank fails to make such payment to the Issuing Bank on such date, such Bank shall pay such amount on demand, together with interest, for the Issuing Bank's own account, for each day from and including the date of the Issuing Bank's payment to and including the date of repayment to the Issuing Bank (before and after judgment) at rate per annum for each day from and including the date of such payment by the Issuing Bank to and including the second Business Day thereafter equal to the Applicable Interest Rate. (c) Distributions to Banks. If, at any time, after there occurs a Letter ---------------------- of Credit Unreimbursed Draw and the Issuing Bank has received from any Bank such Bank's share of such Letter of Credit Unreimbursed Draw, and the Issuing Bank receives any payment or makes any application of funds on account of the Letter of Credit Reimbursement Obligation arising from such Letter of Credit Unreimbursed Draw, the Issuing Bank will pay to the Agent, for the account of such Bank , such Bank's Pro Rata share of such payment. (d) Rescission. If any amount received by the Issuing Bank on account of ---------- any Letter of Credit Reimbursement Obligation shall be avoided, rescinded or otherwise returned or paid over by the Issuing Bank for any reason at any time, whether before or after the termination of this Agreement (or the Issuing Bank believes in good faith that such avoidance, rescission, return or payment is required, whether or not such matter has been adjudicated), each such Bank will, promptly upon notice from the Agent or the Issuing Bank, pay over to the Agent for the account of the Issuing Bank its Pro Rata share of such amount, together with its Pro Rata share of any interest or penalties payable with respect thereto. 2.06 Equalization. If any Bank receives any payment or makes any ------------ application on account of its Letter of Credit Participating Interest, such Bank shall forthwith pay over to the Issuing Bank, in Dollars and in like kind of funds received or applied by it the amount in excess of such Bank's ratable share of the amount so received or applied. 2.07. Obligations Absolute. The payment obligations of the Account -------------------- Parties and of the Banks under Section 2.05 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: 15 (a) any lack of validity or enforceability of this Agreement, any Letter of Credit or any Transaction Document against an Account Party; (b) the existence of any claim, set-off, defense or other right which any Account Party, any Guarantor or any other Person may have at any time against any beneficiary or transferee of any Letter of Credit (or any Persons for whom any such beneficiary or transferee may be acting), the Issuing Bank, any Bank, or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or any unrelated transaction; (c) any draft, certificate, statement or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (d) payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit, or payment by the Issuing Bank under the Letter of Credit in any other circumstances in which conditions to payment are not met, except any such wrongful payment resulting solely from the gross negligence or willful misconduct of the Issuing Bank; or (e) any other event, condition or circumstance whatever, whether or not similar to any of the foregoing, except if the same results solely from the gross negligence or willful misconduct of the Issuing Bank. Each Account Party bears the risk of, and neither the Issuing Bank, any of its directors, officers, employees or agents, nor any Bank, shall be liable or responsible for any of, the foregoing matters, the use which may be made of any Letter of Credit, or acts or omissions of the beneficiary or any transferee in connection therewith, except for such person's gross negligence or willful misconduct. 2.08. Further Assurances. Each Account Party and each Guarantor hereby ------------------ agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments reasonably requested by the Issuing Bank more fully to effect the purposes of this Agreement and the issuance of the Letters of Credit hereunder. 2.09. Letter of Credit Applications. The representations, warranties and ----------------------------- covenants by the Account Parties under, and the rights and remedies of the Issuing Bank under, the Continuing Letter of Credit Agreement and any Letter of Credit Application relating to any Letter of Credit are in addition to, and not in limitation or derogation of, representations, warranties and covenants by the Account Parties under, and rights and remedies of the Issuing Bank and the Banks under, this Agreement, the Transaction Documents, and applicable Law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Application shall inure to the benefit of each Bank to the extent of its Letter of Credit Participating Interest Commitment Percentage as fully as if such Bank was a party to such Letter of Credit Application. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Application, this Agreement shall prevail. 2.10. Certain Provisions Relating to the Issuing Bank. ----------------------------------------------- (a) General. The Issuing Bank shall have no duties or responsibilities ------- except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or any Transaction Document or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the other Bank Parties under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Bank Party or any other Person. The Issuing Bank shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless 16 caused by its own gross negligence or willful misconduct. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Account Party, (ii) the business, operations, condition (financial or otherwise) or prospects of the Account Parties or any other Person, or (iii) the existence of any Event of Default or Potential Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide the Agent or any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. The Issuing Bank shall not be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document. (b) Administration. The Issuing Bank may rely upon any notice or other -------------- communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Issuing Bank shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Issuing Bank may consult with legal counsel (including, without limitation, in-house counsel for the Issuing Bank or in-house or other counsel for the Account Parties), independent public accountants and any other experts selected by it from time to time, and the Issuing Bank shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever the Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to any Account Party or Bank Party, such matter may be established by a certificate of such Account Party or Bank Party, as the case may be, and the Issuing Bank may conclusively rely upon such certificate. The Issuing Bank shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Issuing Bank has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Issuing Bank receives such a notice, the Issuing Bank shall give prompt notice thereof to the Agent. (c) Indemnification of Issuing Bank by Banks. Each Bank hereby agrees to ---------------------------------------- reimburse and indemnify the Issuing Bank and each of its directors, officers, employees and agents (to the extent not reimbursed by the Account Parties and without limitation of the obligations of the Account Parties to do so), Pro Rata, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel (other than in-house counsel) for the Issuing Bank or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Issuing Bank or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Issuing Bank, in its capacity as such, or such other Person, as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Letter of Credit, provided, that no Bank -------- shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting from the gross negligence or willful misconduct of the Issuing Bank or such other Person, as finally determined by a court of competent jurisdiction. (d) Issuing Bank in its Individual Capacity. With respect to its --------------------------------------- Commitments and the Obligations owing to it, the Issuing Bank shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the terms "Banks," "holders of Notes" and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as 17 trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Issuing Bank were not the Issuing Bank hereunder. 2.11. Payments Generally; Interest and Interest on Overdue Amounts. ------------------------------------------------------------ (a) Payments Generally. All payments to be made by an Account Party in ------------------ respect of fees, indemnity, expenses or other amounts due from such Account Party hereunder or under any Transaction Document shall be payable in Dollars at 12:00 o'clock Noon, Pittsburgh time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature. Except for payments under Sections 2.12, 2.13 and 9.04 hereof, such payments shall be made to the Agent at its Office in Dollars in funds immediately available at such Office. Payments under Sections 2.12, 2.13 and 9.04 hereof shall be made to the applicable Bank at such domestic account as it shall specify to the Account Parties from time to time in funds immediately available at such account. Any payment or prepayment received by the Agent or such Bank after 12:00 o'clock Noon, Pittsburgh time, on any day shall be deemed to have been received on the next succeeding Business Day. The Agent shall distribute to the Banks all such payments received by it from an Account Party as promptly as practicable after receipt by the Agent. (b) Interest and Interest on Overdue Amounts. Interest on Letter of ---------------------------------------- Credit Reimbursement Obligations shall accrue at a rate per annum (based on a year of 360 days and actual days elapsed) which for each day shall be equal to the then-current Applicable Interest Rate beginning on the day that the related Letter of Credit payment is made and shall be due and payable on the day that the Letter of Credit Reimbursement Obligation is due and payable in accordance with Section 2.05(a) hereof. To the extent permitted by law, after there shall have become due (by acceleration or otherwise) fees, indemnity, expenses or any other amounts due from the Account Parties hereunder or under any other Transaction Document, such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days and actual days elapsed) which for each day shall be equal to 2% above the then-current Applicable Interest Rate. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any Transaction Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. 2.12. Additional Compensation in Certain Circumstances. If the ------------------------------------------------ introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Official Body (whether or not having the force of law): (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Letters of Credit or payments by the Account Parties of fees or other amounts due from the Account Parties hereunder or under the other Transaction Documents (except for taxes on the overall net income or overall gross receipts of such Bank imposed by the jurisdictions (federal, state and local) in which the Bank's principal office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, such Bank, (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Bank or (B) otherwise applicable to the obligations of any Bank under this Agreement, or 18 (iv) imposes upon any Bank any other condition or expense with respect to this Agreement or the issuance of any Letter of Credit, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank or, in the case of clause (iii) hereof, any Person controlling a Bank, with respect to this Agreement or the issuance of any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Bank's or controlling Person's capital, taking into consideration such Bank's or controlling Person's policies with respect to capital adequacy so long as such policies are reasonable in light of prevailing market practice at the time) by an amount which such Bank deems to be material, such Bank may from time to time notify the Account Parties of the amount determined in good faith (using any averaging and attribution methods) by such Bank (which determination shall be conclusive) to be necessary to compensate such Bank for such increase, reduction or imposition. Such amount shall be due and payable by any applicable Account Party to such Bank five Business Days after such notice is given, together with an amount equal to interest on such amount from the date two Business Days after the date demanded until such due date at the Prime Rate. A certificate by such Bank as to the amount due and payable under this Section 2.12 from time to time and the method of calculating such amount shall be conclusive. Each Bank agrees that it will use good faith efforts to notify the Account Parties of the occurrence of any event that would give rise to a payment under this Section 2.12; provided, -------- however that, so long as such notice is given within a reasonable period after the occurrence of such event, any failure of such Bank to give any such notice shall have no effect on the Account Parties' obligations hereunder. 2.13. Taxes. ----- (a) Payments Net of Taxes. All payments made by the Account Parties under --------------------- this Agreement or any other Transaction Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Official Body, and all liabilities with respect thereto, excluding (i) in the case of the Agent and each Bank, income or franchise taxes imposed on the Agent or such Bank by the jurisdiction under the laws of which the Agent or such Bank is organized or any political subdivision or taxing authority thereof or therein or as a result of a connection between such Bank and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and (ii) in the case of each Bank, income or franchise taxes imposed by any jurisdiction in which such Bank's lending offices which issue Letters of Credit are located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"), unless an Account Party is required to withhold or deduct Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to the Agent or any Bank under this Agreement or any other Transaction Document, the applicable Account Party shall pay the relevant amount of such Taxes and the amounts so payable to the Agent or such Bank shall be increased to the extent necessary to yield to the Agent or such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Transaction Documents. Whenever any Taxes are paid by an Account Party with respect to payments made in connection with this Agreement or any other Transaction Document, as promptly as possible thereafter, such Account Party shall send to the Agent for its own account or for the account of such Bank, as the case may be, a certified copy of an original official receipt received by such Account Party showing payment thereof. If the Agent or a Bank determines in its sole discretion in good faith that it has received a refund in respect of any Taxes as to which it has been indemnified by 19 an Account Party, or with respect to which an Account Party has paid additional amounts pursuant to this Section 2.13, the Agent or such Bank shall promptly after the date of such receipt pay over the amount of such refund to such Account Party (but only to the extent of indemnity payments made, or additional amounts paid, by an Account Party under this Section 2.13 with respect to Taxes giving rise to such refund and only to the extent that the Agent or such Bank has determined that the amount of any such refund is directly attributable to payments made under this Agreement), net of all reasonable expenses of the Agent or such Bank (including additional Taxes attributable to such refund, as determined by the Agent or such Bank) and without interest (other than interest, if any, paid by the relevant Official Body with respect to such refund). An Account Party receiving any such payment from the Agent or a Bank shall, upon demand, pay to the Agent or such Bank any amount paid over to such Account Party by the Agent or such Bank (plus penalties, interest or other charges) in the event the Agent or such Bank is required to repay any portion of such refund to such Official Body. Nothing in this Section 2.13(a) shall entitle an Account Party to have access to the records of the Agent or any Bank, including, without limitation, tax returns. (b) Indemnity. Each Account Party hereby indemnifies the Agent and each --------- of the Banks for the full amount of all Taxes attributable to payments by or on behalf of such Account Party hereunder or under any of the other Transaction Documents, any Taxes paid by the Agent or such Bank, as the case may be, any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Taxes (including any incremental Taxes, interest or penalties that may become payable by the Agent or such Bank as a result of any failure to pay such Taxes, except by reason of unreasonable delay by the Agent or Bank in notifying an Account Party or in making payment after payment was received from an Account Party), whether or not such Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date such Bank or the Agent, as the case may be, makes written demand therefor. (c) Withholding and Backup Withholding. Each Bank that is incorporated or ---------------------------------- organized under the laws of any jurisdiction other than the United States or any State thereof agrees that, on or prior to the date the first payment is due to be made to it hereunder or under any other Transaction Document, it will furnish to the Account Parties and the Agent (i) two valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the other Transaction Documents without deduction or withholding of any United States federal income taxes and (ii) a valid, duly completed Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Bank which so delivers to the Account Parties and the Agent a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, agrees to deliver to the Account Parties and the Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from withholding tax, or after the occurrence of any event requiring a change in the most recent form previously delivered by it, and such extensions or renewals thereof as may reasonably be requested by the Account Parties and the Agent, certifying in the case of a Form 1001 or Form 4224 that such Bank is entitled to receive payments under this Agreement or any other Transaction Document without deduction or withholding of any United States federal income taxes, unless in any such cases an event (including any changes in Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises 20 the Account Parties and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, in which case Section 2.13(a) and (b) shall apply to all further payments. 2.14. Extensions of Expiration Date. X.L. Insurance may, at its option, ----------------------------- give the Agent and the Issuing Bank written notice (an "Extension Request") at any time not more than ninety days, nor less than forty-five days, prior to the Expiration Date in effect at such time (the "Current Expiration Date") of X.L. Insurance's desire to extend the Expiration Date to a date which is not later than 364 days after the Current Expiration Date. The Agent shall promptly inform the Banks of such Extension Request. Each Bank which agrees to such Extension Request shall deliver to the Agent its express written consent thereto no later than thirty days prior to the Current Expiration Date. No extension shall become effective unless the express written consent thereto by the Required Commitment Banks and the Issuing Bank is received by the Agent on or before the thirtieth day prior to the Current Expiration Date. If the Issuing Bank and the Required Commitment Banks, but not all Commitment Banks, have expressly consented in writing to such Extension Request by such thirtieth day, then the Agent shall so notify X.L. Insurance and X.L. Insurance may, effective as of the Current Expiration Date, take one or both of the following actions: (i) replace any Commitment Bank which has not agreed to such Extension Request (a "Nonextending Bank") with another commercial lending institution satisfactory to the Issuing Bank (a "Replacement Bank") by giving notice of the name of such Replacement Bank to the Agent and the Issuing Bank not later than five Business Days prior to the then effective Expiration Date and (ii) elect to implement a Conversion to Tranche System as contemplated by Section 2.15 hereof (or, if the Conversion to Tranche System has previously been implemented, elect to implement a Supplement to Tranche System as contemplated by Section 2.15 hereof). In the event that a Nonextending Bank is to be replaced by a Replacement Bank, such Nonextending Bank shall, upon payment to it of all amounts owing to it on the date of its replacement, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. If the Issuing Bank and the Required Commitment Banks shall have consented to such Extension Request, then, on the Current Expiration Date, the Expiration Date shall be deemed to have been extended to, and shall be, the date specified in such Extension Notice. The Agent shall promptly after any such extension advise the Banks of any changes in the Letter of Credit Participating Interest Committed Amounts and the Letter of Credit Participating Interest Commitment Percentages, as well as any changes effected by the election of the Conversion to Tranche System or a Supplement to Tranche System. 2.15. Tranches. (a) Certain Definitions. As used in this Agreement the -------- ------------------- following terms have the meanings ascribed thereto: "Commitment Banks" at any time means Banks which have Letter of Credit Participating Interest Commitments at such time and "Commitment Bank" means any one of them. "Conversion to Tranche System" means the election by the Account Parties, at a time when X.L. Insurance has made an Extension Request pursuant to Section 2.14 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify Letters of Credit as Tranche 1 Letters of Credit and Tranche 2 Letters of Credit, all in accordance with Section 2.15(b) hereof. "L/C Termination Date" means, with respect to a Letter of Credit, the date which is stated therein to be the last day on which the beneficiary thereof may draw thereon. 21 "Pro Rata" means: (i) until the first Special Expiration Date, from and to the Banks in accordance with their respective Letter of Credit Participating Interest Percentages and (ii) thereafter, (x) with respect to Tranche 1 Letters of Credit, from and to the Tranche 1 Banks in accordance with their respective Tranche 1 Letter of Credit Participating Interest Percentages, (y) with respect to Tranche 2 Letters of Credit and Tranche 2 Letter of Credit Commitments, from and to the Tranche 2 Banks in accordance with their respective Tranche 2 Letter of Credit Participating Interest Percentages and (z) with respect to each additional Tranche of Letters of Credit (i.e., Tranche 3 Letters of Credit, Tranche 4 Letters of Credit, and so on), if any, from and to the Banks which have Letter of Credit Participating Interest Commitments or Letter of Credit Participating Interests, as applicable, with respect to such Tranche in accordance with their respective related Letter of Participating Interest Percentages. "Required Commitment Banks" at any time means Commitment Banks which have, in the aggregate, Letter of Credit Participating Interest Committed Amounts in excess of 50% of the total outstanding Letter of Credit Participating Interest Committed Amounts at such time. "Special Expiration Date" means the Expiration Date which is in effect at a time when each of the following has occurred: (i) X.L. Insurance has made an Extension Request pursuant to Section 2.14 hereof, (ii) such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, and (iii) X.L. Insurance has elected to implement a Conversion to Tranche System or a Supplement to Tranche System. "Supplement to Tranche System" means the election by X.L. Insurance, at a time when the Conversion to Tranche System has been previously made and when X.L. Insurance has made an Extension Request pursuant to Section 2.14 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify additional Letters of Credit as Tranche X Letters of Credit. "Tranche 1 Bank" shall mean each Bank which is a Bank immediately prior to the first Special Expiration Date. "Tranche 1 Letter of Credit" means each Letter of Credit which is issued prior to the first Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such first Special Expiration Date. "Tranche 1 Letter of Credit Participating Interest Percentage" for each Tranche 1 Bank means such Bank's Letter of Credit Participating Interest Percentage immediately prior to the first Special Expiration Date. "Tranche 2 Bank" shall mean each Bank which has a Tranche 2 Letter of Credit Participating Interest Commitment. "Tranche 2 Letter of Credit" means each Letter of Credit which is issued prior to the second Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such second Special Expiration Date and shall not include any Tranche 1 Letter of Credit (it being understood that 22 a Letter of Credit may change from a Tranche 1 Letter of Credit to a Tranche 2 Letter of Credit as a result of the extension, after the first Special Expiration Date, of its L/C Termination Date). "Tranche 3 Letter of Credit" and "Tranche 4 Letter of Credit" have the meanings set forth in the definition of the term "Tranche X". "Tranche X" shall mean Tranche 3 if there are existing Tranche 2 Letters of Credit but not Tranche 3 Letters of Credit, Tranche 4 if there are existing Tranche 3 Letters of Credit but not Tranche 4 Letters of Credit, and so on in consecutive integral succession. The terms "Tranche X Bank", "Tranche X Letter of Credit Participating Interest Commitment", "Tranche X Letter of Credit Participating Interest Committed Amount" and "Tranche X Letter of Credit Participating Interest Percentage" shall have comparable meanings. The term "Tranche X Letter of Credit" shall have a comparable meaning, but such meaning shall be consistent with the following: (i) the term "Tranche 3 Letter of Credit" means each Letter of Credit which is issued prior to the third Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such third Special Expiration Date and shall not include any Tranche 1 Letter or Credit or any Tranche 2 Letter of Credit; (ii) the term "Tranche 4 Letter of Credit" means each Letter of Credit which is issued prior to the fourth Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such fourth Special Expiration Date and shall not include any Tranche 1 Letter of Credit, any Tranche 2 Letter of Credit or any Tranche 3 Letter of Credit; (iii) the terms "Tranche 5 Letter of Credit", "Tranche 6 Letter of Credit", and so on shall have comparable meanings (it being understood that a Letter of Credit can change from one Tranche to another as a result of an extension of its L/C Termination Date). (b) Conversion to Tranche System. If the Account Parties elect the ---------------------------- Conversion to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate as of the Special Expiration Date related to such Extension Request, but such Nonextending Banks (other than Nonextending Banks which have been replaced as contemplated by Section 2.14 hereof) shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Tranche 1 Letters of Credit and shall retain their respective Letter of Credit Participating Interests in and with respect to Tranche 1 Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche 2 Letter of Credit Participating Interest Commitment" and the Letter of Credit Participating Interested Committed Amount of such Lender shall be its "Tranche 2 Letter of Credit Participating Interest Committed Amount"; (iii) the "Tranche 2 Letter of Credit Participating Interest Commitment Percentage" for each Tranche 2 Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche 2 Bank's Tranche 2 Letter of Credit Participating Interest Committed Amount and the denominator of which is the aggregate Tranche 2 Letter of Credit Participating Interest Committed Amounts of all of the Tranche 2 Banks. (c) Supplement to Tranche System. If the Account Parties elect a ---------------------------- Supplement to Tranche System with respect to such Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate, but such Nonextending Banks shall remain parties to this 23 Agreement and shall retain all of their respective obligations with respect to Letters of Credit under existing Tranches and shall retain their respective Letter of Credit Participating Interests in and with respect to existing Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche X Letter of Credit Participating Interest Commitment" and the Letter of Credit Participating Interested Committed Amount of such Lender shall be its "Tranche X Letter of Credit Participating Interest Committed Amount"; (iii) the "Tranche X Letter of Credit Participating Interest Commitment Percentage" for each Tranche X Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche X Bank's Tranche X Letter of Credit Participating Interest Committed, Amount and the denominator of which is the aggregate Tranche X Letter of Credit Participating Interest Committed Amounts of all of the Tranche X Banks, all as contemplated by the definition of the term "Tranche X" contained in paragraph (a) of this Section 2.15. ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES. ------------------------------- Each Credit Party represents and warrants that: 3.01. Organization and Qualification. Such Credit Party and each of its ------------------------------ Credit Subsidiaries is a corporation duly organized, validly existing and (unless the concept of good standing is not known to the law of the relevant jurisdiction) in good standing under the laws of their respective jurisdictions of incorporation and has the power and authority to own its properties and assets, and to carry on its business as presently conducted and is qualified to do business in those jurisdictions in which its ownership of property or the nature of its business activities is such that failure to receive or retain such qualification would have a Material Adverse Effect. A list of such Credit Party's Credit Subsidiaries setting forth their respective jurisdictions of incorporation is set forth in Schedule 3.01 hereto. Such Credit Party is not subject to any Private Act, except, with respect to X.L. Insurance, the X.L. Insurance Company, Ltd. Act, 1989, a copy of which has been provided to the Agent. 3.02. Corporate Power and Authorization. Such Credit Party and any --------------------------------- Subsidiary of such Credit Party which is also a Credit Party has corporate power and authority to make and carry out this Agreement and any other Transaction Document to which it is a party, to execute and deliver this Agreement and each such Transaction Document, to perform its obligations hereunder and under any such Transaction Documents and, in the case of each Credit Party which is an Account Party, to request the issuance of Letters of Credit as provided for herein. All such action has been duly authorized by all necessary corporate proceedings on the part of such Credit Party. 3.03. Financial Information. Such Credit Party has furnished to Agent, ---------------------- with sufficient copies for each Bank, copies of the audited consolidated financial statements and the consolidating financial statements of such Credit Party and its consolidated Subsidiaries including a consolidated and consolidating balance sheet and related statements of income and retained earnings for the fiscal year ending November 30, 1997 (or, in the case of Venton Group, December 31, 1996). Such financial statements fairly present the financial position of such Credit Party and its consolidated Subsidiaries as of the date of such reports and the consolidated and consolidating results of their operations and cash flows for the fiscal period then ended in conformity with GAAP (or, in the case of Venton Group, SAP) applied on a consistent basis, and such consolidated financial statements have been examined and reported upon by independent, certified public accountants. 24 3.04. Litigation. Except as disclosed to the Banks in writing prior to ---------- the Closing Date (including by disclosure in the financial statements delivered to the Banks referred to in Section 3.03 hereof), there is no litigation or governmental proceeding by or against such Credit Party or any of its Subsidiaries pending or, to its knowledge, threatened, which could reasonably be expected (in light of reserves, and total shareholders' equity of such Credit Party and after taking into account the nature of such Credit Party's business and activities) to have a Material Adverse Effect if adversely determined. 3.05. No Adverse Changes. Since November 30, 1997 (or, in the case of ------------------ Venton Group, December 31, 1996), there has been no occurrence or event which has had a Material Adverse Effect. 3.06. No Conflicting Laws or Agreements; Consents and Approvals. (a) --------------------------------------------------------- Neither the execution and delivery of this Agreement or any other Transaction Document, the consummation of the transactions herein or therein contemplated nor compliance with the terms and provisions hereof or thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws of such Credit Party or of any applicable Law or of any material agreement or instrument to which such Credit Party is a party or by which it is bound or to which it is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, except Permitted Liens, of any nature whatsoever upon any of the property of such Credit Party pursuant to the terms of any such agreement or instrument. (b) Except for the filing of the Pledge Agreement with the Registrar of Companies in Bermuda, no authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Official Body is or will be necessary or advisable in connection with (i) execution and delivery of this Agreement or any other Transaction Document, (ii) the consummation of the transactions herein or therein contemplated, or (iii) the performance of or compliance with the terms and conditions hereof or thereof. 3.07. Execution and Binding Effect. This Agreement (and, in the case of ---------------------------- X.L. Investments, the Pledge Agreement) has been duly and validly executed and delivered by such Credit Party. This Agreement and each Transaction Document to which it is a party constitutes legal, valid and binding obligations of such Credit Party enforceable in accordance with the terms thereof except, as to the enforcement of remedies, for limitations imposed by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally (excluding Laws with respect to fraudulent conveyance), (ii) Laws limiting the right of specific performance or (iii) general principles of equity. 3.08. Taxes. All tax returns required to be filed by each Credit Party ----- have been properly prepared, executed and filed. All taxes, assessments, fees and other governmental charges upon such Credit Party or upon its properties, income or sales which are due and payable have been paid. The reserves and provisions for taxes, if any, on the books of such Credit Party are adequate for all open years and for its current fiscal period as determined in accordance with GAAP. 3.09. Use of Proceeds. Such Credit Party will use any Letter of Credit --------------- issued hereunder for its account for general corporate purposes. Such Credit Party will make no request for a Letter of Credit hereunder for the purpose of directly or indirectly buying or carrying any "margin stock" as such term is used in Regulation U of the Board of Governors of the Federal Reserve System in violation of such regulation. Such Credit Party is not engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 3.10. Permits, Licenses and Rights. Such Credit Party and each Credit ---------------------------- Subsidiary of such Credit Party own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties and to carry on their respective businesses as presently conducted and 25 presently planned to be conducted without, to the best knowledge of such Credit Party, conflict with the rights of others. 3.11. Accurate and Complete Disclosure. All information provided by or on -------------------------------- behalf of any Credit Party to the Agent or any Bank pursuant to or in connection with this Agreement or the other Transaction Documents and the transactions contemplated hereby and thereby is true and accurate in all material respects on the date such information is dated (or, if not dated, on the date such information was received by the Agent or such Bank, as the case may be) and such information, taken as a whole, which was provided on or prior to the time this representation is made or remade, does not, to the best knowledge of the Credit Parties, omit to state any material fact necessary to make such information not misleading at such time in light of the circumstances in which it was provided. 3.12. Absence of Violations. Such Credit Party and each Affiliate of such --------------------- Credit Party is not in violation of a any charter document, corporate minute or resolution, any instrument or agreement, in each case binding on it or affecting its property, or any Law, in a manner which could have a Materially Adverse Effect. 3.13. Environmental Matters. Such Credit Party and each of its Credit --------------------- Subsidiaries is and has been in full compliance with all applicable Environmental Laws. Such Credit Party and each of its Credit Subsidiaries have all Approvals by Official Bodies charged with the enforcement of Environmental Laws that are necessary or desirable for the ownership and operation of their respective properties, facilities and businesses as presently owned and operated and as presently proposed to be owned and operated. 3.14. Not an Investment Company. Such Credit Party is not an Investment ------------------------- Company required to be registered under the Investment Company Act of 1940. ARTICLE IV ---------- CONDITIONS ---------- 4.01. Effectiveness. The effectiveness of this Agreement shall be subject --------------- to the following conditions: (a) Proceedings and Incumbency. There shall have been delivered to the -------------------------- Agent with sufficient copies for each Bank a certificate with respect to each Credit Party in form and substance satisfactory to the Agent dated the Closing Date and signed on behalf of each Credit Party by the Secretary or an Assistant Secretary of such Credit Party certifying as to: (a) true copies of all corporate action taken by such Credit Party relative to this Agreement and the other Transaction Documents applicable to it including but not limited to that described in Section 3.02 hereof and (b) the names, true signatures and incumbency of the officer or officers of such Credit Party authorized to execute and deliver this Agreement and the other Transaction Documents applicable to it. Each Bank may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Bank. (b) Organizational Documents. There shall have been delivered to the ------------------------ Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation or memorandum of association and by-laws or other equivalent organizational documents for each Credit Party and (ii) a certificate of good standing for each Credit Party (other than X.L. Europe) certified by the appropriate Official Body of its place of organization. 26 (c) Opinions of Counsel. There shall have been delivered to the Agent ------------------- with sufficient copies for each Bank written opinions addressed to the Banks, dated the Closing Date, of Messrs. Cahill Gordon & Reindel, Messrs. Conyers, Dill & Pearman and Paul S. Giordano, Esq., respectively, the Account Parties' and Guarantors' counsel, which together are substantially to the effects set forth in Exhibit C, and opinions of counsel qualified to practice in each jurisdiction, other than Bermuda and the United States, under the laws of which an Account Party is organized substantially to such effects to the extent that the laws of such jurisdiction are relevant. (d) Details, Proceedings and Documents. All legal details and proceedings ---------------------------------- in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory to each Bank, and each Bank shall have received all such counterpart originals or certified or other copies of this Agreement and the other the Transaction Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Bank have reasonably requested. (e) Fees and Expenses. Each Account Party shall have paid all fees and ----------------- other compensation to be paid by it hereunder on or prior to the Closing Date. (f) Representation and Warranties. The representation and warranties ----------------------------- contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (g) Pledge Agreement. The Pledge Agreement shall have been delivered to ---------------- the Agent, with sufficient copies for each Bank, duly executed by X.L. Investments. The Custodian's Acknowledgment, as defined in the Pledge Agreement, shall have been delivered to the Agent duly executed by the Custodian. (h) Letter of Credit Agreement. The Continuing Letter of Credit Agreement -------------------------- shall have been delivered to the Agent, with sufficient copies for each Bank, duly executed by each Account Party. 4.02. Issuance of Letters of Credit. The obligation of the Issuing Bank ----------------------------- to issue any Letters of Credit hereunder is subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the performance by each Account Party of its obligations to be performed hereunder on or before the date of such Letters of Credit and to the satisfaction of the following further conditions: (a) Representations and Warranties; Events of Default and Potential --------------------------------------------------------------- Defaults. The representations and warranties contained in Article III hereof - - -------- shall be true on and as of the date of each Letter of Credit issued hereunder with the same effect as though made on and as of each such date, and on the date of each Letter of Credit issued hereunder no Event of Default and no Potential Default shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Letter of Credit to be issued on such date. Failure of the Agent to receive notice from the applicable Account Party to the contrary before any Letter of Credit is issued hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the date of such Letter of Credit with the same effect as though made on and as of such date and (ii) on the date of such Letter of Credit no Event of Default or Potential Default has occurred and is continuing or exists or will occur or exist after giving effect to such Letter of Credit. (b) Commitment. The fact that, immediately after the issuance of such ---------- Letter of Credit, the aggregate outstanding Stated Amounts (determined as Dollar Equivalents) of the Letters of Credit issued and outstanding hereunder will not exceed the lesser of (x) the aggregate amount of the Letter of Credit Participating Interest Committed Amounts and (y) the Pledged Securities 27 Available Amount. 28 ARTICLE V --------- AFFIRMATIVE COVENANTS --------------------- Each Credit Party, as applicable, hereby covenants to the Agent, the Issuing Bank and each Bank as follows: 5.01. Reporting and Information Requirements. Each Credit Party shall -------------------------------------- deliver to the Agent with sufficient copies for each Bank: (a) Annual Reports. (i) As soon as practicable and in any event within -------------- 100 days after the close of each fiscal year, audited consolidated statements and unaudited consolidating statements of income, retained earnings and cash flows of such Credit Party and its consolidated Subsidiaries, for such fiscal year and a consolidated audited and consolidating balance sheet of such Credit Party and its consolidated Subsidiaries, as of the close of such fiscal year, and notes to each, all in accordance with GAAP (or, in the case of Venton Group, until it produces GAAP financial statements, SAP), setting forth in comparative form the corresponding figures for the preceding fiscal year, with such consolidated statements and balance sheets to be certified by independent public accountants of recognized national standing in the United States selected by such Credit Party and not unacceptable to the Required Banks, and the certificate or report of such accountants to be free of exceptions or qualifications not reasonably acceptable to the Required Banks and (ii) as soon as practical and in any event within 100 days after the close of each fiscal year of EXEL Limited, audited consolidated statements of income, retained earnings and cash flows of EXEL Limited and its consolidated Subsidiaries for such fiscal year and a consolidated audited balance sheet of EXEL Limited and its consolidated Subsidiaries as of the close of such fiscal year, and notes to each, all in reasonable detail and in accordance with GAAP (or, in the case of Venton Group as aforesaid, SAP), setting forth in comparative form the corresponding figures for the preceding fiscal year, with such statements and balance sheets to be certified by independent public accountants of recognized national standing in the United States selected by EXEL Limited and not unacceptable to the Required Banks, and the certificate or report of such accountants to be free of exceptions or qualifications not reasonably acceptable to the Required Banks. (b) Quarterly Statements. Within sixty days after the end of the first, -------------------- second and third quarterly accounting periods in each fiscal year of X.L. Insurance, copies of the unaudited consolidated and consolidating balance sheets of X.L. Insurance and its consolidated Subsidiaries as of the end of such accounting period and of the consolidated and consolidating income statements of X.L. Insurance and its consolidated Subsidiaries for the elapsed portion of the fiscal year ended with the last day of such accounting period, all in accordance with GAAP subject to year-end audit adjustments and certified by the principal financial officer of X.L. Insurance to have been prepared in accordance with generally accepted accounting principles consistently applied by X.L. Insurance except as explained in such certificate. (c) Compliance Certificates. Within 100 days after the end of each fiscal ------------------------ year of the Credit Parties and within sixty days after the end of each of the first three quarters of each fiscal year, a certificate in the form of Exhibit D hereto dated as of the end of such fiscal year or quarter, signed on behalf of each Credit Party by a principal financial officer thereof, (i) stating that as of the date thereof no Event of Default or Potential Default has occurred and is continuing or exists, or if an Event of Default or Potential Default has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by such Credit Party, (ii) stating in reasonable detail the information and calculations necessary to establish compliance with the provisions of Article VI hereof, and (iii) stating that the signer has reviewed this 29 Agreement and that such certificate is based on an examination made by or under the supervision of the signer sufficient to assure that such certificate is accurate. (d) Further Information. All such other information and in such form as ------------------- any Bank may reasonably request in writing. (e) Notice of Event of Default. Immediately upon becoming aware of any -------------------------- Event of Default or Potential Default, written notice thereof, together with a written statement of the president or a principal financial officer of the applicable Credit Party setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by the Credit Parties. (f) Notice of Material Adverse Change. Promptly upon becoming aware --------------------------------- thereof, written notice of any event or occurrence constituting or which could reasonably be expected to have a Material Adverse Effect. (g) Notice of Material Proceedings. Promptly upon becoming aware thereof, ------------------------------ written notice of the commencement, existence or threat of any proceeding or a material change in any existing material proceeding by or before any Official Body against or affecting such Credit Party which, if adversely decided, could have a Material Adverse Effect. (h) Notice of Certain Material Changes. Promptly upon adoption thereof, ---------------------------------- notice of each material change in any Credit Party's investment policy, underwriting policy or other business policy. The Credit Parties hereby authorize and direct the Agent to, and the Agent agrees to, furnish to the Banks no less frequently than quarterly a statement of value with respect to the Pledged Accounts provided by the Custodian under the Custody Agreement, which statement shall include, or be accompanied by, information as to the risk weighting of the Required Pledged Securities. 5.02. Preservation of Existence and Franchises. Each Credit Party shall, ---------------------------------------- and shall cause each of its Credit Subsidiaries to, maintain its corporate existence, rights and franchises in full force and effect in its jurisdiction of incorporation, which jurisdiction shall continue to be, in the case of each Credit Party, the jurisdiction under the laws of which such Credit Party is organized as of the date hereof. Each Credit Party shall, and shall cause each of its Credit Subsidiaries to, qualify and remain qualified as a foreign corporation in each jurisdiction in which failure to receive or retain such qualification would have a Material Adverse Effect. 5.03. Insurance. Each Credit Party shall, and shall cause each of its --------- Credit 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 a similar business having similar properties similarly situated. 5.04. Maintenance of Properties. Each Credit Party shall, and shall cause ------------------------- each of its Credit 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 shall 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, provided, however, that the foregoing -------- shall not impose on such Credit Party or any Subsidiary of such Credit Party any obligation in respect of any property leased by such Credit Party or such Subsidiary in addition to such Credit Party's obligations under the applicable document creating such Credit Party's or such Subsidiary's lease or tenancy. 5.05. Payment of Taxes and Other Potential Charges and Priority Claims ---------------------------------------------------------------- Payment of Other Current Liabilities. Each Credit Party shall, and shall cause - - ---------------- ------------------- each of its Credit Subsidiaries to, pay or discharge: 30 (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 6.03 hereof) 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 similar Law applicable to any Credit Party, or any insolvency proceeding, liquidation, receivership, rehabilitation, dissolution or winding-up involving such Credit Party or such Credit Subsidiary; provided that, unless and until -------- foreclosure, distraint, levy, sale or similar proceedings shall have been commenced, such Credit Party need not pay or discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is contested in good faith and by appropriate proceedings diligently conducted and so long as such reserves or other appropriate provisions as may be required by GAAP and SAP shall have been made therefor and so long as such failure to pay or discharge does not have a Material Adverse Effect. 5.06. Financial Accounting Practices. Such Credit Party shall, and shall ------------------------------ cause each of its Credit Subsidiaries to, make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements required under Section 5.01 hereof in conformity with GAAP and SAP, as applicable, and to maintain accountability for assets. 5.07. Compliance with Applicable Laws. Each Credit Party shall, and shall ------------------------------- cause each of its Credit Subsidiaries to, comply with all applicable Laws (including but not limited to the Bermuda Companies Law and Bermuda Insurance Laws) in all respects; provided that such Credit Party or any Credit Subsidiary -------- of such Credit Party shall not be deemed to be in violation of this Section 5.07 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 Materially Adversely Effect or (ii) otherwise impair the ability of such Credit Party to perform its obligations under this Agreement. 5.08. Use of Proceeds. Each Account Party shall use the Letters of Credit --------------- issued hereunder for its general corporate purposes. 5.09. Continuation Of and Change In Business. Each Credit Party and its -------------------------------------- Subsidiaries shall continue to engage in substantially the same business and activities it currently engages in on the date of this Agreement. 5.10. Visitation. Each Credit Party shall permit such Persons as any Bank ---------- may reasonably designate to visit and inspect any of the properties of such Credit Party, to discuss its affairs with its financial management, and provide such other information relating to the business and financial condition of such Credit Party at such times as such Bank may reasonably request. Each Credit Party hereby authorizes its financial management to discuss with any Bank the affairs of such Credit Party. 31 ARTICLE VI ---------- NEGATIVE COVENANTS ------------------ Each Credit Party covenants to the Agent and to each Bank as follows: 6.01. Mergers and Acquisitions. (a) Such Credit Party shall not merge ------------------------ with or into or consolidate with any other Person, or agree to do any of the foregoing, except that if no Event of Default or Potential Event of Default shall occur and be continuing or shall exist at the time of such merger or consolidation or immediately thereafter and after giving effect thereto: (i) any Credit Party may merge with any other corporation, including a Subsidiary, if such Credit Party shall be the surviving corporation; and (ii) if the written consent of the Required Banks is obtained, any Credit Party may merge into or consolidate with any other corporation if the corporation into which such Credit Party is merged or which is formed by such consolidation shall expressly assume all obligations of such Credit Party under this Agreement. (b) Such Credit Party shall not acquire the stock or other equity interests, or all or any substantial portion of the properties or assets of any other Person, or agree to do any of the foregoing, unless such Person is engaged primarily in the insurance business or the financial services business. 6.02. Dispositions of Assets. Such Credit Party shall not, and shall not ---------------------- permit any Credit Subsidiary 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 6.02 as a "transaction" and any series of related transactions constituting but a single transaction), 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) Transactions in the ordinary course of business involving current assets or other assets classified on such Credit Party's balance sheet as available for sale. (b) Sales, conveyances, assignments or other transfers or dispositions in immediate exchange for cash or tangible assets, provided that any such sales, conveyances or transfers shall not individually, or in the aggregate, exceed $50,000,000 in any calendar year for all Credit Parties in the aggregate; or (c) Dispositions of equipment or other property which is obsolete or no longer used or useful in the conduct of the business of such Credit Party or its Credit Subsidiaries. 6.03. Liens. Such Credit Party shall not, and shall not permit any Credit ----- Subsidiary to, at any time create, incur, assume or suffer to exist any Lien on any of its property or assets, tangible or intangible, now owned or hereafter acquired or agree or become liable to do so, except: (a) Liens existing on the date hereof (and extension, renewal and replacement Liens upon the same property, provided the amount secured by each Lien constituting such an extension, renewal or replacement Lien shall not exceed the amount secured by the Lien theretofore existing) and listed on Schedule 6.03(a) hereto; provided, however, that no such Lien may at any time -------- ------- exist upon the Pledged Securities; 32 (b) Liens arising from taxes, assessments, charges, levies or claims described in Section 5.05 hereof that are not yet due or that remain payable without penalty or to the extent permitted to remain unpaid under the provision of such Section 5.05; (c) Liens on property securing all or part of the purchase price thereof to such Credit Party and Liens (whether or not assumed) existing on property at the time of purchase thereof by such Credit Party (and extension, renewal and replacement Liens upon the same property), provided -- (i) each such Lien is confined solely to the property so purchased, improvements thereto and proceeds thereof, and (ii) the aggregate amount of the obligations secured by all such Liens on any particular property at any time purchased by such Credit Party, as applicable, shall not exceed 100% (if such obligations are not subject when created to United States income taxes) or 90% (in all other cases) of the lesser of the fair market value of such property at such time or the actual purchase price of such property; provided, however, that no such Lien may at any time exist upon the Pledged - - -------- ------- Securities; (d) Zoning restrictions, easements, minor restrictions on the use of real property, minor irregularities in title thereto and other minor Liens that do not in the aggregate materially detract from the value of a property or asset to, or materially impair its use in the business of, such Credit Party; (e) Liens securing Indebtedness permitted by Section 6.08 hereof covering assets whose market value is not materially greater than an amount equal to the amount of the Indebtedness secured thereby, plus a commercially reasonable margin provided, however, that no such Lien may at any time exist upon the -------- ------- Required Pledged Securities; (f) Liens on cash and securities of such Credit Party or its Credit Subsidiaries incurred as part of the management of its investment portfolio in accordance with customary portfolio management practice and not in violation of such Credit Parties' investment policy as in effect on the date of this Agreement; provided, however, that no such Lien may at any time exist upon the --------- ------- Pledged Securities; or (g) Liens in favor of the Bank Parties created pursuant to the Pledge Agreement. 6.04. Transactions With Affiliates. Such Credit Party shall not, and shall ---------------------------- not permit any Credit Subsidiary to, enter into or carry out any transaction with (including, without limitation, purchase or lease property or services to, loan or advance to or enter into, suffer to remain in existence or amend any contract, agreement or arrangement with) any Affiliate of such Credit Party, or directly or indirectly agree to do any of the foregoing, except transactions among such Credit Party and its wholly-owned Credit Subsidiaries and transactions with Affiliates in good faith in the ordinary course of such Credit Party's business consistent with past practice and on terms no less favorable to such Credit Party or any Credit Subsidiary than those that could have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. 6.05. Business. Such Credit Party will not, and will not permit any -------- Subsidiary to, engage (directly or indirectly) in any businesses other than the businesses substantially the same as those in which such Credit Party and its Subsidiaries are engaged on the Closing Date and any businesses reasonably related thereto or in the financial services industry. Each Account Party which is an insurance company will not permit, at any time, its net premiums earned from insurance operations to comprise less than 50% of gross revenues of such Account Party (on a consolidated basis exclusive of net gains and losses from investments and investment income). X.L. Investments 33 shall not conduct or be engaged in any business other than the business of holding investments provided to it by X.L. Insurance and the affiliates of X.L. Insurance and the proceeds thereof. 6.06. Ratio of Total Funded Debt to Consolidated Tangible Net Worth. X.L. ------------------------------------------------------------- Insurance will not permit its ratio of Total Funded Debt to Consolidated Tangible Net Worth to be greater than 0.35 at any time. 6.07. Consolidated Net Worth. X.L. Insurance will not permit its ---------------------- Consolidated Net Worth to be less than $1,200,000,000 at any time. 6.08. Indebtedness. Such Credit Party shall not, and shall not permit any ------------ Subsidiary to, at any time create, incur, assume or suffer to exist any Indebtedness, or agree, become or remain liable (contingent or otherwise) to do any of the foregoing, except: (a) Indebtedness to the Banks pursuant to this Agreement and the other Transaction Documents; (b) Indebtedness of all Credit Parties and their Subsidiaries in an aggregate principal amount not exceeding $300,000,000 at any time outstanding; (c) Indebtedness pursuant to the Syndicated Revolving Credit Agreements; (d) Indebtedness described on Schedule 6.08(d); (e) Accounts or claims payable and accrued and deferred compensation (including options) incurred in the ordinary course of business by any Credit Party or any Subsidiary of any Credit Party; and (f) Indebtedness incurred in transactions described in Section 6.03(f). 6.09. Operating Leverage. X.L. Insurance will not permit its ratio of net ------------------ premiums written to statutory capital and surplus, in each case as reflected in the notes to its consolidated financial statements, to be greater than 1.2 to 1.0 at any time. 6.10. Private Act. Such Credit Party shall not become subject to a Private ----------- Act except, in the case of X.L. Insurance, the X.L. Insurance Company, Ltd. Act, 1989. ARTICLE VII EVENTS OF DEFAULT ----------------- 7.01. Events of Default. An Event of Default shall mean the occurrence or ----------------- existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law): (a) Any Account Party shall default in the payment when due of any reimbursement obligation with respect to any Letter of Credit; (b) Any Account Party shall default in the payment when due of any Letter of Credit Fee, Commitment Fee, or any other fee or amount payable hereunder which default shall continue for a period of three days from the due date thereof; 34 (c) Any Credit Party shall default in the observance, performance or fulfillment of any covenant contained in Article VI hereof; (d) Any Credit Party shall default in the observance, performance or fulfillment of any other covenant, condition or provision hereof and such default shall not be remedied for a period of twenty days after written notice thereof to such Credit Party from the Agent; (e) Any Credit Party, EXEL Limited, or any Subsidiary of any Credit Party shall default (i) in any payment of principal of or interest on any other obligation for borrowed money in principal amount of $10,000,000 or more 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 under which any such obligation in principal amount of $10,000,000 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; (f) One or more judgments for the payment of money shall have been entered against any Credit Party or EXEL Limited which judgments exceed $50,000,000 in the aggregate and such judgments shall remain undischarged or uncontested or appealed in good faith for a period of thirty consecutive days; (g) Any representation or warranty herein made by any Credit Party, or 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; (h) X.L. Insurance shall cease to own, beneficially and of record, directly or indirectly, 100% of the outstanding voting shares of common stock of each other Credit Party; (i) EXEL Limited shall cease to own, beneficially and of record, directly or indirectly, all of the outstanding voting shares of capital stock of X.L. Insurance, except for a nominal number of shares owned by two nominee shareholders required by the Bermuda Companies Law; (j) A Change in Control shall occur; (k) The guarantee contained in Article X hereof shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of X.L. Insurance or X.L. Investments, or any Credit Party or any Person acting for or on behalf of any of such parties contests such validity or binding nature of such guarantee itself or the transactions contemplated by this Agreement, or any other Person shall assert any of the foregoing, or the Pledge Agreement shall terminate or cease, in whole or in part, to be a legally valid and binding obligation of X.L. Investments, or any Credit Party or any Person acting for or on behalf of any of such parties contests such validity or binding nature of the Pledge Agreement itself or the transactions contemplated thereby (including the security interest granted thereunder); (l) A decree or order by a court having jurisdiction in the premises shall have been entered adjudging any Credit Party or EXEL Limited a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of such Credit Party or EXEL Limited under the Bermuda Companies Law, or any other similar applicable Law, and such decree or order shall have continued undischarged or unstayed for a period of sixty days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of such Credit Party or EXEL Limited 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 remained in force undischarged and unstayed for a period of sixty days; 35 (m) Any Credit Party or EXEL Limited 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 any other similar applicable Law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or examiner (in the case of X.L. Europe) or trustee or assignee in bankruptcy or insolvency of it or of 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 action shall be taken by such Credit Party or EXEL Limited in furtherance of any of the aforesaid purposes; or (n) The Pledged Securities Available Amount shall at any time be less than the Letter of Credit Exposure; then, the Issuing Bank shall be under no further obligation to issue Letters of Credit hereunder and the Agent may, and upon written request of the Required Banks shall, exercise any or all remedies available to it under the Pledge Agreement or otherwise. ARTICLE VIII THE AGENT --------- 8.01. Appointment. (a) Each Bank hereby irrevocably appoints Mellon ----------- Bank, N.A. to act as Agent for such Bank under this Agreement and the other Transaction Documents. Each Bank hereby irrevocably authorizes the Agent to take such action on behalf of such Bank under the provisions of this Agreement and the other Transaction Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Agent on behalf of the Banks on the terms and conditions set forth in this Agreement and the other Transaction Documents, subject to its right to resign as provided in Section 8.10 hereof. Each Bank hereby irrevocably authorizes the Agent to execute and deliver each of the Transaction Documents and to accept delivery of such of the other Transaction Documents as may not require execution by the Agent. Each Bank agrees that the rights and remedies granted to the Agent under the Transaction Documents shall be exercised exclusively by the Agent, and that no Bank shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. (b) Each Bank agrees that Mellon Bank, N. A. may act as collateral agent in connection with a Future Collateral Allocation Transaction. As used herein, the term "Future Collateral Allocation Transaction" means a transaction which includes, among other things, the following elements: (i) X.L. Insurance shall have arranged one or more separate financing transactions with credit providers (which may, but need not, include any of the Banks) for which the Pledged Accounts and securities entitlements therein serve as collateral at a time when the Pledged Accounts and securities entitlements therein serve as collateral for the Obligations under this Agreement; (ii) Mellon Bank, N. A. shall have agreed to serve as collateral agent both for the Issuing Bank, the Agent and the Banks under this Agreement and the Pledge Agreement and for the parties providing the separate financing described in clause (i) of this paragraph; (iii) arrangements shall have been made pursuant to which specific securities entitlements within the Pledged Accounts are allocated as collateral for the Obligations under this Agreement and other specific securities entitlements within the Pledged Accounts are allocated as collateral for such other financings; and (iv) the Required Banks and the Issuing Bank shall have approved all of such arrangements and the documents implementing the same, including amendments to this Agreement and the Pledge Agreement. 36 8.02. General Nature of Agent's Duties. Notwithstanding anything to the -------------------------------- contrary elsewhere in this Agreement or in any other Transaction Document: (a) The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Agent shall be read into this Agreement or any Transaction Document or shall otherwise exist. (b) The duties and responsibilities of the Agent under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Agent shall not have a fiduciary relationship in respect of any Bank. (c) The Agent is and shall be solely the agent of the Banks. The Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Banks as provided in this Agreement and the other Transaction Documents). (d) The Agent shall be under no obligation to take any action hereunder or under any other Transaction Document if the Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Transaction Document, or may require the Agent to qualify to do business in any jurisdiction where it is not then so qualified. 8.03. Exercise of Powers. The Agent shall take any action of the type ------------------ specified in this Agreement or any other Transaction Document as being within the Agent's rights, powers or discretion in accordance with directions from the Required Banks (or, to the extent this Agreement or such Transaction Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set of Persons). In the absence of such directions, the Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Transaction Document expressly requires the direction or consent of the Required Banks (or some other Person or set of Persons), in which case the Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Banks. The Agent shall not have any liability to any Person as a result of (x) the Agent acting or refraining from acting in accordance with the directions of the Required Banks (or other applicable Person or set of Persons), (y) the Agent refraining from acting in the absence of instructions to act from the Required Banks (or other applicable Person or set of Persons), whether or not the Agent has discretionary power to take such action, or (z) the Agent taking discretionary action it is authorized to take under this Section (subject, in the case of this clause (z), to the provisions of Section 8.04(a) hereof). 8.04. General Exculpatory Provisions. Notwithstanding anything to the ------------------------------ contrary elsewhere in this Agreement or any other Transaction Document: (a) The Agent shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. (b) The Agent shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Transaction Document, (iii) any failure of any Credit Party or Bank to perform any of their respective obligations 37 under this Agreement or any other Transaction Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Transaction Documents or otherwise from time to time. (c) The Agent shall not be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Credit Party, (ii) the business, operations, condition (financial or otherwise) or prospects of any Credit Party or any other Person, or (iii) except to the extent set forth in Section 8.05(f) hereof, the existence of any Event of Default or Potential Default. (d) The Agent shall not be under any obligation, either initially or on a continuing basis, to provide any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Transaction Document to be furnished by the Agent to such Bank. 8.05. Administration by the Agent. --------------------------- (a) The Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) The Agent may consult with legal counsel (including, without limitation, in-house counsel for the Agent or in-house or other counsel for any Credit Party), independent public accountants and any other experts selected by it from time to time, and the Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) The Agent may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Agent in accordance with the requirements of this Agreement or any other Transaction Document. Whenever the Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Credit Party or Bank, such matter may be established by a certificate of such Credit Party or Bank, as the case may be, and the Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Transaction Document). (d) The Agent may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Agent by reason of taking or continuing to take any such action. (e) The Agent may perform any of its duties under this Agreement or any other Transaction Document by or through agents or attorneys-in-fact. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care. (f) The Agent shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Agent has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating 38 that such notice is a "notice of default". If the Agent receives such a notice, the Agent shall give prompt notice thereof to each Bank. 8.06. Bank Not Relying on Agent or Other Banks. Each Bank acknowledges as ---------------------------------------- follows: (a) neither the Agent nor any other Bank has made any representations or warranties to it, and no act taken hereafter by the Agent or any other Bank shall be deemed to constitute any representation or warranty by the Agent or such other Bank to it; (b) it has, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Transaction Documents; and (c) it will, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Transaction Documents. 8.07. Indemnification. Each Bank agrees to reimburse and indemnify the --------------- Agent and its directors, officers, employees and agents (to the extent not reimbursed by a Credit Party and without limitation of the obligations of the Loan Parties to do so), ratably in accordance with their respective Letter of Credit Participating Interests, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel for the Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which a Letter of Credit directly or indirectly relates, provided that no Bank shall be liable for any -------- portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting solely from the gross negligence or willful misconduct of the Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section shall be due and payable on demand, and to the extent that any Bank fails to pay any such amount on demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to 2% over the interest rate per annum announced by the Federal Reserve Bank of New York or otherwise determined by the Agent to be applicable for such day to overnight federal funds transactions arranged by federal funds brokers on the previous trading day. 8.08. Agent in its Individual Capacity. With respect to its Commitments -------------------------------- and the Obligations owing to it, the Agent shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Agent, and the terms "Banks" and like terms shall include the Agent in its individual capacity as such. The Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Agent were not the Agent hereunder. 8.09. Successor Agent. The Agent may resign at any time by giving 10 --------------- days' prior written notice thereof to the Banks and the Account Parties. The Agent may be removed by the Required Banks at any time by giving 10 days' prior written notice thereof to the Agent, the other Banks and the Account Parties. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Each successor Agent shall be a commercial bank or trust company organized under the laws of the United States of America or 39 any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance by a successor Agent of its appointment as Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Agent, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Transaction Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If and so long as no successor Agent shall have been appointed, then any notice or other communication required or permitted to be given by the Agent shall be sufficiently given if given by the Required Banks, all notices or other communications required or permitted to be given to the Agent shall be given to each Bank, and all payments to be made to the Agent shall be made directly to the Account Parties or Bank for whose account such payment is made. 8.10. Additional Agents. If the Agent shall from time to time deem it ----------------- necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Banks, the Agent and the Account Parties shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Agent, to constitute another commercial bank or trust company, or one or more other Persons approved by the Agent, to act as co-Agent or agent with such powers of the Agent as may be provided in such supplemental agreement and to vest in such bank, trust company or Person as such co-Agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Agent under this Agreement or any other Transaction Document. 8.11. Calculations. The Agent shall not be liable for any calculation, ------------ apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Bank to whom payment was due but not made shall be to recover from the other Banks any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by the appropriate Account Party, to recover such amount from the appropriate Account Party. 8.12. Agent's Fee. X.L. Insurance agrees to pay to the Agent, for its ----------- individual account, a nonrefundable Agent's fee in an amount and at such time or times as the Agent and X.L. Insurance have heretofore agreed. ARTICLE IX MISCELLANEOUS ------------- 9.01. No Implied Waiver etc. No delay or failure of the Agent or any Bank --------------------- in exercising any right, power or privilege hereunder shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies hereunder of the Agent and the Banks are cumulative and not exclusive of any rights or remedies which, it or they would otherwise have. Any amendment, waiver, permit, consent or approval of any kind or character on the part of the Agent or a Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent in such writing specifically set forth. 9.02. Set-Off. In case any one or more of the Events of Default described ------- in Article VII hereof shall occur, each Bank shall have the right, in addition to all other rights and remedies 40 available to it, to set-off against the unpaid balance of its interests in any Letter of Credit Reimbursement Obligations any debt owing by such Bank to the applicable Credit Party, including without limitation any funds in any deposit account maintained by such Credit Party with such Bank, and such Bank shall have and there is hereby created in favor of such Bank a security interest in all deposit accounts maintained by such Credit Party with such Bank, subject to Liens permitted under 6.03(f). Any sums obtained by any Bank by way of counterclaim, set-off, banker's lien or other lien for application upon any Letter of Credit Reimbursement Obligation shall be shared pro rata with the other Banks. Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.03. Survival of Provisions. Each of the representations, warranties, ---------------------- covenants and agreements of the Credit Parties contained herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, and the issuance of any Letter of Credit hereunder. 9.04. Expenses and Fees; Indemnity. ---------------------------- (a) Each Account Party agrees to pay or cause to be paid and to save the Agent and (in the case of clause (iii) below) each of the Banks harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs) incurred by the Agent or such Bank from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Transaction Documents, (ii) any requested amendments, modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any Transaction Document, and (iii) the enforcement or preservation of rights under this Agreement or any Transaction Document (including but not limited to any such costs or expenses arising from or relating to (A) collection or enforcement of any other amount owing hereunder or thereunder by the Agent or any Bank and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Transaction Documents. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. Each Account Party hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by the Agent or any Bank to be payable in connection with this Agreement or any other Transaction Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and an Account Party agrees to save the Agent and each Bank harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees. (b) Each Account Party hereby agrees to reimburse and indemnify the Agent and each Bank (the "Indemnified Parties") from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which any Letter of Credit directly or indirectly relates (and without in any way limiting the generality of the foregoing, including any violation or breach of any Law by any Credit Party or any exercise by the Agent or any Bank of any of its rights or remedies under 41 this Agreement or any other Transaction Document; any breach of any representation or warranty, covenant or agreement of any Credit Party); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Account Parties under this Section 9.04, or any other indemnification obligation of the Account Parties hereunder or under any other Transaction Document, are unenforceable for any reason, the Account Parties hereby agree to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. 9.05. Severability. In the event any one or more of the provisions ------------ contained in this Agreement or in any other Transaction Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.06. Holidays. Unless otherwise specified herein, whenever any payment -------- or action to be made or taken hereunder shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania or Bermuda, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. 9.07. Notices, etc. Any notice or other communication in connection with ------------ this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to a Bank, at such Bank's address on the signature pages hereof, if to the Agent at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, Attention: Loan Administration, with a copy to Institutional Banking, Room 370, One Mellon Bank Center, Pittsburgh, PA 15258; if to the Issuing Bank at Three Mellon Bank Center, Pittsburgh, Pennsylvania 15258, Attention: Letter of Credit Department with a copy to Institutional Banking, Room 370, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258 and if to any Credit Party, to X.L. Insurance Company, Ltd., Cumberland House, One Victoria Street, Hamilton HM JX Bermuda, Attn: Chief Financial Officer, fax no. (441) 295-7524, with a copy to X.L. Investments Ltd., X.L. Investments, Ltd., Cumberland House, One Victoria Street, Hamilton HM JX Bermuda, Attn: Chief Investment Officer, fax no. (441) 296-4286, and, in the case of notices to Venton Underwriting Group Limited, with a copy to Venton Underwriting Group Limited, c/o Venton Underwriting Agencies Limited, Gracechurch House, 55 Gracechurch Street, London EC3V OJP England, Attn: Martin Slade/Jane Clouting, fax no. 44-171-550-3555, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. For the purposes of both receiving information from the Agent or any Bank or providing information to the Agent or any Bank, X.L. Insurance shall act as the agent for each other Credit Party. 9.08. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED ------------------------------------------- HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR ANY OTHER MATTER RELATED THERETO MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF COMMONWEALTH OF PENNSYLVANIA OR IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. EACH CREDIT PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE WESTERN AND IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN 42 DISTRICT OF PENNSYLVANIA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION, SUBJECT TO ANY GENERAL RIGHT OF APPEAL. EACH CREDIT PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS PROVIDED IN THIS AGREEMENT. 9.09. WAIVER OF JURY TRIAL. TO THE EXTENT LITIGATION HEREUNDER IS BROUGHT -------------------- BEFORE A COURT IN THE UNITED STATES, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISIONS OF EACH OTHER DOCUMENT HERETO TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND EACH BANK ENTERING INTO THIS AGREEMENT AND RELATED AGREEMENTS. 9.10. Governing Law. This Agreement and any other documents delivered in ------------- connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to conflict of laws principles. 9.11 Validity and Enforceability. If any stamp tax, levy, duty or fee is -------------------------- imposed or payable in respect to this Agreement or the transaction contemplated hereby or is necessary or advisable to ensure the legality, validity or enforceability of the documents in this transaction, the Account Parties shall promptly pay such stamp tax, levy, duty or fee. No government approval or consent is necessary for the execution, delivery and performance of the transactions contemplated under this Agreement. 9.12. Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one (1) and the same instrument. 9.13. Successors and Assigns; Participations; Assignments. --------------------------------------------------- (a) Successors and Assigns. The provisions of this Agreement shall be ---------------------- binding upon and inure to the benefit of the Account Parties, the Banks, the Agent, and their respective successors and assigns, except that no Credit Party may assign or otherwise transfer any of its rights or duties under this Agreement without the prior written consent of the Agent and all of the Banks, and any purported assignment without such consent shall be void. (b) Participations. Any Bank may, in the ordinary course of its -------------- commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or a portion of its Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interest); provided, that -------- (i) any such participation sold to a Participant which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of X.L. Insurance and the Agent, unless an Event of 43 Default has occurred and is continuing, in which case the consent of the Account Parties shall not be required, (ii) any such Bank's obligations under this Agreement and the other Transaction Documents shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the parties hereto shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and each of the other Transaction Documents, (v) such Participant shall be bound by the provisions of Section 9.13 hereof, and the Bank selling such participation shall obtain from such Participant a written confirmation of its agreement to be so bound, (vi) no Participant (unless such Participant is an affiliate of such Bank, or is itself a Bank) shall be entitled to require such Bank to take or refrain from taking action under this Agreement or under any other Transaction Document, except that such Bank may agree with such Participant that such Bank will not, without such Participant's consent, take action of the type described in subsections (a), (b), (c) or (d) of Section 9.14 hereof, and (vii) a Participant shall have the right to vote regarding amendments to this Agreement only in connection with amendments which effect changes in the amount of Letter of Credit Participating Interest Commitments, Letter of Credit Participating Interests, fees payable hereunder and the Expiration Date. Each Account Party agrees that any such Participant shall be entitled to the benefits of Sections 2.09 and 9.04 with respect to its participation in the Commitments and the Letters of Credit outstanding from time to time; provided, -------- that no such Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) Assignments. Any Bank may, in the ordinary course of its commercial ----------- banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or any portion of its Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interests to any Bank, any affiliate of a Bank or to one or more additional commercial banks or other Persons (each a "Purchasing Bank"); provided, that - - -------- (i) any such assignment to a Purchasing Bank which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of X.L. Insurance and the Agent, unless an Event of Default has occurred and is continuing or exists, in which case the consent of X.L. Insurance shall not be required, (ii) if a Bank makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Transaction Documents, such assignment shall be in a minimum aggregate principal amount of $10,000,000 of the Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interests then outstanding, 44 (iii) each such assignment shall be of a constant, and not a varying, percentage of each Commitment of the transferor Bank and of all of the transferor Bank's rights and obligations under this Agreement and the other Transaction Documents, and (iv) each such assignment shall be made pursuant to a Transfer Supplement in substantially the form of Exhibit B to this Agreement, duly completed (a "Transfer Supplement"). In order to effect any such assignment, the transferor Bank and the Purchasing Bank shall execute and deliver to the Agent a duly completed Transfer Supplement (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, and a processing and recording fee of $2,500; and, upon receipt thereof, the Agent shall accept such Transfer Supplement; provided, however, that no such processing and -------- ------- recording fee shall be due if such assignment is to an affiliate of a Bank or a Federal Reserve Bank . Upon receipt of the Purchase Price Receipt Notice pursuant to such Transfer Supplement, the Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the close of business at the Agent's Office on the Transfer Effective Date specified in such Transfer Supplement. (x) the Purchasing Bank shall be a party hereto and, to the extent provided in such Transfer Supplement, shall have the rights and obligations of a Bank hereunder, and (y) the transferor Bank thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Transfer Supplement covering all or the remaining portion of a transferor Bank's rights and obligations under this Agreement, such transferor Bank shall cease to be a party to this Agreement) from and after the Transfer Effective Date. (d) Register. The Agent shall maintain at its office a copy of each -------- Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the banks and the Letter of Credit Participating Interest Commitment of, and the amount of the Letter of Credit Participating Interests of, each Bank from time to time. The entries in the Register shall be conclusive absent manifest error and the Account Parties, the Agent and the Banks may treat each person whose name is recorded in the Register as a Bank hereunder for all purposes of the Agreement. The Register shall be available for inspection by an Account Party or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Financial and Other Information. Each Credit Party authorizes the ------------------------------- Agent and each Bank to disclose to any Participant or Purchasing Bank (each, a "transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning the Credit Parties and their affiliates which has been or may be delivered to such Person by or on behalf of the Credit Parties in connection with this Agreement or any other Transaction Document or such Person's credit evaluation of the Credit Parties and their affiliates. At the request of any Bank, a Credit Party, at a Credit Party's expense, shall provide to each prospective transferee the conformed copies of documents referred to in Section 4 of the form of Transfer Supplement. 9.14. Amendments and Waivers. Neither this Agreement nor any Transaction ---------------------- Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Agent and the Credit Parties may from time to time amend, modify or supplement the provisions of this Agreement or any other Transaction Document for the purpose of amending, adding to, or waiving any provisions or changing in any manner the rights and duties of any Credit Party, the Agent or any Bank. Any such amendment, modification or supplement made by the Credit Parties and the Agent in accordance with the provisions of this Section shall be binding upon the Credit Parties, each Bank and the Agent. The Agent shall enter into such amendments, modifications or supplements from time to 45 time as directed by the Required Banks, and only as so directed, provided, -------- that no such amendment, modification or supplement may be made which will: (a) Increase the Letter of Credit Participating Interest Committed Amount of any Bank over the amount thereof then in effect, or extend the Expiration Date, without the written consent of each Commitment Bank affected thereby; (b) Reduce the amount of or postpone the date for payment of any Commitment Fee or Letter of Credit Fee or reduce or postpone the date for payment of any other fees, expenses, indemnities or amounts payable under any Transaction Document, without the written consent of each Bank affected thereby; (c) Change the definition of "Required Banks" or amend this Section 9.14, without the written consent of all the Banks; (d) Amend or waive any of the provisions of Article IX hereof, or impose additional duties upon the Agent or otherwise adversely affect the rights, interests or obligations of the Agent, without the written consent of the Agent; (e) Amend or waive any of the provisions of Article X or release any Guarantor from its obligations hereunder without the written consent of all the Banks; or (f) Amend the definition of Qualifying Pledged Securities or of Required Pledged Securities (as each such term is defined herein and in the Pledge Agreement) or release all or (except in accordance with the terms of the Pledge Agreement) any material part of the Collateral under the Pledge Agreement or release X.L. Investments from all of its obligations as the Grantor thereunder, without the written consent of all of the Banks; and provided further, that Transfer Supplements may be entered into in the ---------------- manner provided in Section 9.13 hereof. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. Implementation of a Future Collateral Allocation Transaction (as defined in Section 8.01(b) hereof) shall require the consent of the Required Banks, the Issuing Bank and the Agent, but shall not require the consent of all of the Banks. 9.15. Judgment Currency. In the event of a judgment or order being ----------------- rendered by any court or tribunal for the payment of any amounts owing to the Banks or any of them under this Agreement or any other Transaction Document or for the payment of damages in respect of any breach of this Agreement or any other Transaction Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Banks harmless against any deficiency in terms of Dollars in the amounts received by the Banks arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which each Bank is able to purchase Dollars with the amount of the Judgment Currency actually received by the Banks on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Account Parties hereunder and shall apply irrespective of any indulgence granted by the Banks. 46 9.16. Records. The amount of outstanding Letters of Credit, each Bank's ------- Letter of Credit Participating Interest Committed Amount and the accrued and unpaid Commitment Fees shall at all times be ascertained from the records of the Agent, which shall be conclusive absent manifest error. 9.17 Confidentiality. Each of the Agent and the Banks agree to keep --------------- confidential any information relating to the Credit Parties received by it pursuant to or in connection with this Agreement which is (a) information which the Agent and the Banks reasonably expect that the applicable Credit Party would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.17 shall not be construed to prevent the Agent or any Bank from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Credit Parties to be bound by this obligation of confidentiality, (ii) upon the order of any court or administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over the Agent or such Bank which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by the Agent or any Bank, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that such Bank does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the applicable Credit Party (vi) in connection with the exercise of any right or remedy hereunder or under any other Transaction Document, (vii) as expressly contemplated by this Agreement or any other Transaction Document or (viii) to any prospective purchaser of all or any part of the interest of any Bank which shall agree in writing for the benefit of the Credit Parties to be bound by the obligation of confidentiality in this Agreement or the other Transaction Documents if such prospective purchaser is a financial institution or has been consented to by the Account Parties, which consent will not be withheld if such purchaser is not a competitor of any Account Party or an affiliate of a competitor of any Account Party. 9.18. Sharing of Collections. The Banks hereby agree among themselves ---------------------- that if any Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of any Obligation contemplated by this Agreement or the other Transaction Documents to be made by an Account Party pro rata to all Banks in greater proportion than any such amount received by any other Bank, then the Bank receiving such proportionately greater payment shall notify each other Bank and the Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Banks. The Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Banks a participation in the applicable Obligations owed to such other Banks in such amount as shall result in a ratable sharing by all Banks of such excess amount (and to such extent the receiving Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Bank making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Bank making such purchase. The Account Parties hereby consent to and confirm the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were a Bank hereunder." ARTICLE X GUARANTEE --------- 10.01. The Guarantee. Each of the Guarantors hereby irrevocably, ------------- unconditionally and absolutely guarantees to the Agent and the Banks, and becomes surety for, the prompt payment of the Obligations of the Account Parties (the "Guaranteed Obligations") in full when due (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each 47 Guarantor hereby further agrees, as a primary obligor, that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise and whether or not such payments would not be permitted under any applicable bankruptcy or similar law), the Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Transaction Documents, to the extent the obligations of either Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 10.02. Obligations Unconditional. The obligations of each Guarantor under ------------------------- this Article are irrevocable, absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Transaction Documents, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against any Account Party, for amounts paid under this Article X until such time as the Banks have been paid in full, no Letter of Credit is outstanding, the Letter of Credit Participating Interest Commitments under this Agreement have been terminated and no Person or Official Body shall have any right to request any return or reimbursement of funds from any Bank in connection with monies received under the Transaction Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of either Guarantor hereunder which shall remain irrevocable, 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 any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Agent or any Bank as security for any of the Guaranteed Obligations shall be void or violable, or shall fail to attach or be perfected or the Agent or any Bank shall fail to realize on any collateral security; or 48 (v) any of the Guaranteed Obligations shall be determined to be void or violable (including, without limitation, for the benefit of any creditor of either Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of either Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and any requirement that the Banks exhaust any right, power or remedy or proceed against any Person under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. This is a guarantee of payment and not merely of collection. 10.03. Reinstatement. The obligations of the Guarantors under this ------------- Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agent and the Banks on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Agent or any Bank in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 10.04. Remedies. Each Guarantor agrees that, to the fullest extent -------- permitted by applicable law, as between such Guarantor, on the one hand, and the Agent and the Banks, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 10.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 10.01. 10.05. Continuing Guarantee. The guarantee in this Article is a -------------------- continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 10.06. No Restrictions. Except for restrictions under the Transaction --------------- Documents, neither Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to any Account Party, (y) make loans or advances to my Account Party, or (z) transfer any of its properties or assets to my Account Party. 49 IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. X.L. INSURANCE COMPANY, LTD., as an Account Party and a Guarantor By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ X.L. GLOBAL REINSURANCE COMPANY, LTD., as an Account Party By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ X.L. EUROPE INSURANCE, as an Account Party By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ VENTON UNDERWRITING GROUP LIMITED, as an Account Party By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ X.L. INVESTMENTS LTD., as a Guarantor By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ 50 MELLON BANK, N.A., as a Bank, as Issuing Bank and as Agent By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: Institutional Banking Department One Mellon Bank Center, Room 370 Pittsburgh, PA 15258 Attn: Susan Whitewood with a copy to: Manager, Letter of Credit Operations Three Mellon Bank Center, 23rd Floor Pittsburgh, PA 15259 Initial Letter of Credit Participating Interest Committed Amount: $125,000,000 BANK OF TOKYO-MITSUBISHI LTD. By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: 1251 Avenue of the Americas New York, NY 10020-1104 Attn: Sally Morse Initial Letter of Credit Participating Interest Committed Amount: $75,000,000 51 THE BANK OF NOVA SCOTIA By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: One Liberty Place New York, NY 10006 Attn: James R. Trimble Initial Letter of Credit Participating Interest Committed Amount: $65,000,000 THE CHASE MANHATTAN BANK, N.A. By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: One Chase Manhattan Plaza New York, NY 10081 Attn: Candace R. Lau-Hansen Initial Letter of Credit Participating Interest Committed Amount: $50,000,000 52 BANK OF AMERICA NT&SA By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: Insurance Division, 10th Floor 231 South LaSalle Street Chicago, IL 60697 Attn: Deborah Basler Initial Letter of Credit Participating Interest Committed Amount: $35,000,000 THE BANK OF BERMUDA LIMITED By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: 6 Front Street Hamilton HM 11, Bermuda Attn: Michael W. Collins Initial Letter of Credit Participating Interest Committed Amount: $35,0000,000 53 BANQUE NATIONALE DE PARIS By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: 499 Park Avenue New York, NY 10022 Attn: Phil Truesdale Initial Letter of Credit Participating Interest Committed Amount: $35,000,000 CREDIT LYONNAIS NEW YORK BRANCH By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: 1301 Avenue of the Americas 12th Floor New York, NY 10019 Attn: Peter Rasmussen Initial Letter of Credit Participating Interest Committed Amount: $35,000,000 54 ROYAL BANK OF CANADA By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: One Financial Square - 24th Floor New York, NY 10005-3531 Attn: Gary Overton Initial Letter of Credit Participating Interest Committed Amount: $35,000,000 BANK AUSTRIA AKTIENGESELLSCHAFT By:_______________________________ (Signature) Name:_____________________________ Title:____________________________ Notice Address: 565 Fifth Avenue New York, NY 10017 Attn: Karla Maloof Initial Letter of Credit Participating Interest Committed Amount: $10,000,000 55 EX-10.14.7 21 1ST AMENDMENT TO LETTER OF CREDIT FACILITY Exhibit 10.14.7 FIRST AMENDMENT TO LETTER OF CREDIT FACILITY -------------------------------------------- AND REIMBURSEMENT AGREEMENT --------------------------- THIS FIRST AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of August 3, 1998 (this "Amendment"), by and among X.L. Insurance Company, Ltd., X.L. Europe Insurance, X.L. Global Reinsurance Company, Ltd. and Venton Underwriting Group Limited (the "Account Parties"), X.L. Insurance Company, Ltd. and X.L. Investments Ltd. (the "Guarantors"), Mellon Bank, N.A., as Issuing Bank and Agent (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Account Parties, the Guarantors, the Banks, and the Agent are parties to a Letter of Credit Facility and Reimbursement Agreement, dated as of February 27, 1998, (the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make a letter of credit facility available to the Account Parties; and WHEREAS, the Account Parties have requested the Banks to make certain changes to the Credit Agreement; and WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is ------------------------------ hereby amended as follows: (a) Section 1.01 of the Credit Agreement is hereby amended by adding thereto, between the definitions of the terms "1998 Merger" and "Nonextending Bank", respectively, appearing therein, the following definition: "1998 Reinsurance Merger Transaction" shall mean the transfer, after or contemporaneously with consummation of the 1998 Merger, to Mid Ocean Limited by X.L. Insurance of all of the common stock of X. L. Reinsurance and the subsequent amalgamation of X.L. Reinsurance with Mid Ocean Reinsurance Company, Ltd., the resulting corporation of which amalgamation will be a Bermuda corporation which shall have assumed and shall be liable for all of the obligations of X.L. Reinsurance under the Loan Documents. (b) The definition of the term "1998 Merger" appearing in Section 1.01 of the Credit Agreement is hereby amended to read as follows: "1998 Merger" shall mean consummation of the transactions provided for in the Agreement and Schemes of Arrangement among EXEL Limited, EXEL Merger Company, Ltd. and Mid Ocean Limited, as described in the Current Report on Form 8-K of EXEL Limited dated as of March 16, 1998, as modified by the amendment and restatement thereof dated April 28, 1998. (c) Section 1.01 of the Credit Agreement is hereby amended by adding thereto; immediately following the definition of the term "Valuation Date" appearing therein, the following definition: "X.L. Reinsurance" and "X.L. Global" shall mean (i) until consummation of the 1998 Reinsurance Merger Transactions, X.L. Global Reinsurance Company, Ltd., a corporation organized under the laws of Bermuda, and (ii) from and after consummation of the 1998 Reinsurance Merger Transaction, X.L. Mid Ocean Reinsurance Company, Ltd., a corporation organized under the laws of Bermuda and the resulting corporation of the amalgamation referred to in the definition of the term "1998 Reinsurance Merger Transaction" appearing in this Section. (d) The introductory phrase of Article VI of the Credit Agreement, appearing before Section 6.01, is hereby amended to read as follows: Each Credit Party covenants to the Agent and to each Bank as follows (it being understood that nothing in Section 6.01, Section 6.02 or Section 6.04 hereof shall prohibit the -2- consummation of the 1998 Reinsurance Merger Transaction): (e) Section 7.01(h) of the Credit Agreement is hereby amended to read as follows: (h) X.L. Insurance shall cease to own, beneficially and of record, directly or indirectly, 100% of the outstanding shares of common stock of each other Credit Party (other than X.L. Reinsurance) or EXEL Limited shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of common stock of X.L. Reinsurance, except for a nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law. (f) Section 6.03 of the Credit Agreement is hereby amended by deleting the period at the end of paragraph (g) thereof and replacing it with "; or" and by adding after such paragraph (g) a new paragraph (h) to read as follows: (h) Liens securing letter of credit reimbursement obligations under the Security Agreement listed on Schedule 6.03(h) hereto (and extension, renewal and replacement Liens upon the same property or upon substitute property of approximately the same value, provided the total amount secured by each Lien constituting such extension, renewal or replacement Liens shall not exceed the maximum amount secured by the Liens theretofore existing). (g) Section 6.08(d) of the Credit Agreement is hereby amended by adding thereto, between the phrase "Schedule 6.08(d)" and the semicolon at the end thereof, the phrase "and Indebtedness described on Schedule 6.03(h) hereto". (h) The Credit Agreement is hereby amended by adding thereto a Schedule 6.03(h) in the form attached to this Amendment as Schedule 6.03(h). SECTION 2. EFFECT OF AMENDMENT. The Credit Agreement, as amended by ------------------- this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 3. GOVERNING LAW. This Amendment shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. -3- SECTION 4. COUNTERPARTS. This Amendment may be executed in any ------------ number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as an Account Party and as a Guarantor By:_______________________________ Title:____________________________ X.L. GLOBAL REINSURANCE COMPANY, LTD. as an Account Party By:_______________________________ Title:____________________________ X.L. EUROPE INSURANCE, as an Account Party By:_______________________________ Title:____________________________ VENTON UNDERWRITING GROUP LIMITED, as an Account Party By:_______________________________ Title:____________________________ X.L. INVESTMENTS LTD., as a Guarantor By:_______________________________ Title:____________________________ MELLON BANK, N.A., as a Bank, Issuing Bank and as Agent By:_______________________________ Title:____________________________ -4- BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:_______________________________ Title:____________________________ THE BANK OF NOVA SCOTIA, as a Bank By:_______________________________ Title:____________________________ THE CHASE MANHATTAN BANK, as a Bank By:_______________________________ Title:____________________________ THE BANK OF BERMUDA LIMITED, as a Bank By:_______________________________ Title:____________________________ ROYAL BANK OF CANADA, as a Bank By:_______________________________ Title:____________________________ BANQUE NATIONALE DE PARIS, as a Bank By:_______________________________ Title:____________________________ By:_______________________________ Title:____________________________ -5- CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By:_______________________________ Title:____________________________ By:_______________________________ Title:____________________________ BANK OF AMERICA NT&SA, as a Bank By:_______________________________ Title:____________________________ BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By:_______________________________ Title:____________________________ By:_______________________________ Title:____________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:_______________________________ Title:____________________________ By:_______________________________ Title:____________________________ -6- Schedule 6.03(h) From and after consummation of the 1998 Reinsurance Merger Transaction, the Lien referred to in Section 6.03(h) of the Agreement with reference to this Schedule is a Lien on investment securities and similar property in favor of Citibank, N.A., as agent or as issuing bank, securing reimbursement obligations and related obligations with respect to letters of credit issued for the account of X. L. Reinsurance or its affiliates (or for the account of its predecessor, Mid Ocean Reinsurance Company, Ltd. or its affiliates) in an aggregate face amount not exceeding $325,000,000. The Indebtedness described in Section 6.08(d) of the Agreement with reference to this Schedule consists of the obligations referred to in the immediately preceding sentence. -7- EX-10.14.8 22 2ND AMENDMENT TO LETTER OF CREDIT FACILITY Exhibit 10.14.8 11.16.98 SECOND AMENDMENT TO LETTER OF CREDIT FACILITY --------------------------------------------- AND REIMBURSEMENT AGREEMENT --------------------------- THIS SECOND AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of November 13, 1998 (this "Amendment"), by and among X.L. Insurance Company, Ltd., X.L. Europe Insurance, X.L. Midocean Reinsurance Company, Ltd. (successor to X.L. Global Reinsurance Company, Ltd.) and Venton Underwriting Group Limited (the "Account Parties"), X.L. Insurance Company, Ltd. and X.L. Investments Ltd. (the "Guarantors"), Mellon Bank, N.A., as Issuing Bank and Agent (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Account Parties, the Guarantors, the Banks, and the Agent are parties to a Letter of Credit Facility and Reimbursement Agreement, dated as of February 27, 1998, (as amended by the First Amendment thereto dated as of August 3, 1998, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make a letter of credit facility available to the Account Parties; and WHEREAS, Venton Underwriting Group Limited is proposed to be sold by X.L. Insurance Company, Ltd. and, upon consummation of such sale, it is desired that Venton Underwriting Group Limited no longer be an Account Party under, or a party to, the Credit Agreement; and WHEREAS, the Account Parties and the Guarantors have requested the Banks to increase the aggregate stated amount of letters of credit which may have an expiration date later than one year after the date of issuance; and WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement. NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is ------------------------------ hereby amended as follows: (a) Section 2.01(b) of the Credit Agreement, entitled "Terms of Letters of Credit", is hereby amended by deleting the phrase "up to $200,000,000 may have an expiration date no later than five years from the date of issuance" and inserting in lieu thereof the phrase "up to $300,000,000 may have an expiration date no later than five years from the date of issuance". (b) Upon certification to the Agent by X.L. Insurance Company, Ltd. that Venton Underwriting Group Limited is no longer an affiliate of X.L. Insurance Company, Ltd. and the delivery to Mellon Bank, N. A. of documentation satisfactory to it with respect to the guarantee of reimbursement liabilities for letters of credit issued for the account of Venton Underwriting Group Limited by Underwriters Reinsurance Company, Venton Underwriting Group Limited will cease to be an Account Party under, and will cease to be a party to, the Credit Agreement. SECTION 2. EFFECTIVENESS AND EFFECT OF AMENDMENT. This Amendment ------------------------------------- shall become effective upon execution and delivery by the Required Banks and the Credit Parties. The Credit Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 3. GOVERNING LAW. This Amendment shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 4. COUNTERPARTS. This Amendment may be executed in any ------------ number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as an Account Party and as a Guarantor By:_____________________________________ Title:__________________________________ -2- X.L. MIDOCEAN REINSURANCE COMPANY, LTD. as an Account Party By:_____________________________________ Title:__________________________________ X.L. EUROPE INSURANCE, as an Account Party By:_____________________________________ Title:__________________________________ VENTON UNDERWRITING GROUP LIMITED By:_____________________________________ Title:__________________________________ X.L. INVESTMENTS LTD., as a Guarantor By:_____________________________________ Title:__________________________________ MELLON BANK, N.A., as a Bank, Issuing Bank and as Agent By:_____________________________________ Title:__________________________________ BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:_____________________________________ Title:__________________________________ -3- THE BANK OF NOVA SCOTIA, as a Bank By:_____________________________________ Title:__________________________________ THE CHASE MANHATTAN BANK, as a Bank By:_____________________________________ Title:__________________________________ THE BANK OF BERMUDA LIMITED, as a Bank By:_____________________________________ Title:__________________________________ ROYAL BANK OF CANADA, as a Bank By:_____________________________________ Title:__________________________________ BANQUE NATIONALE DE PARIS, as a Bank By:_____________________________________ Title:__________________________________ By:_____________________________________ Title:__________________________________ -4- CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By:_____________________________________ Title:__________________________________ By:_____________________________________ Title:__________________________________ BANK OF AMERICA NT&SA, as a Bank By:_____________________________________ Title:__________________________________ BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By:_____________________________________ Title:__________________________________ By:_____________________________________ Title:__________________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:_____________________________________ Title:__________________________________ By:_____________________________________ Title:__________________________________ -5- EX-10.14.10 23 1ST AMENDMENT TO SHORT TERM CREDIT AGREEMENT EXHIBIT 10.14.10 EXECUTION COPY FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT --------------------------------------------- THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT, dated as of November 5, 1997 (this "Amendment"), by and among X.L. Insurance Company, Ltd. and X.L. Reinsurance Company, Ltd. (the "Borrowers"), X.L. Insurance Company, Ltd. and EXEL Acquisition Ltd. (the "Guarantors"), MELLON BANK, N.A., (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Guarantors, the Banks, and the Agent are parties to a Revolving Credit Agreement, dated as of June 6, 1997, (the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, the Borrowers have requested the Banks to make certain changes to the Credit Agreement; and WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is ------------------------------ hereby amended as follows: (a) Section 2.05(a) is hereby amended by deleting the term "Section 2.11(b)" in the first sentence thereof and replacing it with the term "Section 2.10(b)". (b) Section 6.08(c) is hereby amended by deleting Section 6.08(c) in its entirety and substituting the following: "Reimbursement obligations with respect to letters of credit not exceeding $500,000,000 in aggregate principal amount, of which $500,000,000 may be secured;" (c) Schedule 6.08(d) is hereby amended by adding the following at the end thereof: "Upon the closing of a secured letter of credit facility providing for the issuance of letters of credit in an aggregate face amount of $500,000,000 between the Borrowers, certain affiliates of the Borrowers, Mellon Bank, N.A., as Agent and Issuing Bank and the other banks parties thereto, all of the letters of credit listed on this Schedule 6.08(d) shall be deleted. (d) A new Section 9.18 shall be added to the Credit Agreement as follows: "9.18 Sharing of Collections. The Banks hereby agree among themselves ---------------------- that if any Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of the Loans, interest thereon, or any other Obligation contemplated by this Agreement or the other Loan Documents to be made by the Borrowers pro rata to all Banks in greater proportion than any such amount received by any other Bank, then the Bank receiving such proportionately greater payment shall notify each other Bank and the Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Banks. The Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Banks a participation in the applicable Obligations owed to such other Banks in such amount as shall result in a ratable sharing by all Banks of such excess amount (and to such extent the receiving Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Bank making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Bank making such purchase. The Borrower hereby consents to and confirms the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were a Bank hereunder." SECTION 2. EFFECT OF AMENDMENT. The Credit Agreement, as amended by ------------------- this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 3. GOVERNING LAW. This Amendment shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 4. COUNTERPARTS. This Amendment may be executed in any ------------ number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as a Borrower and as a Guarantor By:________________________________ Title:_____________________________ X.L. REINSURANCE COMPANY, LTD., as a Borrower By:________________________________ Title:_____________________________ EXEL ACQUISITION LTD., as a Guarantor By:________________________________ Title:_____________________________ MELLON BANK, N.A., as a Bank and as Agent By:________________________________ Title:_____________________________ BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:________________________________ Title:_____________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:________________________________ Title:_____________________________ By:________________________________ Title:_____________________________ THE BANK OF NOVA SCOTIA, as a Bank By:________________________________ Title:_____________________________ THE CHASE MANHATTAN BANK, as a Bank By:________________________________ Title:_____________________________ THE BANK OF BERMUDA LIMITED, as a Bank By:________________________________ Title:_____________________________ ROYAL BANK OF CANADA, as a Bank By:________________________________ Title:_____________________________ BANQUE NATIONALE DE PARIS, as a Bank By:________________________________ Title:_____________________________ By:________________________________ Title:_____________________________ BANK OF AMERICA NT&SA, as a Bank By:________________________________ Title:_____________________________ EX-10.14.11 24 2ND AMENDMENT TO SHORT TERM CREDIT AGREEMENT Exhibit 10.14.11 SECOND AMENDMENT TO SHORT TERM REVOLVING CREDIT AGREEMENT --------------------------------------------------------- THIS SECOND AMENDMENT TO SHORT TERM REVOLVING CREDIT AGREEMENT, dated as of May 13, 1998 (this "Amendment"), by and among X.L. Insurance Company, Ltd. and X.L. Global Reinsurance Company, Ltd. (formerly known as X.L. Reinsurance Company, Ltd.) (the "Borrowers"), X.L. Insurance Company, Ltd. and EXEL Acquisition Ltd. (the "Guarantors"), MELLON BANK, N.A., (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Guarantors, the Banks, and the Agent are parties to a Short Term Revolving Credit Agreement, dated as of June 6, 1997 and amended as of November 5, 1997 (as so amended, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, the Borrowers and the Banks wish to make certain changes to the Credit Agreement; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENT TO CREDIT AGREEMENT. Section 2.04(b) of the ----------------------------- Credit Agreement is hereby amended to read in its entirety as follows: (b) Applicable Margin. "Applicable Margin" for any day shall mean ----------------- 0.200% plus the Utilization Rate for such day. "Utilization Rate" shall mean (x) 0.050% for any day on which the aggregate outstanding principal amount of all Loans under this Agreement exceeds 66% of the sum of the Committed Amounts of all Banks on such day, (y) 0.025% for any day on which the aggregate outstanding principal amount of all Loans under this Agreement exceeds 33%, but is equal to or less than 66%, of the sum of the Committed Amounts of all Banks on such day and (z) zero for each other day. SECTION 2. CONFIRMATION OF EXTENSION OF EXPIRATION DATE. By their -------------------------------------------- execution hereof, the Banks hereby confirm that the Expiration Date under and as defined in the Credit Agreement has been extended to May 5, 1999, notwithstanding the fact that not all of the Banks had consented to such extension in writing by May 6, 1998 (which was the "Reset Date" in 1998, as used in Section 2.13 of the Credit Agreement). SECTION 3. EFFECT OF AMENDMENT. The amendment made in Section 1 of ------------------- the Agreement shall be effective as of June 6, 1998. The Credit Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 4. GOVERNING LAW. This Amendment shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 5. COUNTERPARTS. This Amendment may be executed in any ------------ number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as a Borrower and as a Guarantor By:__________________________________ Title:_______________________________ X.L. GLOBAL REINSURANCE COMPANY, LTD. (formerly known as X.L. Reinsurance Company, Ltd., as a Borrower By:__________________________________ Title:_______________________________ EXEL ACQUISITION LTD., as a Guarantor By:__________________________________ Title:_______________________________ -2- MELLON BANK, N.A., as a Bank and as Agent By:__________________________________ Title:_______________________________ BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:__________________________________ Title:_______________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:__________________________________ Title:_______________________________ By:__________________________________ Title:_______________________________ THE BANK OF NOVA SCOTIA, as a Bank By:__________________________________ Title:_______________________________ THE CHASE MANHATTAN BANK, as a Bank By:__________________________________ Title:_______________________________ THE BANK OF BERMUDA LIMITED, as a Bank By:__________________________________ Title:_______________________________ ROYAL BANK OF CANADA, as a Bank -3- By:__________________________________ Title:_______________________________ BANQUE NATIONALE DE PARIS, as a Bank By:__________________________________ Title:_______________________________ By:__________________________________ Title:_______________________________ BANK OF AMERICA NT&SA, as a Bank By:__________________________________ Title:_______________________________ CREDIT LYONNAIS, as a Bank By:__________________________________ Title:_______________________________ By:__________________________________ Title:_______________________________ BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By:__________________________________ Title:_______________________________ -4- EX-10.14.12 25 3RD AMENDMENT TO SHORT TERM CREDIT AGREEMENT Exhibit 10.14.12 THIRD AMENDMENT TO SHORT TERM REVOLVING CREDIT AGREEMENT -------------------------------------------------------- THIS THIRD AMENDMENT TO SHORT TERM REVOLVING CREDIT AGREEMENT, dated as of August 3, 1998 (this "Amendment"), by and among X.L. Insurance Company, Ltd. and X.L. Global Reinsurance Company, Ltd. (formerly known as X.L. Reinsurance Company, Ltd.) (the "Borrowers"), X.L. Insurance Company, Ltd. and EXEL Acquisition Ltd. (the "Guarantors"), MELLON BANK, N.A., (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: ------------------- WHEREAS, the Borrowers, the Guarantors, the Banks, and the Agent are parties to a Short Term Revolving Credit Agreement, dated as of June 6, 1997, (as amended by the First Amendment thereto, dated as of November 5, 1997, and by the Second Amendment thereto, dated as of May 13, 1998, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, the Borrowers have requested the Banks to make certain changes to the Credit Agreement; and WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is ------------------------------ hereby amended as follows: (A) Section 1.01 of the Credit Agreement is hereby amended by adding thereto, between the definitions of the terms "Material Adverse Effect" and "Notes", respectively, appearing therein, the following definitions: "1998 Merger" shall mean consummation of the transactions provided for in the Agreement and Schemes of Arrangement among EXEL Limited, EXEL Merger Company, Ltd. and Mid Ocean Limited, as described in the Current Report on Form 8-K of EXEL Limited dated as of March 16, 1998, as modified by the amendment and restatement thereof dated April 28, 1998. "1998 Reinsurance Merger Transaction" shall mean the transfer, after or contemporaneously with consummation of the 1998 Merger, to Mid Ocean Limited by X.L. Insurance of all of the common stock of X. L. Reinsurance and the subsequent amalgamation of X.L. Reinsurance with Mid Ocean Reinsurance Company, Ltd., the resulting corporation of which amalgamation will be a Bermuda corporation which shall have assumed and shall be liable for all of the obligations of X.L. Reinsurance under the Loan Documents. (B) The definition of the term "Business Day" appearing in Section 1.01 of the Credit Agreement is hereby amended by inserting therein, between the word "Pennsylvania" and the period at the end thereof, the words "or Bermuda". (c) The definition of the term "Change of Control" appearing in Section 1.01 of the Credit Agreement is hereby amended by adding thereto, after the word "shareholders" and before the period at the end thereof, the following phrase: "; provided, that consummation of the 1998 Merger shall be deemed not to be a -------- Change of Control". (D) The definition of the term "EXEL Limited" appearing in Section 1.01 of the Credit Agreement is hereby amended to read as follows: "EXEL Limited" shall mean (i) until consummation of the 1998 Merger, EXEL Limited, a corporation organized under the laws of the Cayman Islands, British West Indies which, on the date of this Agreement, is the sole shareholder of X.L. Insurance Company, Ltd., except for a nominal number of shares owned by two nominee shareholders required by the Bermuda Companies Law and (ii) from and after consummation of the 1998 Merger, EXEL Limited, a corporation organized under the laws of the Cayman Islands, British West Indies which is referred to as "New EXEL" in the 8-K Report referred to in the definition of 1998 Merger below. (E) The definition of the term "Indebtedness" appearing in Section 1.01 of the Credit Agreement is hereby amended by inserting therein, between the phrase "of a Person shall mean" and the colon, the following: (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 company or corporate member of -2- Lloyds (other than in connection with the financing activities of such Person or of any of such Person's Affiliates) shall not be deemed to constitute Indebtedness) (F) The definition of the term "X.L. Reinsurance" appearing in Section 1.01 of the Credit Agreement is hereby amended to read as follows: "X.L. Reinsurance" shall mean (i) until consummation of the 1998 Reinsurance Merger Transactions, X.L. Global Reinsurance Company, Ltd., a corporation organized under the laws of Bermuda, and (ii) from and after consummation of the 1998 Reinsurance Merger Transaction, X.L. Mid Ocean Reinsurance Company, Ltd., a corporation organized under the laws of Bermuda and the resulting corporation of the amalgamation referred to in the definition of the term "1998 Reinsurance Merger Transaction" appearing in this Section. (G) Section 5.08 of the Credit Agreement is hereby amended by adding thereto a new second sentence, to read as follows: "General corporate purposes", as used in the immediately preceding sentence with respect to the use of proceeds of Loan, may include payment of dividends. (H) The introductory phrase of Article VI of the Credit Agreement, appearing before Section 6.01, is hereby amended to read as follows: Each Borrower covenants to the Agent and to each Bank as follows (it being understood that nothing in Section 6.01, Section 6.02 or Section 6.04 hereof shall prohibit the consummation of the 1998 Reinsurance Merger Transaction): (I) Section 7.01(h) of the Credit Agreement is hereby amended to read as follows: (h) EXEL Limited shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of common stock of X.L. Reinsurance, except for a nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law. -3- (J) Section 6.03 of the Credit Agreement is hereby amended by deleting the period at the end of paragraph (f) thereof and replacing it with "; or" and by adding after such paragraph (f) a new paragraph (g) to read as follows: (g) Liens securing letter of credit reimbursement obligations under the Security Agreement listed on Schedule 6.03(g) hereto (and extension, renewal and replacement Liens upon the same property or upon substitute property of approximately the same value, provided the total amount secured by each Lien constituting such extension, renewal or replacement Liens shall not exceed the maximum amount secured by the Liens theretofore existing). (K) Section 6.08(d) of the Credit Agreement is hereby amended by adding thereto, between the phrase "Schedule 6.08(d)" and the semicolon at the end thereof, the phrase "and Indebtedness described on Schedule 6.03(g) hereto". (L) The Credit Agreement is hereby amended by adding thereto a Schedule 6.03(g) in the form attached to this Amendment as Schedule 6.03(g). SECTION 2. EFFECT OF AMENDMENT. The Credit Agreement, as amended by ------------------- this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 3. GOVERNING LAW. This Amendment shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 4. COUNTERPARTS. This Amendment may be executed in any ------------ number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as a Borrower and as a Guarantor By:__________________________________ Title:_______________________________ -4- X.L. GLOBAL REINSURANCE COMPANY, LTD. (formerly X.L. Reinsurance Company, Ltd.), as a Borrower By:________________________________________ Title:_____________________________________ EXEL ACQUISITION LTD., as a Guarantor By:________________________________________ Title:_____________________________________ MELLON BANK, N.A., as a Bank and as Agent By:________________________________________ Title:_____________________________________ BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:________________________________________ Title:_____________________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:________________________________________ Title:_____________________________________ By:________________________________________ Title:_____________________________________ THE BANK OF NOVA SCOTIA, as a Bank By:________________________________________ Title:_____________________________________ -5- THE CHASE MANHATTAN BANK, as a Bank By:________________________________________ Title:_____________________________________ THE BANK OF BERMUDA LIMITED, as a Bank By:________________________________________ Title:_____________________________________ ROYAL BANK OF CANADA, as a Bank By:________________________________________ Title:_____________________________________ BANQUE NATIONALE DE PARIS, as a Bank By:________________________________________ Title:_____________________________________ By:________________________________________ Title:_____________________________________ BANK OF AMERICA NT&SA, as a Bank By:________________________________________ Title:_____________________________________ CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By:________________________________________ Title:_____________________________________ By:________________________________________ Title:_____________________________________ -6- BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By:________________________________________ Title:_____________________________________ By:________________________________________ Title:_____________________________________ -7- Schedule 6.03(g) From and after consummation of the 1998 Reinsurance Merger Transaction, the Lien referred to in Section 6.03(g) of the Credit Agreement with reference to this Schedule is a Lien on investment securities and similar property in favor of Citibank, N.A., as agent or as issuing bank, securing reimbursement obligations and related obligations with respect to letters of credit issued for the account of X. L. Reinsurance or its affiliates (or for the account of its predecessor, Mid Ocean Reinsurance Company, Ltd. or its affiliates) in an aggregate face amount not exceeding $325,000,000. The Indebtedness described in Section 6.08(d) of the Credit Agreement with reference to this Schedule consists of the obligations referred to in the immediately preceding sentence. -8- EX-10.14.13 26 4TH AMENDMENT TO SHORT TERM CREDIT AGREEMENT Exhibit 10.14.13 FOURTH AMENDMENT TO SHORT TERM REVOLVING CREDIT AGREEMENT --------------------------------------------------------- THIS FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT, dated as of December 4, 1998 (this "Amendment"), by and among X.L. Insurance Company, Ltd. and X.L. Mid Ocean Reinsurance Company, Ltd. (successor to X.L. Global Reinsurance Company, Ltd.) (the "Borrowers"), X.L. Insurance Company, Ltd. and EXEL Acquisition Ltd. (the "Guarantors"), MELLON BANK, N.A., (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrowers, the Guarantors, the Banks, and the Agent are parties to a Revolving Credit Agreement, dated as of June 6, 1997, (as amended by the First Amendment thereto, dated as of November 5, 1997, the Second Amendment thereto, dated as of May 13, 1998, and the Third Amendment thereto, dated as of August 3, 1998, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, the Borrowers have requested the Banks to make certain changes to the Credit Agreement; and WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is ------------------------------ hereby amended as follows: (a) Section 2.04(c) of the Credit Agreement is hereby amended by deleting the words "One, two, three, six or twelve months ('Euro-Rate Funding Period')" appearing under the column heading "Available Funding Periods" ------------------------- appearing therein and inserting in lieu of such words under such column heading the following: "One, two, three, six or twelve months or, if acceptable to all Banks, one or two weeks ('Euro-Rate Funding Period')". (b) Section 6.03(e) of the Credit Agreement is hereby amended to read as follows: (e) Liens securing Indebtedness permitted by Section 6.08(b) or Section 6.08(c) hereof covering assets whose market value is not materially greater than an amount equal to the amount of the Indebtedness secured thereby, plus a commercially reasonable margin. (c) Section 6.08(b) of the Credit Agreement is hereby amended by deleting the word "Unsecured" appearing at the beginning thereof. SECTION 2. EFFECT OF AMENDMENT. The Credit Agreement, as amended by ------------------- this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remains in full force and effect. SECTION 3. GOVERNING LAW. This Amendment shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 4. COUNTERPARTS. This Amendment may be executed in any ------------ number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as a Borrower and as a Guarantor By:_________________________________ Title:______________________________ -2- X.L. MID OCEAN REINSURANCE COMPANY, LTD. (successor to X.L. Global Reinsurance Company, Ltd.), as a Borrower By:_________________________________ Title:______________________________ EXEL ACQUISITION LTD., as a Guarantor By:_________________________________ Title:______________________________ MELLON BANK, N.A., as a Bank and as Agent By:_________________________________ Title:______________________________ BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:_________________________________ Title:______________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:_________________________________ Title:______________________________ By:_________________________________ Title:______________________________ THE BANK OF NOVA SCOTIA, as a Bank By:_________________________________ Title:______________________________ -3- THE CHASE MANHATTAN BANK, as a Bank By:_________________________________ Title:______________________________ THE BANK OF BERMUDA LIMITED, as a Bank By:_________________________________ Title:______________________________ ROYAL BANK OF CANADA, as a Bank By:_________________________________ Title:______________________________ BANQUE NATIONALE DE PARIS, as a Bank By:_________________________________ Title:______________________________ By:_________________________________ Title:______________________________ BANK OF AMERICA NT&SA, as a Bank By:_________________________________ Title:______________________________ CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By:_________________________________ Title:______________________________ By:_________________________________ -4- Title:______________________________ BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By:_________________________________ Title:______________________________ By:_________________________________ Title:______________________________ -5- EX-10.14.15 27 1ST AMENDMENT TO REVOLVING CREDIT AGREEMENT Exhibit 10.14.15 FIRST AMENDMENT TO TERM LOAN AGREEMENT -------------------------------------- THIS FIRST AMENDMENT TO TERM LOAN AGREEMENT, dated as of November 9, 1998 (this "Amendment"), by and among X.L. America, Inc. (formerly known as X.L. Holdings, Inc.) (the "Borrower"), X.L. Insurance Company, Ltd. (the "Guarantor"), and MELLON BANK, N.A., (the "Bank"). W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Guarantor and the Bank are parties to a Term Loan Agreement, dated as of July 7, 1998 (the "Loan Agreement"), pursuant to which the Bank has made a $50,000,000 term loan advance to the Borrower; and WHEREAS, the Borrower and the Guarantor have requested the Bank to make an additional $50,000,000 term loan advance to the Borrower and to amend the Loan Agreement to provide for such advance and the Bank is willing to do so on the terms and subject to the conditions set forth herein; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Loan Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO LOAN AGREEMENT. ---------------------------- (a) The definition of the term "Closing Date" in Section 1.01 of the Loan Agreement is hereby amended to read as follows: "Closing Date" shall mean, with respect to the first advance hereunder, July 10, 1998, and shall mean, with respect to the second advance hereunder, November 9, 1998 or such other date prior to December 1, 1998 as the Borrower shall designate. (b) The definition of the term "Loan" in Section 1.01 of the Loan Agreement is hereby amended to read as follows: "Loan" shall mean the loan, in the aggregate principal amount of up to $100,000,000, made by the Bank to the Borrower under this Agreement, comprising the first advance in the principal amount of $50,000,000 and the second advance in the amount of $50,000,000 (it being understood that if such second advance is not made, the term Loan will refer to such first advance). (c) The definition of the term "Note" in Section 1.01 of the Loan Agreement is hereby amended by deleting the phrase "the promissory note" appearing therein and inserting in lieu thereof the phrase ", collectively, the promissory notes". (d) Section 2.01(a) of the Loan Agreement is hereby amended to read as follows: (a) Commitment. Subject to the terms and conditions and ---------- relying upon the representations and warranties herein set forth, the Bank agrees to make two advances to the Borrower, each in the principal amount of the $50,000,000, the first on July 10, 1998 and the second on the Closing Date with respect thereto (collectively, the "Loan"). (e) Section 2.01(c) of the Loan Agreement is hereby amended to read as follows: (c) Note. From and after the date of the second advance of ---- the Loan, the obligation of the Borrower to repay the unpaid principal amount of the Loan made by the Bank and to pay interest thereon shall be evidenced in part by two promissory notes of the Borrower, each dated the applicable Closing Date (collectively, the "Note"), each in substantially the form attached hereto as Exhibit A, with the blanks appropriately filled, payable to the order of the Bank. (f) Section 4.01 of the Loan Agreement is hereby amended by deleting the introductory phrase "The obligation of the Bank to make the Loan hereunder on the Closing Date shall be subject to the following conditions:" appearing therein and inserting in lieu thereof the introductory phrase: "The obligation of the Bank to make each advance of the Loan hereunder on the applicable Closing Date shall be subject to the satisfaction of the following conditions on the applicable Closing Date and to the payment by the Borrower to the Bank of an amendment fee of $10,000 on the Closing Date with respect to the second advance:". SECTION 2. REPRESENTATIONS AND WARRANTIES. Each Loan Party ------------------------------ represents and warrants that the representations and warranties contained in Article III of the Loan Agreement are true and correct on and as of the date of this Amendment, and will be true and correct on and as of the Closing Date with respect to the second advance of the Loan, as if made on each such date. For purposes of Section 7.01(g) of the Loan Agreement this representation and warranty is deemed to be made in the Loan Agreement. SECTION 3. EFFECT OF AMENDMENT. The Loan Agreement, as amended by ------------------- this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 4. GOVERNING LAW. This Amendment shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. -2- SECTION 5. COUNTERPARTS. This Amendment may be executed in any ------------ number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD., as Guarantor By:____________________________________ Title:_________________________________ X.L. AMERICA, INC. (formerly known as X.L. Holdings, Inc.), as Borrower By:____________________________________ Title:_________________________________ MELLON BANK, N.A., as Bank By:____________________________________ Title:_________________________________ -3- EX-10.14.16 28 2ND AMENDMENT TO REVOLVING CREDIT AGREEMENT Exhibit 10.14.16 SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT ---------------------------------------------- THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT, dated as of August 3, 1998 (this "Amendment"), by and among X.L. Insurance Company, Ltd. and X.L. Global Reinsurance Company, Ltd. (formerly known as X.L. Reinsurance Company, Ltd.) (the "Borrowers"), X.L. Insurance Company, Ltd. and EXEL Acquisition Ltd. (the "Guarantors"), MELLON BANK, N.A., (the "Agent") and the banks listed on the signature pages hereto (collectively, the "Banks"). W I T N E S S E T H: ------------------- WHEREAS, the Borrowers, the Guarantors, the Banks, and the Agent are parties to a Revolving Credit Agreement, dated as of June 6, 1997, (as amended by the First Amendment thereto, dated as of November 5, 1997, the "Credit Agreement"), pursuant to which the Banks have agreed, on the terms and subject to the conditions described therein, to make Loans to the Borrowers; and WHEREAS, the Borrowers have requested the Banks to make certain changes to the Credit Agreement; and WHEREAS, the Banks are willing to amend the Credit Agreement as set forth below; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement; NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is ------------------------------ hereby amended as follows: (a) Section 1.01 of the Credit Agreement is hereby amended by adding thereto, between the definitions of the terms "Material Adverse Effect" and "Notes", respectively, appearing therein, the following definitions: "1998 Merger" shall mean consummation of the transactions provided for in the Agreement and Schemes of Arrangement among EXEL Limited, EXEL Merger Company, Ltd. and Mid Ocean Limited, as described in the Current Report on Form 8-K of EXEL Limited dated as of March 16, 1998, as modified by the amendment and restatement thereof dated April 28, 1998. "1998 Reinsurance Merger Transaction" shall mean the transfer, after or contemporaneously with consummation of the 1998 Merger, to Mid Ocean Limited by X.L. Insurance of all of the common stock of X. L. Reinsurance and the subsequent amalgamation of X.L. Reinsurance with Mid Ocean Reinsurance Company, Ltd., the resulting corporation of which amalgamation will be a Bermuda corporation which shall have assumed and shall be liable for all of the obligations of X.L. Reinsurance under the Loan Documents. (b) The definition of the term "Business Day" appearing in Section 1.01 of the Credit Agreement is hereby amended by inserting therein, between the word "Pennsylvania" and the period at the end thereof, the words "or Bermuda". (c) The definition of the term "Change of Control" appearing in Section 1.01 of the Credit Agreement is hereby amended by adding thereto, after the word "shareholders" and before the period at the end thereof, the following phrase: "; provided, that consummation of the 1998 Merger shall be deemed not to be a -------- Change of Control". (d) The definition of the term "EXEL Limited" appearing in Section 1.01 of the Credit Agreement is hereby amended to read as follows: "EXEL Limited" shall mean (i) until consummation of the 1998 Merger, EXEL Limited, a corporation organized under the laws of the Cayman Islands, British West Indies which, on the date of this Agreement, is the sole shareholder of X.L. Insurance Company, Ltd., except for a nominal number of shares owned by two nominee shareholders required by the Bermuda Companies Law and (ii) from and after consummation of the 1998 Merger, EXEL Limited, a corporation organized under the laws of the Cayman Islands, British West Indies which is referred to as "New EXEL" in the 8-K Report referred to in the definition of 1998 Merger below. (e) The definition of the term "Indebtedness" appearing in Section 1.01 of the Credit Agreement is hereby amended by inserting therein, between the phrase "of a Person shall mean" and the colon, the following: (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 company or corporate member of Lloyds (other than in connection with the financing activities of such Person or of any -2- of such Person's Affiliates) shall not be deemed to constitute Indebtedness) (f) The definition of the term "X.L. Reinsurance" appearing in Section 1.01 of the Credit Agreement is hereby amended to read as follows: "X.L. Reinsurance" shall mean (i) until consummation of the 1998 Reinsurance Merger Transactions, X.L. Global Reinsurance Company, Ltd., a corporation organized under the laws of Bermuda, and (ii) from and after consummation of the 1998 Reinsurance Merger Transaction, X.L. Mid Ocean Reinsurance Company, Ltd., a corporation organized under the laws of Bermuda and the resulting corporation of the amalgamation referred to in the definition of the term "1998 Reinsurance Merger Transaction" appearing in this Section. (g) Section 5.08 of the Credit Agreement is hereby amended by adding thereto a new second sentence, to read as follows: "General corporate purposes", as used in the immediately preceding sentence with respect to the use of proceeds of Loan, may include payment of dividends. (h) The introductory phrase of Article VI of the Credit Agreement, appearing before Section 6.01, is hereby amended to read as follows: Each Borrower covenants to the Agent and to each Bank as follows (it being understood that nothing in Section 6.01, Section 6.02 or Section 6.04 hereof shall prohibit the consummation of the 1998 Reinsurance Merger Transaction): (i) Section 7.01(h) of the Credit Agreement is hereby amended to read as follows: (h) EXEL Limited shall cease to own, beneficially and of record, directly or indirectly all of the outstanding voting shares of common stock of X.L. Reinsurance, except for a nominal number of shares owned by nominee shareholders required by the Bermuda Companies Law. (j) Section 6.03 of the Credit Agreement is hereby amended by deleting the period at the end of paragraph (f) -3- thereof and replacing it with "; or" and by adding after such paragraph (f) a new paragraph (g) to read as follows: (g) Liens securing letter of credit reimbursement obligations under the Security Agreement listed on Schedule 6.03(g) hereto (and extension, renewal and replacement Liens upon the same property or upon substitute property of approximately the same value, provided the total amount secured by each Lien constituting such extension, renewal or replacement Liens shall not exceed the maximum amount secured by the Liens theretofore existing). (k) Section 6.08(d) of the Credit Agreement is hereby amended by adding thereto, between the phrase "Schedule 6.08(d)" and the semicolon at the end thereof, the phrase "and Indebtedness described on Schedule 6.03(g) hereto". (l) The Credit Agreement is hereby amended by adding thereto a Schedule 6.03(g) in the form attached to this Amendment as Schedule 6.03(g). SECTION 2. EFFECT OF AMENDMENT. The Credit Agreement, as amended by this ------------------- Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 3. GOVERNING LAW. This Amendment shall be deemed to be a contract ------------- under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 4. COUNTERPARTS. This Amendment may be executed in any number ------------ of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. X.L. INSURANCE COMPANY, LTD. as a Borrower and as a Guarantor By:______________________________ Title:___________________________ -4- X.L. GLOBAL REINSURANCE COMPANY, LTD. (formerly X.L. Reinsurance Company, Ltd.), as a Borrower By:___________________________________ Title:________________________________ EXEL ACQUISITION LTD., as a Guarantor By:___________________________________ Title:________________________________ MELLON BANK, N.A., as a Bank and as Agent By:___________________________________ Title:________________________________ BANK OF TOKYO - MITSUBISHI LTD., as a Bank By:___________________________________ Title:________________________________ DEUTSCHE BANK AG, NEW YORK OR CAYMAN ISLANDS BRANCHES, as a Bank By:___________________________________ Title:________________________________ By:___________________________________ Title:________________________________ THE BANK OF NOVA SCOTIA, as a Bank By:___________________________________ Title:________________________________ -5- THE CHASE MANHATTAN BANK, as a Bank By:___________________________________ Title:________________________________ THE BANK OF BERMUDA LIMITED, as a Bank By:___________________________________ Title:________________________________ ROYAL BANK OF CANADA, as a Bank By:___________________________________ Title:________________________________ BANQUE NATIONALE DE PARIS, as a Bank By:___________________________________ Title:________________________________ By:___________________________________ Title:________________________________ BANK OF AMERICA NT&SA, as a Bank By:___________________________________ Title:________________________________ CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By:___________________________________ Title:________________________________ By:___________________________________ Title:________________________________ -6- BANK AUSTRIA AKTIENGESELLSCHAFT, as a Bank By:___________________________________ Title:________________________________ By:___________________________________ Title:________________________________ -7- Schedule 6.03(g) From and after consummation of the 1998 Reinsurance Merger Transaction, the Lien referred to in Section 6.03(g) of the Credit Agreement with reference to this Schedule is a Lien on investment securities and similar property in favor of Citibank, N.A., as agent or as issuing bank, securing reimbursement obligations and related obligations with respect to letters of credit issued for the account of X. L. Reinsurance or its affiliates (or for the account of its predecessor, Mid Ocean Reinsurance Company, Ltd. or its affiliates) in an aggregate face amount not exceeding $325,000,000. The Indebtedness described in Section 6.08(d) of the Credit Agreement with reference to this Schedule consists of the obligations referred to in the immediately preceding sentence. -8- EX-11.1 29 STATEMENT REGARDING COMPUTATION OF EARNINGS EXHIBIT 11.1 XL CAPITAL LTD COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT
Year Ended November 30, ----------------------- 1998 1997 1996 ---- ---- ---- Earnings per ordinary share and ordinary share equivalent--basic: Weighted average shares outstanding 92,975 85,120 90,734 -------- -------- -------- Net Income $587,663 $676,961 $494,313 -------- -------- -------- Earnings per ordinary share and ordinary share equivalent $ 6.32 $ 7.95 $ 5.45 ======== ======== ======== Earnings per ordinary share and ordinary share equivalent--diluted Weighted average shares outstanding 92,790 84,905 90,420 -------- -------- -------- Average stock options outstanding (net of repurchased shares under the modified treasury stock method) 1,995 1,410 908 -------- -------- -------- Weighted average ordinary shares and ordinary share equivalents outstanding $ 94,785 $ 86,315 $ 91,328 ======== ======== ======== Net income $587,663 $676,961 $494,313 ======== ======== ======== Earnings per ordinary share and ordinary share equivalent $ 6.20 $ 7.84 $ 5.41 ======== ======== ========
EX-21.1 30 LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES EXEL Holdings Limited (100%) - Cayman EXEL Acquisition Ltd. (100%) - Cayman Reeve Court Insurance Company (51%) - Bermuda Reeve Court Holdings Ltd. (50%) - Bermuda XL Capital Products Ltd (100%) - Bermuda X. L. Property Holdings Ltd. (50%) - Bermuda XL Financial Assurance Ltd (80%) - Bermuda XL Insurance Ltd (100%) - Bermuda X. L. Investments Ltd. (100%) - Bermuda XL Global Services (Bermuda) Ltd (100%) - Bermuda X. L. Holdings Barbados Ltd. (100%) - Barbados X. L. One Ltd. (100%) - Bermuda X. L. Two Ltd. (100%) - Bermuda EXEL Cumberland Limited (100%) - UK IPT Compliance Limited (100%) - UK X. L. America Inc. (100%) - Delaware X. L. Europe (100%) - Republic of Ireland X. L. Insurance Company of America, Inc. (100%) - New York Inquislogic Inc. (100%) - Delaware X. L. Global Services, Inc. (100%) - Delaware X. L. Risk Solutions Inc. (100%) - Connecticut X. L. Australia Pty Ltd. (100%) - Australia X.L. Investment Private Trustee Ltd. (100%) - Bermuda First Cumberland Bank, Inc. (100%) - Barbados Garrison Investments Inc. (100%) - Barbados Inquislogic Ltd. (100%) - Barbados Kensington Investments Inc. (100%) - Barbados X. L. Investments (Barbados) Inc. (100%) - Barbados Cumberland Holdings, Inc. (100%) - Delaware Mid Ocean Limited (73% - Class A) - Cayman Mid Ocean Holdings Limited (100%) - Bermuda XL Mid Ocean Reinsurance Ltd (100%) - Bermuda LARC Holdings Ltd. (74%) - Bermuda L. A. Reinsurance Company, Ltd. (100%) - Bermuda Ridgewood Holdings Company (100%) - Bermuda The Brockbank Group Plc (100%) - UK Baltusrol (51%) - Bermuda Brockbank holdings (100%) - UK Brockbank Underwriting (100%) - UK County Down Ltd. (100%) - UK Dornoch Ltd. (100%) - UK Brockbank Insurance Services (100%) - UK EX-23.1 31 CONSENT OF PRICEWATERHOUSECOOPERS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Form 10-K of our report dated January .., 1999, on our audits of the financial statements and financial statement schedules of XL Capital Ltd. We further consent to the incorporation by reference in the registration statements of XL Capital Ltd on Form S-3 (File No. 33-76170), Form S-8 (File No. 33-86826) and Form S-8 and S-3 (File No. 33-86824) of our report dated January .., 1999 on our audits of the financial statements and financial statement schedules of XL Capital Ltd. PricewaterhouseCoopers New York, New York February.., 1999 EX-27 32 FINANCIAL DATA SCHEDULE
7 1,000 YEAR NOV-30-1998 DEC-01-1997 NOV-30-1998 5,333,795 0 0 1,128,601 0 0 6,462,396 443,654 0 97,951 10,108,650 3,121,739 1,010,907 19,167 0 301,000 0 0 1,118 4,816,762 10,108,650 806,861 279,375 191,795 61,278 390,483 88,596 144,717 593,852 5,363 587,663 0 0 0 587,663 6.32 6.20 2,342,254 713,059 (164,156) 167,409 199,066 3,121,739 349,662
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