-----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, Fqlb3vjn9SpB+CNiQGWAIdlrEeWJO8qib/wdsaCpW4vDCmV9yBwrfJ971fnxwVid hGdQP/BatJwUlmgKFcDzcA== 0000902561-02-000571.txt : 20021114 0000902561-02-000571.hdr.sgml : 20021114 20021114125433 ACCESSION NUMBER: 0000902561-02-000571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE LTD CENTRAL INDEX KEY: 0000896159 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11778 FILM NUMBER: 02823415 BUSINESS ADDRESS: STREET 1: ACE BLDG STREET 2: 30 WOODBOURNE AVE CITY: HAMILTON HM 08 BERMU STATE: D0 ZIP: 00000 BUSINESS PHONE: 8092955200 MAIL ADDRESS: STREET 1: P O BOX HM 1015 CITY: HAMITON BERMUDA STATE: D0 ZIP: 00000 10-Q 1 form10-q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ___________ to ___________ Commission File No. 1-11778 I.R.S. Employer Identification No. 98-0091805 ACE LIMITED (Incorporated in the Cayman Islands) ACE Global Headquarters 17 Woodbourne Avenue Hamilton HM 08 Bermuda Telephone 441-295-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ------- The number of registrant's Ordinary Shares ($0.041666667 par value) outstanding as of November 8, 2002 was 262,650,978. ACE LIMITED INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements: Consolidated Balance Sheets September 30, 2002 (Unaudited) and December 31, 2001 3 Consolidated Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2002 and 2001 4 Consolidated Statements of Shareholders' Equity (Unaudited) Nine Months Ended September 30, 2002 and 2001 5 Consolidated Statements of Comprehensive Income (Unaudited) Nine Months Ended September 30, 2002 and 2001 7 Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2002 and 2001 8 Notes to Interim Consolidated Financial Statements (Unaudited) 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 31 Item 3. Quantitative and Qualitative Disclosures about Market Risk 67 Item 4. Controls and Procedures 68 Part II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 69 Item 6. Exhibits and Reports on Form 8-K 69 2 ITEM 1. Financial Statements - ---------------------------- ACE LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30 December 31 2002 2001 -------------- ------------- (Unaudited) (in thousands of U.S. dollars, except share and per share data) Assets Investments and cash Fixed maturities available for sale, at fair value (amortized cost - $12,991,777 and $12,794,444) $ 13,504,458 $ 13,000,165 Equity securities, at fair value (cost - $560,583 and $516,028) 401,142 467,566 Securities on loan, at fair value (amortized cost - $518,177 and $0) 532,876 - Short-term investments, at fair value 2,004,144 1,205,795 Other investments (cost - $619,077 and $569,045) 645,164 591,006 Cash 649,774 671,381 ------------- -------------- Total investments and cash 17,737,558 15,935,913 Accrued investment income 212,342 213,821 Insurance and reinsurance balances receivable 3,208,065 2,521,562 Accounts and notes receivable 240,088 242,724 Reinsurance recoverable 11,889,368 11,398,446 Deferred policy acquisition costs 823,374 679,281 Prepaid reinsurance premiums 1,646,301 1,222,795 Goodwill 2,716,860 2,772,094 Deferred tax assets 1,151,937 1,250,835 Other assets 1,203,892 949,293 ------------- -------------- Total assets $ 40,829,785 $ 37,186,764 ============= ============== Liabilities Unpaid losses and loss expenses $ 21,641,231 $ 20,728,122 Future policy benefits for life and annuity contracts 419,041 382,730 Unearned premiums 5,525,634 3,853,429 Premiums received in advance 44,585 57,486 Insurance and reinsurance balances payable 1,826,319 1,418,001 Contract holder deposit funds 93,136 101,187 Securities lending collateral 546,385 - Accounts payable, accrued expenses and other liabilities 1,483,048 1,466,127 Dividends payable 47,689 42,044 Short-term debt 220,280 495,408 Long-term debt 1,748,869 1,349,473 Trust preferred securities 475,000 875,000 ------------- -------------- Total liabilities 34,071,217 30,769,007 ------------- -------------- Commitments and contingencies Mezzanine equity 311,050 311,050 ------------- -------------- Shareholders' equity Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized; 262,495,210 and 259,861,205 shares issued and outstanding) 10,937 10,828 Additional paid-in capital 3,780,132 3,710,698 Unearned stock grant compensation (47,390) (37,994) Retained earnings 2,419,034 2,321,576 Deferred compensation obligation 18,630 16,497 Accumulated other comprehensive income 284,805 101,599 Ordinary Shares issued to employee trust (18,630) (16,497) ------------- -------------- Total shareholders' equity 6,447,518 6,106,707 ------------- -------------- Total liabilities, mezzanine equity and shareholders' equity $ 40,829,785 $ 37,186,764 ============= ============== See accompanying notes to the interim consolidated financial statements 3 ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the three and nine months ended September 30, 2002 and 2001 (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------- ------------- -------------- ------------- (in thousands of U.S. dollars, except per share data) Revenues Gross premiums written Property and casualty premiums $ 3,470,196 $ 2,470,195 $ 9,460,386 $ 7,403,515 Life and annuity premiums 58,529 32,176 115,440 63,155 ------------- ------------- -------------- ------------- 3,528,725 2,502,371 9,575,826 7,466,670 Reinsurance premiums ceded (1,305,938) (1,197,304) (3,491,633) (2,955,840) Net premiums written ------------- ------------- -------------- ------------- Property and casualty premiums 2,165,939 1,272,891 5,972,395 4,447,675 Life and annuity premiums 56,848 32,176 111,798 63,155 ------------- ------------- -------------- ------------- 2,222,787 1,305,067 6,084,193 4,510,830 Change in unearned premiums (297,208) 94,362 (1,223,098) (357,098) Net premiums earned ------------- ------------- -------------- ------------- Property and casualty premiums 1,868,731 1,367,253 4,749,526 4,090,577 Life and annuity premiums 56,848 32,176 111,569 63,155 ------------- ------------- -------------- ------------- 1,925,579 1,399,429 4,861,095 4,153,732 Net investment income 199,740 192,909 600,679 593,606 Other income (expense) ` (14,032) (1,858) (21,301) 827 Net realized losses on investments (235,282) (58,843) (400,884) (62,654) ------------- ------------- -------------- ------------- Total revenues 1,876,005 1,531,637 5,039,589 4,685,511 ------------- ------------- -------------- ------------- Expenses Losses and loss expenses 1,327,792 1,541,627 3,141,886 3,447,761 Life and annuity benefits 59,697 29,706 106,004 58,511 Policy acquisition costs 253,013 204,666 685,016 558,996 Administrative expenses 250,668 205,531 677,597 608,615 Interest expense 48,679 49,130 146,633 153,094 Amortization of goodwill - 19,912 - 59,664 ------------- ------------- -------------- ------------- Total expenses 1,939,849 2,050,572 4,757,136 4,886,641 ------------- ------------- -------------- ------------- Income (loss) before income tax and cumulative effect of adopting a new accounting standard (63,844) (518,935) 282,453 (201,130) Income tax expense (benefit) (7,334) (76,345) 37,258 (31,121) Income (loss) before cumulative effect of adopting ------------- ------------- -------------- ------------- a new accounting standard (56,510) (442,590) 245,195 (170,009) Cumulative effect of adopting a new accounting standard (net of income tax) - - - (22,670) ------------- ------------- -------------- ------------- Net income (loss) $ (56,510) $ (442,590) $ 245,195 $ (192,679) ============= ============= ============== ============= Basic earnings (loss) per share before cumulative effect of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.87 $ (0.82) ============= ============= ============== ============= Basic earnings (loss) per share $ (0.24) $ (1.95) $ 0.87 $ (0.92) ============= ============= ============== ============= Diluted earnings (loss) per share before cumulative effect of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.84 $ (0.82) ============= ============= ============== ============= Diluted earnings (loss) per share $ (0.24) $ (1.95) $ 0.84 $ (0.92) ============= ============= ============== ============= See accompanying notes to the interim consolidated financial statements 4
ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the nine months ended September 30, 2002 and 2001 (Unaudited) 2002 2001 ------------ ------------ (in thousands of U.S. dollars) Ordinary Shares Balance - beginning of period $ 10,828 $ 9,681 Shares issued 36 8 Exercise of stock options 81 41 Issued under Employee Stock Purchase Plan (ESPP) 10 9 Cancellation of Shares (18) (24) Repurchase of Shares - (282) ------------- ------------- Balance - end of period 10,937 9,433 ------------- ------------- Additional paid-in capital Balance - beginning of period 3,710,698 2,637,085 Ordinary Shares issued 36,509 3,206 Exercise of stock options 40,642 19,729 Ordinary Shares issued under ESPP 7,462 7,054 Cancellation of Ordinary Shares (15,179) (15,145) Repurchase of Ordinary Shares - (76,849) ------------- ------------- Balance - end of period 3,780,132 2,575,080 ------------- ------------- Unearned stock grant compensation Balance - beginning of period (37,994) (29,642) Stock grants awarded (39,106) (18,503) Stock grants forfeited 7,830 813 Amortization 21,880 7,203 ------------- ------------- Balance - end of period (47,390) (40,129) ------------- ------------- Retained earnings Balance - beginning of period 2,321,576 2,733,633 Net income (loss) 245,195 (192,679) Dividends declared on Ordinary Shares (128,491) (98,756) Dividends declared on FELINE PRIDES (19,246) (19,179) Repurchase of Ordinary Shares - (102,315) ------------- ------------- Balance - end of period 2,419,034 2,320,704 ------------- ------------- Deferred compensation obligation Balance - beginning of period 16,497 14,597 Net increase to obligation 2,133 1,900 ------------- ------------- Balance - end of period $ 18,630 $ 16,497 ------------- ------------- See accompanying notes to the interim consolidated financial statements 5 ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (cont'd.) For the nine months ended September 30, 2002 and 2001 (Unaudited) 2002 2001 ------------ ------------ (in thousands of U.S. dollars) Accumulated other comprehensive income Net unrealized appreciation (depreciation) on investments Balance - beginning of period $ 136,916 $ 102,335 Change in period, net of income tax 182,553 84,629 ------------ ----------- Balance - end of period 319,469 186,964 ------------ ----------- Cumulative translation adjustments Balance - beginning of period (35,317) (32,881) Change in period, net of income tax 653 (1,391) ------------ ----------- Balance - end of period (34,664) (34,272) ------------ ----------- Accumulated other comprehensive income 284,805 152,692 ------------ ----------- Ordinary Shares issued to employee trust Balance - beginning of period (16,497) (14,597) Net increases in Ordinary Shares (2,133) (1,900) ------------ ----------- Balance - end of period (18,630) (16,497) ------------ ----------- Total shareholders' equity $ 6,447,518 $5,017,780 ============ =========== See accompanying notes to the interim consolidated financial statements 6 ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the nine months ended September 30, 2002 and 2001 (Unaudited) 2002 2001 ------------ ------------ (in thousands of U.S. dollars) Net income (loss) $ 245,195 $ (192,679) Other comprehensive income (loss) Net unrealized appreciation (depreciation) on investments Unrealized appreciation (depreciation) on investments 227,651 137,718 Less: reclassification adjustment for net realized (gains) losses included in net income 42,654 (15,334) ----------- ------------ 270,305 122,384 Cumulative translation adjustments 4,150 (6,297) ----------- ------------ Other comprehensive income, before income tax 274,455 116,087 Income tax expense related to other comprehensive income items (91,248) (32,849) ----------- ------------ Other comprehensive income 183,207 83,238 ----------- ------------ Comprehensive income (loss) $ 428,402 $ (109,441) =========== ============ See accompanying notes to the interim consolidated financial statements 7
ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2002 and 2001 (Unaudited) 2002 2001 ------------- ------------- (in thousands of U.S. dollars) Cash flows from operating activities Net income (loss) $ 245,195 $ (192,679) Adjustments to reconcile net income to net cash provided by operating activities: Unpaid losses and loss expenses, net of reinsurance recoverable 377,390 750,610 Future policy benefits for life and annuity contracts 34,238 56,732 Unearned premiums 1,639,827 753,329 Prepaid reinsurance premiums (423,506) (376,271) Deferred income taxes 9,089 (69,604) Net realized losses on investments 400,884 62,654 Amortization of premium/discounts on fixed maturities 28,364 (5,166) Deferred policy acquisition costs (135,932) (115,426) Insurance and reinsurance balances receivable (670,472) (375,967) Premiums received in advance (12,901) (5,143) Insurance and reinsurance balances payable 411,633 244,558 Accounts payable, accrued expenses and other liabilities (88,061) 92,028 Other (223,841) 59,333 Cumulative effect of adopting a new accounting standard - 22,670 Amortization of goodwill - 59,664 ------------- -------------- Net cash flows from operating activities $ 1,591,907 $ 961,322 ------------- -------------- Cash flows from investing activities Purchases of fixed maturities (12,751,573) (10,914,332) Purchases of equity securities (154,835) (158,103) Sales of fixed maturities 11,468,572 10,371,634 Sales of equity securities 110,377 153,871 Maturities of fixed maturities 249,426 39,190 Net realized losses on financial futures contracts (117,580) (44,060) Acquisition of subsidiary, net of cash acquired 54,380 - Other (102,411) (83,821) ------------- -------------- Net cash used for investing activities $ (1,243,644) $ (635,621) ------------- -------------- Cash flows from financing activities Dividends paid on Ordinary Shares (122,846) (94,279) Dividends paid on FELINE PRIDES (19,246) (19,251) Net proceeds from (repayment of) short-term debt (275,128) 86,961 Repayment of trust preferred securities (400,000) - Proceeds from exercise of options for Ordinary Shares 40,723 19,770 Proceeds from shares issued under ESPP 7,472 7,063 Proceeds from long-term debt 399,155 - Repurchase of Ordinary Shares - (179,446) ------------- -------------- Net cash used for financing activities $ (369,870) $ (179,182) ------------- -------------- Net increase (decrease) in cash (21,607) 146,519 Cash - beginning of period 671,381 608,069 ------------- -------------- Cash - end of period $ 649,774 $ 754,588 ============= ============== See accompanying notes to the interim consolidated financial statments 8
ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (Unaudited) 1. General The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. ACE Limited ("ACE" or "the Company") is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its principal business office in Bermuda. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. During the first quarter of 2002, following changes in executive management responsibilities, the Company reassessed and changed its reporting segments from the individual operating units to lines of business. The four reporting segments are: Insurance - North American, Insurance - Overseas General, Global Reinsurance and Financial Services. These segments are described in Note 14. The following table summarizes the Company's gross premiums written by geographic region for the nine months ended September 30, 2002 and 2001. Allocations have been made on the basis of location of risk: Nine Months North Australia & Asia Ended America Europe New Zealand Pacific Latin America September 30, 2002 64% 22% 2% 8% 4% September 30, 2001 62% 22% 2% 9% 5% 2. New accounting pronouncements In June 2001, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. As required, the Company adopted FAS 142 on January 1, 2002 and ceased amortizing goodwill at that time. All goodwill recognized in the Company's consolidated balance sheet at January 1, 2002 was assigned to one or more reporting units. FAS 142 requires that goodwill in each reporting unit be tested for impairment by June 30, 2002. Any impairment loss recognized as a result of a transitional impairment test of goodwill should be reported as the cumulative effect of a change in accounting principle. Management has determined that there was no impairment in goodwill as a result of the test. As discussed in Note 14 "Segment information", we do not allocate assets to our new segments, therefore, changes in goodwill are not disclosed by segment. The following table details the movement in goodwill during the nine months ended September 30, 2002. The reduction in goodwill is a result of the settlement of a lawsuit involving a prior acquisition. ACE Consolidated -------------- Goodwill at beginning of period $ 2,772,094 Adjustment to purchased goodwill (55,234) -------------- Goodwill at end of period $ 2,716,860 ============== 9 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) The following table provides a reconciliation of prior year reported net income to adjusted net income had FAS 142 been applied at the beginning of fiscal 2001:
Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (in thousands of U.S. dollars, except per share data) Reported net income (loss) $ (56,510) $ (442,590) $ 245,195 $ (196,679) Add back: Goodwill amortization - 19,912 - 59,664 ----------- ----------- ----------- ----------- Adjusted net income (loss) $ (56,510) $ (422,678) $ 245,195 $ (137,015) =========== =========== =========== =========== Basic earnings (loss) per share: Reported earnings (loss) per share $ (0.24) $ (1.95) $ 0.87 $ (0.92) Add back: Goodwill amortization - 0.09 - 0.26 ----------- ----------- ----------- ----------- Adjusted earnings (loss) per share $ (0.24) $ (1.86) $ 0.87 $ (0.66) =========== =========== =========== =========== Diluted earnings (loss) per share: Reported earnings (loss) per share $ (0.24) $ (1.95) $ 0.84 $ (0.92) Add back: Goodwill amortization - 0.09 - 0.26 ----------- ----------- ----------- ----------- Adjusted earnings (loss) per share $ (0.24) $ (1.86) $ 0.84 $ (0.66) =========== =========== =========== ===========
3. Securities on loan We participate in a securities lending program whereby certain securities from our portfolio are loaned to other institutions for short periods of time. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities changes. Our policy is to require initial cash collateral equal to 102 percent of the fair value of the loaned securities. The proceeds from the collateral are invested in short-term investments and are reported on the balance sheet. We maintain full ownership rights to the securities loaned, and continue to earn interest on them. We share a portion of the interest earned on these short-term investments with the lending agent. In addition, we have the ability to sell the securities while they are on loan. We have an indemnification agreement with the lending agents in the event a borrower becomes insolvent or fails to return securities. Securities lending collateral of $546 million is recorded in short-term investments and fixed maturities and in liabilities. The fair value of the securities on loan of $533 million at September 30, 2002 is reported on a separate line in total investments and cash. There were no securities loaned in 2001. 4. Commitments and contingencies The Company has considered asbestos and environmental claims and claims expenses in establishing the liability for unpaid losses and loss expenses. The Company has developed reserving methods, which incorporate new sources of data with historical experience to estimate the ultimate losses arising from asbestos and environmental exposures. The reserves for asbestos and environmental claims and claims expenses represent management's best estimate of future loss and loss expense payments and recoveries which are expected to develop over the next several decades. The Company continuously monitors evolving case law and its effect on environmental and latent injury claims. While reserving for these claims is inherently uncertain, the Company believes that the reserves carried for these claims are adequate based on known facts and current law. Our reserve review process involves a continual evaluation of cases taking into account all currently known information as well as reasonable assumptions related to unknown information. When facts and circumstance change, including the impact of the risk factors, changes are made to reflect overall reserve adequacy. It is possible that adverse 10 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) developments could cause us to re-evaluate our assumptions, which could lead us to increase our asbestos related reserves. The National Indemnity Company ("NICO") reinsurance cover protecting Brandywine provides a layer of protection against such adverse developments. In the event the remaining NICO cover is insufficient to cover future adverse loss development, such development could have a material adverse effect on future operating results. 5. Restricted stock awards Under the Company's long-term incentive plans, 848,950 restricted Ordinary Shares were awarded during the nine months ended September 30, 2002, to officers of the Company and its subsidiaries. These shares vest at various dates through September 2006. In addition, during the period, 12,588 restricted Ordinary Shares were awarded to outside directors under the terms of the 1995 Outside Directors Plan. These shares vest in May 2003. At the time of grant the market value of the shares awarded under these grants is recorded as unearned stock grant compensation and is presented as a separate component of shareholders' equity. The unearned compensation is charged to income over the vesting period. 6. Earnings per share The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (in thousands of U.S. dollars, except share and per share data) Numerator: Net income (loss) before cumulative effect of adopting a new accounting standard $ (56,510) $ (442,590) $ 245,195 $ (170,009) Dividends on FELINE PRIDES (6,416) (6,416) (19,246) (19,179) ------------- ------------- ------------- ------------- Net income (loss) available to holders of Ordinary Shares before cumulative effect (62,926) (449,006) 225,949 (189,188) Cumulative effect of adopting a new accounting standard - - - (22,670) ------------- ------------- ------------- ------------- Net income (loss) available to holders of Ordinary Shares $ (62,926) $ (449,006) $ 225,949 $ (211,858) ============= ============= ============= ============= Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 260,264,791 230,610,425 259,810,039 231,390,682 Dilutive effect of FELINE PRIDES - - 3,137,944 - Effect of other dilutive securities - - 7,247,792 - ------------- ------------- ------------- ------------- Denominator for diluted earnings per share: Adjusted weighted average shares outstanding and assumed conversions 260,264,791 230,610,425 270,195,775 231,390,682 ============= ============= ============= ============= Basic earnings per share: Earnings (loss) per share before cumulative effect of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.87 $ (0.82) ============= ============= ============= ============= Earnings (loss) per share $ (0.24) $ (1.95) $ 0.87 $ (0.92) ============= ============= ============= ============= Diluted earnings per share: Earnings (loss) per share before cumulative effect of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.84 $ (0.82) ============= ============== ============= ============= Earnings (loss) per share $ (0.24) $ (1.95) $ 0.84 $ (0.92) ============= ============== ============= =============
11 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) The denominator for diluted loss per share for the three months ended September 30, 2002 and the three and nine months ended September 30, 2001 does not include the dilutive effect of FELINE PRIDES and other dilutive securities. The incremental shares from assumed conversions are not included in computing diluted loss per share amounts as these shares are considered anti-dilutive. The dilutive effect of FELINES PRIDES for the three months ended September 30, 2002 is 1,614,340 shares. The dilutive effect of FELINES PRIDES for the three and nine months ended September 30, 2001 is 2,462,861 shares and 3,067,185 shares, respectively. Other dilutive securities totaled 6,383,065 shares for the three months ended September 30, 2002. Other dilutive securities totaled 5,907,562 shares and 6,440,916 shares for the three and nine months ended September 30, 2001, respectively. 7. Credit facilities In April 2002, the Company renewed its $800 million, 364-day revolving credit facility. This facility, together with the Company's $250 million, five-year revolving credit facility, which was last renewed in May 2000, are available for general corporate purposes and each of the facilities may also be used as commercial paper back-up. The five-year facility also permits the issuance of letters of credit. In 2000, $25 million was drawn under the five-year facility and was repaid in April 2002. In September 2002, the Company reduced the availability under the 364-day facility from $800 million to $500 million. ACE Tempest Re also maintained an uncollateralized, syndicated revolving credit facility in the amount of $72.5 million, which was guaranteed by the Company. This facility expired in February 2002 and was not renewed. No amounts had been drawn on this facility. At September 30, 2002, ACE Guaranty Corp. was party to a credit facility which provides up to $150 million specifically designed to provide rating agency qualified capital to further support ACE Guaranty Corp's claims-paying resources. In 2001, the facility's expiry date was extended to October 2008. ACE Guaranty Corp. has not borrowed under this credit facility. In September 2002, the Company arranged a $500 million unsecured syndicated, one year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced a then existing LOC facility in the amount of $450 million, which was last renewed in August 2001. Usage under this facility was $449 million at September 30, 2002. In September 2002, the Company also arranged a $350 million secured, syndicated, one year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced an LOC facility originally arranged in December 2001 in the amount of $500 million. Usage under this facility was $213 million at September 30, 2002. 12 8. Debt The following table outlines the Company's consolidated debt position at September 30, 2002 and December 31, 2001: September 30 December 31 2002 2001 ------------ ------------ (in millions of U.S. dollars) Short-term debt ACE INA commercial paper $ 145 $ - ACE Financial Services Debentures due 2002 75 75 ACE Financial Services Note - 25 Reverse Repurchase Agreements - 395 ---------- ---------- $ 220 $ 495 ========== ========== Long-term debt ACE INA Notes due 2004 $ 400 $ 400 ACE INA Notes due 2006 300 299 ACE Limited Senior Notes due 2007 499 - ACE US Holdings Senior Notes due 2008 250 250 ACE INA Subordinated Notes due 2009 200 300 ACE INA Debentures due 2029 100 100 ---------- ---------- $ 1,749 $ 1,349 ========== ========== Trust Preferred Securities Capital Re LLC Monthly Income Preferred Securities due 2044 $ 75 $ 75 ACE INA Trust Preferred Securities due 2029 100 100 ACE INA Capital Securities due 2030 300 300 ACE INA RHINO Preferred Securities due 2002 - 400 ---------- ---------- $ 475 $ 875 ========== ========== 13 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) a) Commercial paper and money market facilities In 1999, the Company arranged certain commercial paper programs. The programs use revolving credit facilities as back-up facilities and provide for up to $2.8 billion in commercial paper issuance (subject to the availability of back-up facilities, which currently total $1.05 billion) for ACE and for ACE INA. In October 2001, the Company and certain subsidiaries executed securities repurchase agreements with various counterparties. Under these repurchase agreements, the Company agreed to sell securities and repurchase them at a date in the future for a predetermined price. The amounts due to brokers under the repurchase agreements at December 31, 2001 of $395 million were repaid during the first quarter of 2002 using proceeds from commercial paper raised during that quarter. In addition, the Company repaid $150 million of expiring commercial paper and the $25 million ACE Financial Services bank note. The Company repaid the $75 million ACE Financial Services Debentures during October 2002. The average cost of borrowing using commercial paper was 1.9 percent and 2.0 percent for the three and nine months ended September 30, 2002, respectively. b) ACE Limited Senior Notes In March 2002, ACE Limited issued $500 million of 6.0 percent notes due April 1, 2007. The notes are not redeemable before maturity and do not have the benefit of any sinking fund. These senior unsecured notes rank equally with all of the Company's other senior obligations and contain a customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt. c) ACE INA subordinated notes In 1999, ACE INA issued $300 million 11.2 percent unsecured subordinated notes maturing in December 2009. The subordinated notes are callable subject to certain call premiums. The Company repaid $50 million of these notes during the quarter ended June 30, 2002 and $50 million during the quarter ended September 30, 2002. The Company incurred debt prepayment expense of $25 million ($17 million, net of income tax), which is reported as other expense in the statement of operations. d) ACE INA RHINO preferred securities In 1999, ACE RHINOS Trust sold in a private placement, $400 million of Auction Rate Reset Preferred Securities ("Preferred Securities"). The sole assets of the Trust consisted of $412 million of Auction Rate Reset Subordinated Notes Series A ("Subordinated Notes") issued by ACE INA. Proceeds of the an Ordinary Share Offering of September 12, 2000 which was completed in satisfaction of a related agreement with Bank of America Securities, were used to support our guarantee of the Subordinated Notes. The Company repaid $200 million in principal amount of Preferred Securities during the quarter ended June 30, 2002 and the remaining $200 million of these Preferred Securities during the quarter ending September 30, 2002. 9. Mezzanine Equity In April 2000, the Company publicly offered and issued 6,000,000 FELINE PRIDES. On May 8, 2000, exercise of the underwriter's over allotment option resulted in the issuance of an additional 221,000 FELINE PRIDES, for aggregate net proceeds of approximately $311 million. Each FELINE PRIDE initially consists of a unit referred to as an Income PRIDE. Each Income PRIDE consists of (i) one 8.25 percent Cumulative Redeemable Preferred Share, Series A, liquidation preference $50 per share, of the Company, and (ii) a purchase contract pursuant to which the holder of the Income PRIDE agrees to purchase from the Company, on May 16, 2003, Ordinary Shares at the applicable settlement rate. On May 16, 2003 pursuant to the purchase contract, the holders of the FELINE PRIDES will be required to purchase $311 million of our Ordinary Shares. Each preferred share is pledged to the Company to secure the holders' obligations under the purchase contract. A holder of an Income PRIDE can obtain the release of the preferred share by substituting certain zero-coupon treasury securities as security for 14 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) performance under the purchase contract. The resulting unit consisting of the zero-coupon treasury security and the purchase contract is a Growth PRIDE, and the preferred shares would be a separate security. A holder of a Growth PRIDE can convert it back into an Income PRIDE by depositing preferred shares as security for performance under the purchase contract and thereby obtain the release of the zero-coupon treasury securities. The aggregate liquidation preference of the 8.25 percent Cumulative Redeemable Preferred Shares is $311 million. Unless deferred by the Company, the preferred shares pay dividends quarterly at a rate of 8.25 percent per year to May 16, 2003, and thereafter at the reset rate established pursuant to a remarketing procedure. If the Company elects to defer dividend payments on the preferred shares, the dividends will continue to accrue and the Company will be restricted from paying dividends on its Ordinary Shares and taking certain other actions. The preferred shares are not redeemable prior to June 16, 2003, on which date they must be redeemed by the Company in whole. 10. Reinsurance The Company purchases reinsurance to manage various exposures including catastrophe risks. Although reinsurance agreements contractually obligate the Company's reinsurers to reimburse it for the agreed upon portion of its gross paid losses, they do not discharge the primary liability of the Company. The amounts for net premiums written and net premiums earned in the statements of operations are net of reinsurance. Direct, assumed and ceded amounts for these items for the three and nine months ended September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------- ------------- ------------- ------------- (in thousands of U.S. dollars) Premiums written Direct $ 2,731,725 $ 1,923,847 $ 7,194,180 $ 5,698,290 Assumed 797,000 578,524 2,381,646 1,768,380 Ceded (1,305,938) (1,197,304) (3,491,633) (2,955,840) ------------- ------------- ------------- ------------- Net premiums written $ 2,222,787 $ 1,305,067 $ 6,084,193 $ 4,510,830 ============= ============= ============= ============= Premiums earned Direct $ 2,225,720 $ 1,776,333 $ 6,068,443 $ 5,155,324 Assumed 721,531 694,181 1,809,927 1,609,875 Ceded (1,021,672) (1,071,085) (3,017,275) (2,611,467) ------------- ------------- ------------- ------------- Net premiums earned $ 1,925,579 $ 1,399,429 $ 4,861,095 $ 4,153,732 ============= ============= ============= ============= The composition of the Company's reinsurance recoverable at September 30, 2002 and December 31, 2001, is as follows: September 30 December 31 2002 2001 ------------- -------------- (in thousands of U.S. dollars) Reinsurance recoverable on paid losses and loss expenses $ 1,190,315 $ 1,066,495 Reinsurance recoverable on unpaid losses and loss expenses 11,495,491 11,120,888 ------------- -------------- Gross reinsurance 12,685,806 12,187,383 Bad debt reserve (796,438) (788,937) ------------- -------------- Net reinsurance recoverable $ 11,889,368 $ 11,398,446 ============= ==============
15 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) The Company evaluates the financial condition of its reinsurers and potential reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. The provision for unrecoverable reinsurance is required principally due to the failure of reinsurers to indemnify ACE, primarily because of disputes under reinsurance contracts and insolvencies. Reinsurance disputes continue to be significant, particularly on larger and more complex claims, including those related to asbestos and environmental pollution. Allowances have been established for amounts estimated to be uncollectible. 11. Deferred compensation obligation The Company maintains a rabbi trust for deferred compensation plans for key employees and executive officers. In accordance with EITF 97-14, "Accounting for Deferred Compensation Agreements Where Amounts Earned are Held in a Rabbi Trust and Invested", assets of the rabbi trust are to be consolidated with those of the employer, and the value of the employer's stock held in the rabbi trust should be classified in shareholders' equity and accounted for at historical cost in a manner similar to treasury stock. The shares issued by the Company to the rabbi trust are recorded in Ordinary Shares issued to employee trust and the obligation has been recorded in deferred compensation obligation, both are components of shareholders' equity. 12. Taxation Under current Cayman Islands law, the Company is not required to pay any taxes in the Cayman Islands on its income or capital gains. The Company has received an undertaking that, in the event of any taxes being imposed, the Company will be exempted from taxation in the Cayman Islands until the year 2013. Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in Bermuda on its income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2016. Income from the Company's operations at Lloyd's is subject to United Kingdom corporation taxes. Lloyd's is required to pay U.S. income tax on U.S. connected income ("U.S. income") written by Lloyd's syndicates. 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/Corporate Members in proportion to their participation in the relevant syndicates. The Company's Corporate Members are subject to this arrangement but, as UK domiciled companies, will receive UK corporation tax credits for any U.S. income tax incurred up to the value of the equivalent UK corporation income tax charge on the U.S. income. ACE INA, ACE US Holdings and ACE Financial Services are subject to income taxes imposed by U.S. authorities and file U.S. tax returns. Certain international operations of the Company are also subject to income taxes imposed by the jurisdictions in which they operate. There can be no assurance that there will not be changes in applicable laws, regulations or treaties, which might require the Company to change the way it operates or become subject to taxation. The income tax provision for the three and nine months ended September 30, 2002 and 2001 is as follows:
Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (in thousands of U.S. dollars) Current tax expense $ 23,312 $ 9,366 $ 28,169 $ 38,483 Deferred tax expense (benefit) (30,646) (85,711) 9,089 (69,604) ------------ ------------ ------------ ------------ Provision for income taxes $ (7,334) $ (76,345) $ 37,258 $ (31,121) ============ ============ ============ ============ 16 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) The weighted average expected tax provision has been calculated using pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate. A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the three and nine months ended September 30, 2002 and 2001, is provided below. Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (in thousands of U.S. dollars) Expected tax provision at weighted average rate $ (10,461) $ (76,306) $ 33,331 $ (41,517) Permanent differences Tax-exempt interest (6,507) (3,739) (13,589) (11,380) Goodwill - 7,247 - 17,340 Other 5,605 (7,223) 6,166 (6,060) Net withholding taxes 4,029 3,676 11,350 10,496 ------------- ------------ ------------ ------------ Provision for income taxes $ (7,334) $ (76,345) $ 37,258 $ (31,121) ============= ============ ============ ============
The components of the net deferred tax asset at September 30, 2002 and December 31, 2001 are as follows: September 30 December 31 2002 2001 ------------ ------------ (in thousands of U.S. dollars) Deferred tax assets Loss reserve discount $ 486,085 $ 523,195 Foreign tax credits 174,278 155,079 Policyholder dividends 48,524 47,509 Net operating loss carryforward 446,430 495,048 Other 310,587 299,068 ------------ ------------ Total deferred tax assets 1,465,904 1,519,899 ------------ ------------ Deferred tax liabilities Deferred policy acquisition costs 44,082 66,454 Unrealized appreciation on investments 98,863 28,570 Other 35,430 38,448 ------------ ------------ Total deferred tax liabilities 178,375 133,472 ------------ ------------ Valuation allowance 135,592 135,592 ------------ ------------ Net deferred tax asset $ 1,151,937 $ 1,250,835 ============ ============ The valuation allowance reflects management's assessment, based on available information, that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income. Adjustments to the valuation allowance are made when there is a change in management's assessment of the amount of deferred tax asset that is realizable. 17 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) At September 30, 2002, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $1.3 billion which are available to offset future U.S. federal taxable income through 2021. 13. Subsidiary Issuer Information The following tables present condensed consolidating financial information for ACE Limited (the "Parent Guarantor"), ACE INA Holdings, Inc. and ACE Financial Services, Inc. (formerly Capital Re Corporation), (the "Subsidiary Issuers") at September 30, 2002 and December 31, 2001 and for the three and nine months ended September 30, 2002 and 2001. The Subsidiary Issuers are indirect wholly-owned subsidiaries of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor and the Subsidiary Issuers under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor's investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuers.
Condensed Consolidating Balance Sheet as at September 30, 2002 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Assets Total investments and cash $ 181,469 $ 7,256,362 $ 1,002,573 $ 9,297,154 $ - $ 17,737,558 Insurance and reinsurance balances receivable - 2,149,518 27,397 1,031,150 - 3,208,065 Reinsurance recoverable - 9,399,216 1,142 2,489,010 - 11,889,368 Goodwill - 2,130,908 96,723 489,229 - 2,716,860 Investments in subsidiaries 7,002,502 - 152,000 (152,000) (7,002,502) - Due from subsidiaries and affiliates, net 156,748 (194,915) (51,395) 246,310 (156,748) - Other assets 17,892 3,779,195 223,844 1,257,003 5,277,934 ------------ ------------- ------------ ------------- ------------- ------------- Total assets $ 7,358,611 $ 24,520,284 $ 1,452,284 $ 14,657,856 $ (7,159,250) $ 40,829,785 ============ ============= ============ ============= ============= ============= Liabilities Unpaid losses and loss expenses $ - $ 14,370,086 $ 69,404 $ 7,201,741 $ - $ 21,641,231 Future policy benefits for life and annuity contracts - - - 419,041 - 419,041 Unearned premiums - 3,145,797 353,104 2,026,733 - 5,525,634 Short-term debt - 145,280 75,000 - - 220,280 Long-term debt 499,239 999,630 - 250,000 - 1,748,869 Trust preferred securities - 400,000 75,000 - - 475,000 Other liabilities 100,804 2,648,952 168,216 1,123,190 - 4,041,162 ------------ ------------- ------------ ------------- ------------- ------------- Total liabilities 600,043 21,709,745 740,724 11,020,705 - 34,071,217 ------------ ------------- ------------ ------------- ------------- ------------- Mezzanine equity 311,050 - - - - 311,050 ------------ ------------- ------------ ------------- ------------- ------------- Total shareholders' equity 6,447,518 2,810,539 711,560 3,637,151 (7,159,250) 6,447,518 ------------ ------------- ------------ ------------- ------------- ------------- Total liabilities, mezzanine equity and shareholders' equity $ 7,358,611 $ 24,520,284 $ 1,452,284 $ 14,657,856 $ (7,159,250) $ 40,829,785 ============ ============= ============ ============= ============= ============= (1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. (2) Includes ACE Limited parent company eliminations. 18 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Condensed Consolidating Balance Sheet as at December 31, 2001 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Assets Total investments and cash $ 489,596 $ 6,443,230 $ 901,905 $ 8,101,182 $ - $ 15,935,913 Insurance and reinsurance balances receivable - 1,715,873 24,075 781,614 - 2,521,562 Reinsurance recoverable - 9,259,608 8,194 2,130,644 - 11,398,446 Goodwill - 2,186,142 96,723 489,229 - 2,772,094 Investments in subsidiaries 5,621,604 - 152,000 (152,000) (5,621,604) - Due from subsidiaries and affiliates, net 348,372 (478,645) (11,862) 490,507 (348,372) - Other assets 64,570 3,313,941 184,509 995,729 - 4,558,749 ------------- ------------- ------------- ------------- ------------- ------------- Total assets $ 6,524,142 $ 22,440,149 $ 1,355,544 $ 12,836,905 $ (5,969,976) $ 37,186,764 ============= ============= ============= ============= ============= ============= Liabilities Unpaid losses and loss expenses $ - $ 14,468,024 $ 75,823 $ 6,184,275 $ - $ 20,728,122 Future policy benefits for life and annuity contracts - - - 382,730 - 382,730 Unearned premiums - 2,055,459 323,951 1,474,019 - 3,853,429 Short-term debt - - 25,000 395,428 - 495,408 Long-term debt - 1,099,473 74,980 250,000 - 1,349,473 Trust preferred securities - 800,000 75,000 - - 875,000 Other liabilities 106,385 2,395,745 138,586 444,129 - 3,084,845 ------------- ------------- ------------- ------------- ------------- ------------- Total liabilities 106,385 20,818,701 713,340 9,130,581 - 30,769,007 ------------- ------------- ------------- ------------- ------------- ------------- Mezzanine equity 311,050 - - - - 311,050 ------------- ------------- ------------- ------------- ------------- ------------- Total shareholders' equity 6,106,707 1,621,448 642,204 3,706,324 (5,969,976) 6,106,707 ------------- ------------- ------------- ------------- ------------- ------------- Total liabilities, mezzanine equity and shareholders' equity $ 6,524,142 $ 22,440,149 $ 1,355,544 $ 12,836,905 $ (5,969,976) $ 37,186,764 ============= ============= ============= ============= ============= ============= (1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. (2) Includes ACE Limited parent company eliminations.
19
ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Condensed Consolidating Statement of Operations For the three months ended September 30, 2002 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Net premiums written $ - $ 1,075,787 $ 42,887 $ 1,104,113 $ - $ 2,222,787 Net premiums earned - 863,326 29,613 1,032,640 - 1,925,579 Net investment income 12,872 76,737 11,703 106,491 (8,063) 199,740 Other income (expense) - (14,516) - 484 - (14,032) Equity in earnings of subsidiaries 17,301 - - - (17,301) - Net realized gains (losses) on investments (55,564) (47,386) (33,012) (99,320) - (235,282) Losses and loss expenses - 609,457 4,976 713,359 - 1,327,792 Life and annuity benefits - - - 59,697 - 59,697 Policy acquisition costs and administrative expenses 20,174 235,300 13,487 235,601 (881) 503,681 Interest expense 8,619 35,742 3,017 5,227 (3,926) 48,679 Income tax expense (benefit) 2,326 (2,815) (7,103) 258 - (7,334) ------------ ------------ ------------ ------------ ----------- ------------ Net income (loss) $ (56,510) $ 477 $ (6,073) $ 26,153 $ (20,557) $ (56,510) ============ ============ ============ ============ =========== ============ Condensed Consolidating Statement of Operations For the three months ended September 30, 2001 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Net premiums written $ - $ 662,841 $ (1,229) $ 643,455 $ - $ 1,305,067 Net premiums earned - 639,010 17,688 742,731 - 1,399,429 Net investment income 14,605 88,546 11,542 86,161 (7,945) 192,909 Other income (expense) - - - (1,858) - (1,858) Equity in earnings of subsidiaries (417,958) - - - 417,958 - Net realized gains (losses) on investments (25,065) (9,709) (8,879) (15,190) - (58,843) Losses and loss expenses - 461,693 16,038 1,063,896 - 1,541,627 Life and annuity benefits - - - 29,706 - 29,706 Policy acquisition costs and administrative expenses 15,080 199,828 8,161 187,326 (198) 410,197 Amortization of goodwill - 14,490 1,051 4,371 - 19,912 Interest expense (3,034) 43,808 3,840 5,564 (1,048) 49,130 Income tax expense (benefit) 2,126 3,295 (12,100) (69,666) - (76,345) ------------- ------------- ----------- ------------- ----------- ------------ Net income (loss) $ (442,590) $ (5,267) $ 3,361 $ (409,353) $ 411,259 $ (442,590) ============= ============= =========== ============= =========== ============ (1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. (2) Includes ACE Limited parent company eliminations.
20
ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Condensed Consolidating Statement of Operations For the nine months ended September 30, 2002 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Net premiums written $ - $ 2,887,006 $ 88,637 $ 3,108,550 $ - $ 6,084,193 Net premiums earned - 2,232,787 78,029 2,550,279 - 4,861,095 Net investment income 41,948 236,989 35,154 313,380 (26,792) 600,679 Other income (expense) - (25,587) - 4,286 - (21,301) Equity in earnings of subsidiaries 358,254 - - - (358,254) - Net realized gains (losses) on investments (78,248) (81,859) (51,933) (188,844) - (400,884) Losses and loss expenses - 1,557,630 10,818 1,573,438 - 3,141,886 Life and annuity benefits - - - 106,004 - 106,004 Policy acquisition costs and administrative expenses 53,263 607,442 36,764 667,787 (2,643) 1,362,613 Interest expense 16,745 116,374 9,564 14,482 (10,532) 146,633 Income tax expense 6,751 23,330 (5,664) 12,841 - 37,258 ------------ ------------ ------------ ------------- ------------ ------------ Net income $ 245,195 $ 57,554 $ 9,768 $ 304,549 $ (371,871) $ 245,195 ============ ============ ============ ============= ============ ============ Condensed Consolidating Statement of Operations For the nine months ended September 30, 2001 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Net premiums written $ - $ 1,872,616 $ 42,209 $ 2,596,005 $ - $ 4,510,830 Net premiums earned - 1,763,422 56,049 2,334,261 - 4,153,732 Net investment income 42,015 275,700 35,205 262,144 (21,458) 593,606 Other income - - - 827 - 827 Equity in earnings of subsidiaries (166,398) - - - 166,398 - Net realized gains (losses) on investments (25,065) (39,662) 14,779 (12,706) - (62,654) Losses and loss expenses - 1,252,928 21,814 2,173,019 - 3,447,761 Life and annuity benefits - - - 58,511 - 58,511 Policy acquisition costs and 27,437 administrative expenses 45,342 550,395 545,032 (595) 1,167,611 Amortization of goodwill - 43,470 3,153 13,041 - 59,664 Interest expense (8,282) 137,240 10,486 16,769 (3,119) 153,094 Income tax expense (benefit) 6,171 17,620 2,652 (57,564) - (31,121) ------------ ------------ ------------ ------------ ------------ ------------ Income before cumulative effect of 148,654 adopting a new accounting standard (192,679) (2,193) 40,491 (164,282) (170,009) Cumulative effect of adopting a new accounting standard (net of income tax) - (50) (22,800) 180 - (22,670) ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) $ (192,679) $ (2,243) $ 17,691 $ (164,102) $ 148,654 $ (192,679) ============ ============ ============ ============ ============ ============ (1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. (2) Includes ACE Limited parent company eliminations. 21 ACE LIMITED AND SUBSIDIARIES Notes to interim Consolidated Financial Statements (cont'd) (Unaudited) Condensed Consolidating Statement of Cash Flows For the nine months ended September 30, 2002 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Net cash flows from (used for) operating activities $ (148,253) $ 127,199 $ 36,047 $ 1,576,914 $ - $ 1,591,907 ------------ ------------ ------------ ------------- ------------- ------------ Cash flows from investing activities Purchases of fixed maturities (149,170) (2,231,174) (480,079) (9,891,150) - (12,751,573) Purchases of equity securities - (60,165) (94,670) - (154,835) Sales of fixed maturities 342,097 1,842,602 436,144 8,847,729 - 11,468,572 Sales of equity securities - 54,512 - 55,865 - 110,377 Maturities of fixed maturities - - - 249,426 - 249,426 Net realized gains (losses) on financial futures contracts - - - (117,580) - (117,580) Acquisition of subsidiaries - 54,380 - - - 54,380 Other - - 1,129 (103,540) - (102,411) ------------ ------------ ------------ ------------- ------------- ------------- Net cash from (used for) investing activities $ 192,927 $ (339,845) $ (42,806) $ 1,053,920) $ - $ (1,243,644) ------------ ------------ ------------ ------------- ------------- ------------- Cash flows from financing activities Dividends paid on Ordinary Shares (122,846) - - - - (122,846) Dividends paid on FELINE PRIDES (19,246) - - - (19,246) Proceeds from short term debt - (383,109) (25,000) 132,981 - (275,128) Proceeds from long term debt 499,155 (100,000) - - - 399,155 Advances to (from) affiliates 359,103 - 9,891 (368,994) - - Proceeds from exercise of options for Ordinary Shares 40,723 - - - - 40,723 Proceeds from shares issued under ESPP 7,472 - - - - 7,472 Repayment of trust preferred securities - (400,000) - - - (400,000) Capitalization of subsidiary (1,098,896) 1,185,956 25,000 (112,060) - - Dividends received from subsidiaries 260,000 - - (260,000) - - ------------ ------------ ------------ ------------- ------------- ------------- Net cash used for financing activities $ (74,535) $ 302,847 $ 9,891 $ (607,073) $ - $ (369,870) ------------ ------------ ------------ ------------- ------------- ------------- Net increase (decrease) in cash (29,861) 90,201 3,132 (85,079) - (21,607) Cash - beginning of period 32,525 355,327 1,027 282,502 - 671,381 ------------ ------------ ------------ ------------- ------------- ------------- Cash - end of period $ 2,664 $ 445,528 $ 4,159 $ 197,423 $ - $ 649,774 ============ ============ ============ ============= ============= ============= (1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. (2) Includes ACE Limited parent company eliminations. 22 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Condensed Consolidating Statement of Cash Flows For the nine months ended September 30, 2001 (in thousands of U.S. dollars) ACE INA ACE Financial Other ACE ACE Limited Holdings, Inc. Services, Inc. Limited (Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated ---------- ------- ------- ---------------- -------------- ------------ Net cash flows from (used for) operating activities $ (8,893) $ (270,099) $ 51,909 $ 1,188,405 $ - $ 961,322 ------------ ------------ ------------ -------------- ------------- ------------ Cash flows from investing activities Purchases of fixed maturities (119,715) (1,245,557) (819,018) (8,730,042) - (10,914,332) Purchases of equity securities - (94,569) - (63,534) - (158,103) Sales of fixed maturities 96,274 1,598,007 664,717 8,012,636 - 10,371,634 Sales of equity securities - 101,501 52,370 - 153,871 Maturities of fixed maturities - - 6,500 32,690 - 39,190 Net realized gains (losses) on financial futures contracts - - - (44,060) - (44,060) Other - (3,876) 68,178 (148,123) - (83,821) ------------ ------------ ------------ -------------- -------------- ------------ Net cash from (used for) investing activities $ (23,441) $ 355,506 $ (79,623) $ (888,063) $ - $ (635,621) ------------ ------------ ------------ -------------- -------------- ------------ Cash flows from financing activities Dividends paid on Ordinary Shares (94,279) - - - - (94,279) Dividends paid on FELINE PRIDES (19,251) - - - - (19,251) Proceeds from short term debt, net - 86,961 - - - 86,961 Advances to affiliates 8,697 (41,861) 41,346 (8,182) - - Proceeds from exercise of options for Ordinary Shares 19,770 - - - - 19,770 Proceeds from shares issued under ESPP 7,063 - - - - 7,063 Repurchase of Ordinary Shares (179,446) - - - - (179,446) Dividends received from subsidiaries 258,691 - - (258,691) - - ------------ ------------ ------------ -------------- -------------- ------------ Net cash from (used for) financing activities $ 1,245 $ 45,100 $ 41,346 $ (266,873) $ - $ (179,182) ------------ ------------ ------------ -------------- -------------- ------------ Net increase (decrease) in cash (31,089) 130,507 13,632 33,469 - 146,519 Cash - beginning of period 46,516 253,447 26,576 281,530 - 608,069 ------------ ------------ ------------ -------------- -------------- ------------ Cash - end of period $ 15,427 $ 383,954 $ 40,208 $ 314,999 $ - $ 754,588 ============ ============ ============ ============== ============== ============ (1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. (2) Includes ACE Limited parent company eliminations.
23 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) 14. Segment information Following changes in executive management responsibilities, during the first quarter of 2002, the Company reassessed and changed its reporting segments from the individual operating units to lines of business. The Company operates through four business segments: Insurance - North American, Insurance - Overseas General, Global Reinsurance and Financial Services. Insurance - North American includes the operations of ACE USA and ACE Bermuda, excluding the Financial Solutions business in both the U.S. and Bermuda which is now included in the new Financial Services segment, and ACE Canada. ACE USA primarily comprises the domestic U.S. and Canadian operations of ACE INA, which were acquired on July 2, 1999, and the operations of ACE US Holdings, which were acquired on January 2, 1998. These operations provide property and casualty insurance and reinsurance coverage, including excess liability, professional lines, satellite, excess property and political risk, to a diverse group of industrial, commercial and other enterprises. Insurance - Overseas General includes the operations of ACE International, including ACE Europe, ACE Japan, ACE Far East and ACE Latin America. ACE International primarily comprises the international operations of ACE INA, which were acquired on July 2, 1999. ACE International provides property and casualty insurance, accident and health insurance and consumer-oriented products to individuals, mid-sized firms and large commercial clients. In addition, ACE International provides customized and comprehensive insurance policies and services to multinational firms and their cross-border subsidiaries. Insurance - Overseas General also includes the insurance operations of ACE Global Markets, which primarily encompasses the Company's operations in the Lloyd's market (including for segment purposes Lloyd's operations owned by ACE Financial Services). ACE Global Markets provides funds at Lloyd's to support underwriting by the Lloyd's syndicates managed by Lloyd's managing agencies which are owned by the Company. The reinsurance operation of ACE Global Markets is included in the new Global Reinsurance segment. Global Reinsurance comprises the operations of ACE Tempest Re, ACE Tempest US and ACE Tempest UK and the reinsurance operations of ACE Global Markets. These subsidiaries primarily include property catastrophe reinsurance provided worldwide to insurers of commercial and personal property. Global Reinsurance also includes the operations of ACE Tempest Life Reinsurance. The principal business of ACE Tempest Life Reinsurance Ltd. is to provide reinsurance coverage to other life insurance companies. The life reinsurance business completed its first full year of operations in 2001. Financial Services includes the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International ("ACE Financial Services"). Financial Services also includes the financial solutions business in the U.S. and Bermuda. ACE Financial Services provides value-added reinsurance products in several specialty insurance markets. ACE Financial Services has two principal divisions: financial guaranty and financial risks. The financial guaranty division is comprised of municipal and non-municipal financial guaranty reinsurance and credit default swaps. The financial risks division is comprised of mortgage guaranty reinsurance, trade credit reinsurance and title reinsurance. The financial solutions business includes insurance and reinsurance solutions to complex risks that generally can not be adequately addressed by the traditional insurance marketplace. a) The following tables summarize the operations by segment for the three and nine months ended September 30, 2002 and 2001. b) For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. For segment reporting purposes, items considered non-recurring in nature have been aggregated and shown separately net of related income taxes, and net realized gains (losses) have been presented net of related income taxes. 24
ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Statement of Operations by Segment For the three months ended September 30, 2002 Insurance - Insurance - Corporate North Overseas Global Financial and ACE American General Reinsurance Services Other(1) Consolidated ---------- ---------- ----------- --------- --------- ------------ (in thousands of U.S. Dollars) Operations Data Property and Casualty Gross premiums written $ 1,783,574 $ 1,007,923 $ 185,474 $ 493,225 $ - $ 3,470,196 Net premiums written 869,008 689,318 131,008 476,605 - 2,165,939 Net premiums earned 654,003 647,308 194,307 373,113 - 1,868,731 Losses and loss expenses 452,643 445,900 101,069 328,180 - 1,327,792 Policy acquisition costs 54,493 140,860 37,339 17,132 - 249,824 Administrative expenses 86,031 107,031 10,174 15,912 29,894 249,042 ------------ ------------ ----------- ------------ ---------- ------------ Underwriting income (loss) 60,836 (46,483) 45,725 11,889 (29,894) 42,073 ------------ ------------ ----------- ------------ ----------- ------------ Life Gross premiums written - - 58,529 - - 58,529 Net premiums written - - 56,848 - - 56,848 Net premiums earned - - 56,848 - - 56,848 Life and annuity benefits - - 59,697 - - 59,697 Policy acquisition costs - - 3,189 - - 3,189 Administrative expenses - - 1,626 - - 1,626 Net investment income - - 6,927 - - 6,927 ------------ ------------ ----------- ------------ ----------- ------------ Underwriting income (loss) - - (737) - - (737) ------------ ------------ ----------- ------------ ----------- ------------ Net investment income - property and casualty 101,500 28,519 23,863 45,615 (6,684) 192,813 Other income (expense) (271) (230) 554 431 - 484 Interest expense 7,595 493 4,565 3,103 32,923 48,679 Income tax expense (benefit) 41,661 (3,141) (1,432) 6,761 (16,349) 27,500 ------------ ------------ ----------- ------------ ----------- ------------ Income excluding net realized gains (losses) & non-recurring expense 112,809 (15,546) 66,272 48,071 (53,152) 158,454 Debt prepayment expense* - - - - (9,436) (9,436) Net realized gains (losses)* (51,006) (13,850) (26,564) (58,544) (55,564) (205,528) ------------ ------------ ----------- ------------ ----------- ------------ Net income (loss) $ 61,803 $ (29,396) $ 39,708 $ (10,473) $ (118,152) $ (56,510) ============ ============ =========== ============ =========== ============ * Shown net of income tax (1)Includes ACE Limited, ACE INA Holdings and intercompany eliminations. 25 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Statement of Operations by Segment For the three months ended September 30, 2001 Insurance - Insurance - Corporate North Overseas Global Financial and ACE American General Reinsurance Services Other(1) Consolidated ---------- ---------- ----------- --------- --------- ------------ (in thousands of U.S. Dollars) Operations Data Property and Casualty Gross premiums written $ 1,317,724 $ 673,035 $ 94,787 $ 384,649 $ - $ 2,470,195 Net premiums written 550,063 423,689 36,708 262,431 - 1,272,891 Net premiums earned 478,321 445,103 69,348 374,481 - 1,367,253 Losses and loss expenses 468,366 378,568 228,996 465,697 - 1,541,627 Policy acquisition costs 58,028 114,013 18,465 13,601 - 204,107 Administrative expenses 74,929 82,386 11,246 13,339 22,181 204,081 ------------ ----------- ---------- ----------- ----------- ------------ Underwriting income (loss) (123,002) (129,864) (189,359) (118,156) (22,181) (582,562) ------------ ----------- ---------- ----------- ----------- ------------ Life Gross premiums written - - 32,176 - - 32,176 Net premiums written - - 32,176 - - 32,176 Net premiums earned - - 32,176 - - 32,176 Life and annuity benefits - - 29,706 - - 29,706 Policy acquisition costs - - 559 - - 559 Administrative expenses - - 1,450 - - 1,450 Net investment income - - 119 - - 119 ------------ ----------- ---------- ----------- ----------- ------------ Underwriting income - - 580 - - 580 ------------ ----------- ---------- ----------- ----------- ------------ Net investment income - property and casualty 105,617 24,896 16,847 43,469 1,961 192,790 Other income (expense) (1,147) (94) - (617) - (1,858) Amortization of goodwill (90) 958 3,503 1,051 14,490 19,912 Interest expense 8,798 653 4,409 35,270 49,130 Income tax expense (benefit) 13,145 (37,728) (33,433) 7,035 (18,997) (69,978) Net realized gains (losses)* (1,401) 1,653 (4,624) (23,039) (25,065) (52,476) ------------ ----------- ----------- ------------ ----------- ------------ Net income (loss) $ (41,786) $ (67,292) $ (146,626) $ (110,838) $ (76,048) $ (442,590) ============ =========== =========== =========== =========== ============ * Shown net of income tax (1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations. 26 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Statement of Operations by Segment For the nine months ended September 30, 2002 Insurance - Insurance - Corporate North Overseas Global Financial and ACE American General Reinsurance Services Other(1) Consolidated ---------- ---------- ----------- --------- --------- ------------ (in thousands of U.S. Dollars) Operations Data Property and Casualty Gross premiums written $ 4,476,260 $ 2,911,298 $ 773,649 $ 1,299,179 $ - $ 9,460,386 Net premiums written 2,100,172 1,919,904 682,840 1,269,479 - 5,972,395 Net premiums earned 1,732,934 1,721,892 459,133 835,567 - 4,749,526 Losses and loss expenses 1,176,275 1,082,973 192,748 689,890 - 3,141,886 Policy acquisition costs 146,821 382,383 83,008 57,551 - 669,763 Administrative expenses 243,604 281,486 26,054 42,979 79,214 673,337 ------------ ------------- ------------ ------------ ----------- ------------ Underwriting income (loss) 166,234 (24,950) 157,323 45,147 (79,214) 264,540 ------------ ------------- ------------ ------------ ----------- ------------ Life Gross premiums written - - 115,440 - - 115,440 Net premiums written - - 111,798 - - 111,798 Net premiums earned - - 111,569 - - 111,569 Life and annuity benefits - - 106,004 - - 106,004 Policy acquisition costs - - 15,253 - - 15,253 Administrative expenses - - 4,260 - - 4,260 Net investment income - - 19,124 - - 19,124 ------------ ------------- ------------ ------------ ----------- ------------ Underwriting income - - 5,176 - - 5,176 ------------ ------------- ------------ ------------ ----------- ------------ Net investment income - property and casualty 306,801 77,109 71,228 140,491 (14,074) 581,555 Other income (expense) (291) 3,592 554 431 - 4,286 Interest expense 24,286 1,414 9,257 10,358 101,318 146,633 Income tax expense (benefit) 115,728 9,397 519 23,702 (51,038) 98,308 ------------ ------------- ------------ ------------ ----------- ------------ Income excluding net realized gains (losses) & non-recurring expenses 332,730 44,940 224,505 152,009 (143,568) 610,616 Debt prepayment expense* - - - - (16,632) (16,632) Net realized gains (losses)* (90,731) (22,247) (57,047) (100,516) (78,248) (348,789) ------------ ------------- ------------ ------------ ----------- ------------ Net income (loss) $ 241,999 $ 22,693 $ 167,458 $ 51,493 $ (238,448) $ 245,195 ============ ============= ============ ============ =========== ============ * Shown net of income tax (1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations. 27 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Statement of Operations by Segment For the nine months ended September 30, 2001 Insurance - Insurance - Corporate North Overseas Global Financial and ACE American General Reinsurance Services Other(1) Consolidated ---------- ---------- ----------- --------- --------- ------------ (in thousands of U.S. Dollars) Operations Data Property and Casualty Gross premiums written $ 3,423,915 $ 2,361,139 $ 427,399 $ 1,191,062 $ - $ 7,403,515 Net premiums written 1,518,095 1,533,483 336,391 1,059,706 - 4,447,675 Net premiums earned 1,360,207 1,429,761 233,128 1,067,481 - 4,090,577 Losses and loss expenses 1,081,869 983,942 300,217 1,081,733 - 3,447,761 Policy acquisition costs 149,607 320,651 48,918 38,086 - 557,262 Administrative expenses 232,095 238,141 23,295 41,430 64,682 559,643 ------------ ----------- ----------- ----------- ------------ ------------ Underwriting income (loss) (103,364) (112,973) (139,302) (93,768) (64,682) (514,089) ------------ ----------- ----------- ----------- ------------ ------------ Life Gross premiums written - - 63,155 - - 63,155 Net premiums written - - 63,155 - - 63,155 Net premiums earned - - 63,155 - - 63,155 Life and annuity benefits - - 58,511 - - 58,511 Policy acquisition costs - - 1,734 - - 1,734 Administrative expenses - - 2,599 - - 2,599 Net investment income - - 454 - - 454 ------------ ----------- ----------- ----------- ------------ ------------ Underwriting income - - 765 - - 765 ------------ ----------- ----------- ----------- ------------ ------------ Net investment income - property and casualty 325,738 81,627 51,378 127,251 7,158 593,152 Other income (expense) 784 (380) - 423 - 827 Amortization of goodwill (270) 2,803 10,508 3,153 43,470 59,664 Interest expense 25,593 2,078 - 11,637 113,786 153,094 Income tax expense (benefit) 67,726 (25,179) (26,055) 17,958 (55,704) (21,254) ------------ ----------- ----------- ----------- ------------ ------------ Income excluding net realized gains (losses), non-recurring expenses and cumulative effect 130,109 (11,428) (71,612) 1,158 (159,076) (110,849) Non-recurring expenses* - (3,970) (491) - - (4,461) Net realized gains (losses)* (5,122) (2,695) (22,784) 967 (25,065) (54,699) Cumulative effect of adopting a new accounting standard (50) 441 539 (23,600) - (22,670) ------------ ----------- ----------- ----------- ------------ ------------ Net income (loss) $ 124,937 $ (17,652) $ (94,348) $ (21,475) $ (184,141) $ (192,679) ============ =========== =========== =========== ============ ============ * Shown net of income tax (1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations. 28 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) The following tables summarize the revenues of each segment by product offering for the three and nine months ended September 30, 2002 and 2001: Net premiums earned by type of premium Three months ended September 30, 2002 - ------------------------------------- Life, Property & Accident Financial Financial ACE Casualty & Health Services Solutions Consolidated ---------- -------- --------- --------- ------------ (in millions of U.S. dollars) Insurance - North American $ 637 $ 17 $ - $ - $ 654 Insurance - Overseas General 489 158 - - 647 Global Reinsurance 194 57 - - 251 Financial Services - - 42 331 373 ----------- --------- ---------- ---------- ----------- $ 1,320 $ 232 $ 42 $ 331 $ 1,925 =========== ========= ========== ========== =========== Three months ended September 30, 2001 - ------------------------------------- Life, Property & Accident Financial Financial ACE Casualty & Health Services Solutions Consolidated ---------- -------- --------- --------- ------------ (in millions of U.S. dollars) Insurance - North American $ 478 $ - $ - $ - $ 478 Insurance - Overseas General 319 126 - - 445 Global Reinsurance 70 32 - - 102 Financial Services - - 44 330 374 ----------- ---------- ---------- ---------- ----------- $ 867 $ 158 $ 44 $ 330 $ 1,399 =========== ========== ========== ========== =========== Nine months ended September 30, 2002 - ------------------------------------- Life, Property & Accident Financial Financial ACE Casualty & Health Services Solutions Consolidated ---------- -------- --------- --------- ------------ (in millions of U.S. dollars) Insurance - North American $ 1,673 $ 60 $ - $ - $ 1,733 Insurance - Overseas General 1,307 415 - - 1,722 Global Reinsurance 459 112 - - 571 Financial Services - - 168 667 835 ----------- ---------- ---------- ---------- ----------- $ 3,439 $ 587 $ 168 $ 667 $ 4,861 =========== ========== ========== ========== =========== Nine months ended September 30, 2001 - ------------------------------------- Life, Property & Accident Financial Financial ACE Casualty & Health Services Solutions Consolidated ---------- -------- --------- --------- ------------ (in millions of U.S. dollars) Insurance - North American $ 1,356 $ 4 $ - $ - $ 1,360 Insurance - Overseas General 1,061 366 - 3 1,430 Global Reinsurance 233 63 - - 296 Financial Services - - 266 801 1,067 ----------- ---------- ---------- ---------- ----------- $ 2,650 $ 433 $ 266 $ 804 $ 4,153 =========== ========== ========== ========== ===========
29 ACE LIMITED AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (cont'd) (Unaudited) Property and casualty underwriting assets are reviewed in total by management for purposes of decision-making. We do not allocate assets to our new segments. Assets are specifically identified for our life segment and corporate holding companies. The following table summarizes the identifiable assets at September 30, 2002 and December 31, 2001: September 30 December 31 2002 2001 ------------ ------------ (in millions of U.S. dollars) Property and casualty $ 37,910 $ 34,198 Life reinsurance 554 480 Other 2,366 2,509 ------------- ------------ Total assets $ 40,830 $ 37,187 ============= ============ 30 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition The following is a discussion of our results of operations, financial condition, liquidity and capital resources as of and for the three and nine months ended September 30, 2002. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our consolidated financial statements and related notes and the Management's Discussion and Analysis of Results of Operations and Financial Condition included in our Annual Report on Form 10-K for the year ended December 31, 2001. Safe Harbor Disclosure The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Any written or oral statements made by or on behalf of ACE may include forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission) include, but are not limited to, (i) the impact of the September 11th tragedy and its aftermath on ACE's insureds and reinsureds, on the insurance and reinsurance industry and on the economy in general and uncertainties relating to governmental responses to the tragedy, (ii) the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto, (iii) the occurrence of catastrophic events or other insured or reinsured events with a frequency or severity exceeding our estimates, (iv) the uncertainties of the loss reserving and claims settlement processes, including the difficulties associated with assessing environmental damage and asbestos related latent injuries, (v) actual loss experience, (vi) uncertainties relating to government and regulatory policies such as subjecting ACE to insurance regulation or taxation in additional jurisdictions or amending, revoking or enacting any laws, regulations or treaties affecting our current operations and other legal, regulatory and legislative developments, (vii) judicial decisions and legal tactics, (viii) the actual amount of new and renewal business and market acceptance of our products, (ix) risks associated with the introduction of new products and services and with entering new markets, (x) the competitive environment in which we operate, related trends and associated pricing pressures, market perception, and developments, (xi) actions that rating agencies may take from time to time, (xii) developments in global financial markets, which could affect our investment portfolio and financing plans, (xiii) changing rates of inflation and other economic conditions, (xiv) losses due to foreign currency exchange rate fluctuations, (xv) loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame, (xvi) the ability of technology to perform as anticipated, (xvii) the amount of dividends received from subsidiaries, (xviii) economic and political conditions, and (xix) management's response to these factors. The words "believe", "anticipate", "estimate", "project", "should", "plan", "expect", "intend", "hope", "will likely result" or "will continue" and variations thereof and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise. Reporting Segments During the quarter ended March 31, 2002, following changes in executive management responsibilities, we reassessed and changed our reporting segments from individual operating units to lines of business: We operate through four business segments: Insurance - North American, Insurance - Overseas General, Global Reinsurance and Financial Services (previously known as Financial Products). We believe that these segments better represent the way we manage our operations and measure our performance. Insurance - North American includes the operations of ACE USA, ACE Bermuda and ACE Canada, excluding the financial solutions divisions in both the U.S. and Bermuda which are included in the Financial Services segment. Insurance - Overseas General includes the operations of ACE International, including 31 ACE Europe, ACE Japan, ACE Far East and ACE Latin America, and the insurance operations of ACE Global Markets. The reinsurance operations of ACE Global Markets are now included in the Global Reinsurance segment together with ACE Tempest Re, ACE Tempest US and our life reinsurance operation which is disclosed separately. The Financial Services segment includes the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International and the financial solutions business in the U.S. and Bermuda. Critical Accounting Policies Certain amounts in our consolidated financial statements are the result of transactions that require us to use our best estimates and assumptions to determine our reported values. These amounts could ultimately be materially different than what has been provided for in our consolidated financial statements. We consider the assessment of our property and casualty ("P&C") loss reserves, including asbestos reserves, the fair value of our investment portfolio including derivatives and the reinsurance recoverable to be the values requiring the most inherently subjective and complex estimates. As such, we deem our accounting policies for these amounts to be of critical importance to our consolidated financial statements. More information regarding the estimates and assumptions required to arrive at these amounts can be found below in the sections entitled, Investments and Cash, Property and Casualty Loss Reserves, Reinsurance, Asbestos and Environmental Claims and Derivatives. September 11th 2001 Tragedy The terrorist attacks on September 11, 2001 ("the September 11th tragedy") resulted in the largest insured loss in history. We continue to monitor our total potential liability based upon individual insurance and reinsurance policy language, legal and factual developments in underlying matters involving its insureds as well as legislative developments in the U.S. involving the terrorist attack. If our current assessments of future developments are proved wrong, the financial impact of any of them, singularly or in the aggregate, could be material. For example, business interruption insurance claims could materialize in the future with greater frequency than we have anticipated or provided for in our estimates, or, insureds that we expect will not be held responsible for injuries resulting from the attack, are ultimately found to be responsible at a financial level that impacts our insurance or reinsurance policies. In February 2002, we announced that one of our Bermuda subsidiaries, ACE Bermuda Insurance Ltd. ("ACE Bermuda") agreed to settle its property insurance claim with Silverstein Properties, Inc., ("Silverstein") arising from the World Trade Center disaster. The settlement is based upon a single occurrence and comprised payment of only one policy limit. ACE Bermuda and Silverstein have agreed to dismiss all litigation and arbitration pending between them. The settlement amount is within the reserve previously established for this event and does not affect the remaining group reserves for other claims arising from the September 11th tragedy. During the current quarter we paid gross losses of $61 million and net losses of $43 million for this event. As of September 30, 2002 we have paid gross losses of $585 million and net losses of $132 million with respect to the September 11th tragedy and have collected approximately 95 percent of the related recoverable. We believe our reserve in connection with the September 11th tragedy is adequate at September 30, 2002. 32
Results of Operations - Three months ended September 30, 2002 and 2001 The discussions that follow include tables, which show our consolidated and segment operating results for the three and nine months ended September 30, 2002 and 2001. To enhance comparability between reporting periods we have presented last year's results both including and excluding the September 11th tragedy. The "as reported" column shows our prior year results including the effects of the September 11th tragedy and the "ex WTC" column shows how our results would have been presented excluding this event. The "percentage change from prior year" column compares our current year's results with our results from 2001, including the September 11th tragedy. Consolidated Operating Results Three Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 3,528 $ 2,502 $ 2,380 41% Net premiums written 2,223 1,305 1,254 70 Net premiums earned 1,925 1,399 1,385 38 Losses and loss expenses 1,328 1,542 892 (14) Life and annuity benefits 60 29 29 107 Policy acquisition costs 253 205 204 23 Administrative expenses 250 205 205 22 ---------- ---------- --------- ------ Underwriting income (loss) $ 34 $ (582) $ 55 NM ---------- ---------- --------- ------ Net investment income 199 192 192 4% Other income (expense) - (2) (2) NM Interest expense 48 49 49 (2) Amortization of goodwill - 19 19 NM Income tax expense (benefit) 27 (70) 8 NM ---------- ---------- --------- ------ Net operating income (loss) $ 158 $ (390) $ 169 NM ---------- ---------- --------- ------ Debt prepayment expense (net of income tax) (10) - Net realized gains (losses) on investments (net of income tax) (205) (52) ---------- ---------- Net loss $ (57) $ (442) ========== ========== Loss and loss expense ratio* 71.0% 112.7% 65.9% Underwriting and administrative expense ratio* 26.7% 29.8% 30.1% Combined ratio* 97.7% 142.5% 96.0% * Ratios exclude life reinsurance business NM - not meaningful
Our gross premiums written increased by 41 percent for the current quarter compared with the comparable quarter last year and our net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased by 70 percent. Our net premiums earned, which reflect the portion of net premiums written recorded as revenues for the quarter, increased by 38 percent for this quarter compared with the same quarter last year. These increases are discussed in each segment section. The large increases are due to a combination of price increases on renewal business and new business opportunities. While these very high rates of growth are not sustainable over the long term, we believe our increasing position of importance in the global property and casualty marketplace, demonstrated by the breadth of premium increases over the entire range of our products, is sustainable. During the current quarter, our Financial Services segment wrote several large contracts, including a large retroactive contract in the form of a 33 loss portfolio transfer contract ("LPT") for $178 million, bringing the total LPT business for the quarter to $187 million. Our LPT activity for the same quarter last year was $135 million. When LPT contracts are written in a quarter, they can cause variations in premium volume compared with other quarters, particularly in net premiums earned as the entire written premium is fully earned in the quarter it is written, LPTs are discussed in more detail in the Financial Services segment. The underwriting results of P&C business are discussed by reference to the combined ratio, loss and loss expense ratio and underwriting and administrative expense ratio. We calculate these ratios by dividing the relevant expense amounts by net premiums earned. The combined ratio is the sum of the loss and loss expense ratio and the underwriting and administrative expense ratio. A combined ratio under 100 percent indicates underwriting income and a combined ratio exceeding 100 percent indicates underwriting losses. Our loss and loss expense ratio was 71.0 percent for the current quarter compared with 112.7 percent for the same quarter of 2001. Our current quarter loss ratio was impacted by an accumulation of losses incurred with respect to the floods in Europe in the quarter. These series of floods caused $3 billion of industry insurance losses. We incurred $100 million of pre tax losses ($90 million after tax) from these events. Our loss ratio for the quarter ended September 30, 2001 was substantially impacted by the September 11th tragedy. If you remove the impact of the flood losses and the September 11th tragedy losses from our loss ratios, the ratios would have been 65.7 percent for the current quarter and 65.9 percent last year. This ratio is also influenced by changes in the mix of business written, particularly in the Financial Services segment where LPTs can cause variations in the loss ratio. Excluding the Financial Services segment, our loss ratios would have been 60.1 percent for the current quarter compared with 62.5 percent for the same quarter last year. Underwriting and administrative expenses are comprised of policy acquisition costs, which include commissions, premium taxes, underwriting and other costs that vary with and are primarily related to the production of premium, and administrative expenses which include all other operating costs. The underwriting and administrative expense ratio was 26.7 percent this quarter compared with 29.8 percent for the quarter ended September 30, 2001. The principal reason for the decline is the increase in net premiums earned for the current quarter. However, this ratio is also influenced by changes in the mix of business written. Excluding the Financial Services segment, our underwriting and administrative expense ratios would have been 31.2 percent compared with 38.4 percent. As discussed later in this report, net investment income increased by 4 percent for the current quarter compared with the same quarter last year. Our net operating income, which is comprised of income excluding net realized gains (losses), debt prepayment expense and non-recurring expenses, was $158 million for the current quarter compared with a net operating loss of $390 million for the same quarter last year. Removing the effects of the floods in Europe in the current quarter and the September 11th tragedy last year, our net operating income would have been $248 million and $169 million for the quarters ended September 30, 2002 and 2001, respectively, a 47 percent increase. We adopted FAS 142 on January 1, 2002 and accordingly have not amortized any goodwill in the current quarter, compared with $19 million of goodwill amortized for the quarter ended September 30, 2001. The debt prepayment expense of $10 million (net of income tax) resulted from our decision to prepay a portion of the ACE INA Subordinated Notes due in 2009. These subordinated notes bear interest at 11.2 percent. This cost was mostly attributable to the decrease in interest rates since the original note was issued. Net realized losses on investments (net of income tax) were $205 million for the three months ended September 30, 2002 compared with net realized losses of $52 million for the three months ended September 30, 2001. The net realized losses incurred in the current quarter are discussed in detail in the net realized gains (losses) on investments section. 34 Segment Operating Results Insurance - North American The Insurance - North American segment is comprised of our P&C insurance operations in the U.S., Bermuda and Canada excluding the financial solutions business in the U.S. and Bermuda. This segment writes a variety of insurance products including property, liability, professional risk (directors and officers liability, ("D&O") and errors and omissions coverages, ("E&O")), marine, program business, political risk, accident and health, warranty, aerospace and other specialty lines.
Three Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 1,783 $ 1,318 $ 1,318 35% Net premiums written 869 551 573 58 Net premiums earned 654 478 500 37 Losses and loss expenses 453 468 349 (3) Underwriting and administrative expenses 141 133 133 6 ---------- ---------- ------------ -------- Underwriting income (loss) $ 60 $ (123) $ 18 NM ---------- ---------- ------------ -------- Net investment income 101 106 106 (5)% Other income (expense) - (1) (1) NM Interest expense 7 9 9 (22) Income tax expense 41 13 29 215 ---------- ---------- ------------ -------- Net operating income (loss) $ 113 $ (40) $ 85 NM ---------- ---------- ------------ -------- Loss and loss expense ratio 69.2% 97.9% 69.8% Underwriting and administrative expense ratio 21.5% 27.8% 26.6% Combined ratio 90.7% 125.7% 96.4% NM - not meaningful
Gross premiums written for the segment increased by 35 percent for the quarter compared with the same quarter last year. ACE USA and ACE Bermuda benefited from a reduced supply of reinsurance in the marketplace, which resulted in increased premium prices and underwriting opportunities for both operations. Gross premiums written in ACE USA, which is the major component of this segment, increased by 33 percent to $1.7 billion for the current quarter compared with $1.3 billion last year. The majority of this growth stems from ACE USA's Westchester Specialty, Diversified Risk (formerly Professional Risk) and Accident and Health Groups. The main driver of the increase in Westchester Specialty is their excess and surplus lines division that has been able to capitalize on current market conditions to significantly increase its pricing as well as obtain improved policy terms and conditions. This is principally due to a decline in available insurance capacity due to a decrease of available reinsurance in the market and the fact that capacity in the admitted market has been shrinking (partly because terrorism coverage exclusions have not been approved by a large number of U.S. states). The Diversified Risk Group (formerly known as the Professional Risk Group) provides insurance coverages for management and professional liability including E&O, D&O, as well as surety, aviation and satellite risks. Recent high profile corporate failures as well as allegations of public company management impropriety have greatly increased demand for E&O, D&O, and surety coverage and this has resulted in significant increases in price combined with much lower policy limits and improvements in policy terms. The Accident and Health Group also contributed to ACE USA's growth this quarter producing $31 million in gross premiums written mainly from new business initiated late in 2001 and earlier this year. 35 ACE Bermuda reported $110 million in gross premiums written for the quarter compared with $63 million last year, a 75 percent increase. This significant increase is due primarily to growth in core lines of business as gross premiums written for excess liability increased by over 30 percent, excess property by over 44 percent and professional lines more than doubled. Net premiums written for the Insurance - North American segment increased by 58 percent for the current quarter compared with the same quarter last year. Growth in net premiums written outpaced our growth in gross premiums written partly due to our decision to purchase less reinsurance in the current market conditions. Net premiums earned increased by 37 percent for the current quarter compared with the same quarter last year, reflecting the strong growth in premiums written. The loss and loss expense ratio was 69.2 percent for the current quarter compared with 97.9 percent last year. The loss ratio last year was impacted by losses we incurred from the September 11th tragedy. Excluding the impact of the September 11th tragedy, the loss and loss expense ratio would have been 69.8 percent for the quarter ended September 30, 2001. This slight decrease resulted from the general improvement in insurance pricing, offset somewhat by a change in business mix at ACE USA and higher losses in the ACE Bermuda professional liability book. The underwriting and administrative expense ratio declined from 27.8 percent last year to 21.5 percent for the current quarter. This decline is primarily a result of reduced policy acquisition costs for the segment due to a shift to lower commission products like D&O and E&O from higher commission professional risk and property business. Administrative expenses increased in the current quarter principally due to the growth in new product lines and increased volume in existing product lines. Net underwriting income for the Insurance - North American segment was $60 million for the quarter compared with an underwriting loss of $123 million for the same quarter last year. Even if we excluded the impact of the September 11th tragedy on last year's results, our underwriting income in this segment would have increased by 233 percent, from $18 million last year to $60 million this year. This increase is primarily the result of growth in net premiums earned and a decline in the combined ratio in the current quarter compared with the quarter ended September 30, 2001. Net operating income increased due to the substantial increase in underwriting income in the current year and the effects of the September 11th tragedy in the prior year. Excluding the September 11th tragedy, net operating income increased by 33 percent. Insurance - Overseas General The Insurance - Overseas General segment comprises ACE International, our network of indigenous insurance operations and the insurance operations of ACE Global Markets, our Lloyd's operation. Like the North American insurance segment, this segment writes a variety of insurance products including property, liability, professional risk (D&O and E&O), marine, political risk, accident and health, aerospace and consumer oriented products. 36
Three Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 1,008 $ 673 $ 693 50% Net premiums written 690 423 469 63 Net premiums earned 647 445 491 45 Losses and loss expenses 446 379 312 18 Underwriting and administrative expenses 247 196 196 26 ----------- ----------- ----------- -------- Underwriting loss $ (46) $ (130) $ (17) NM ----------- ----------- ----------- -------- Net investment income 28 25 25 12% Other income (expense) (1) - - NM Interest expense 1 1 1 - Amortization of goodwill - 1 1 NM Income tax benefit (4) (38) (11) NM ----------- ----------- ----------- -------- Net operating income (loss) $ (16) $ (69) $ 17 NM ----------- ----------- ----------- -------- Loss and loss expense ratio 68.9% 85.1% 63.3% Underwriting and administrative expense ratio 38.3% 44.1% 40.0% Combined ratio 107.2% 129.2% 103.3% NM - not meaningful
Gross premiums written for the segment increased by 50 percent for the current quarter compared with the same quarter last year. As with Insurance - North American, this segment benefited from the favorable current market conditions. ACE International benefited from higher premium rates on new and renewal business and a weaker U.S. dollar in posting a 44 percent increase in gross premiums written to $683 million for the current quarter compared with $474 million last year. ACE Europe, ACE Latin America and ACE Far East and ACE Asia Pacific all contributed to the increase. ACE Europe had a 73 percent increase in net premiums written for the current quarter compared with last year, primarily due to rate increases on new and renewal business and the appreciation of the Euro and the pound sterling relative to the U.S. dollar. ACE Latin America and ACE Asia Pacific had increases of net premiums written of 50 percent and 73 percent, respectively for the current quarter driven by rate increases and the strengthening of the underlying currencies relative to the U.S. dollar. ACE Far East also had an increase in net premiums written of 6 percent in a market that had no growth in the period. Gross premiums written at ACE Global Markets increased by 63 percent to $325 million for the current quarter compared with $199 million last year. This significant increase is primarily due to rate increases in the property, professional and marine lines and new business written. We also increased our participation in Lloyd's syndicate 2488 from 90 percent in 2001 to 99.6 percent in 2002. ACE Global Markets has continued with its strategy to move from a gross line underwriter (where large gross limits are written on the basis that most of the risk is then reinsured) to a net line underwriter (where smaller gross limits are written and less reliance is placed on reinsurance). 37 ACE Overseas General is very committed to ACE Global Markets as our excess and surplus underwriter. For the 2003 year of account, syndicate 2488 will be reducing its capacity at Lloyd's to (pound)652 million ($1 billion) from (pound)900 million ($1.4 billion) for the 2002 year of account. Traditionally, we have underwritten excess and surplus business through our Lloyd's syndicates. We now have the ability to write business through our admitted company network as well as syndicate 2488. With the exception of marine and aviation, we feel the majority of the business lends itself to our admitted company paper. Our plan is to migrate business from the syndicate to the ACE International network of companies (namely ACE INA UK) over a three year period, at which time the syndicate will be about one-third of its current size and contain primarily marine and aviation business. The shift of the business to our company paper will also allow us to reduce our operating costs. The loss and loss expense ratio was 68.9 percent for the current quarter compared with 85.1 percent last year. This segment incurred $68 million in losses relating to the European floods in the current quarter and $67 million in losses relating to the September 11th tragedy last year. Removing the impact of the European floods and the September 11th tragedy, the loss and loss expense ratio would have been 58.4 percent and 63.3 percent for the current quarter and last year, respectively. The underwriting and administrative expense ratio for this segment was 38.3 percent for the current quarter compared with 44.1 percent last year. Excluding the impact of the September 11th tragedy, the underwriting and administrative expense ratio would have been 40.0 percent for the same quarter last year. The principal reason for the decline is the increase in net premiums earned for the current quarter. This segment reported an underwriting loss of $46 million for the quarter compared with an underwriting loss of $130 million for the same quarter last year. Again, excluding the floods and the September 11th tragedy, we would have had underwriting income of $22 million for the current quarter and an underwriting loss of $17 million for the same quarter last year. This segment had net operating losses in both the current quarter and for the quarter ended September 30, 2001 due to the floods and the September 11th tragedy as discussed. Excluding the September 11th tragedy last year and the European floods in the current quarter, net operating income would have been $17 million last year and $45 million for the current quarter. Global Reinsurance The Global Reinsurance segment consists of ACE Tempest Re, ACE Tempest USA and ACE Global Market's P&C reinsurance operations as well as our life reinsurance operations which are disclosed separately. The P&C reinsurance group writes catastrophe, marine, casualty, and nuclear products. 38
Property and Casualty Three Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 186 $ 94 $ 94 98% Net premiums written 131 36 59 264 Net premiums earned 194 70 92 177 Losses and loss expenses 101 229 16 (56) Underwriting and administrative expenses 48 30 29 6 --------- ---------- --------- --------- Underwriting income (loss) $ 45 $ (189) $ 47 NM --------- ---------- --------- --------- Net investment income 24 16 16 50% Other income (expense) 1 - - NM Interest expense 4 - - NM Amortization of goodwill - 3 3 NM Income tax expense (benefit) (1) (33) 2 NM --------- ---------- --------- ---------- Net operating income (loss) $ 67 $ (143) $ 58 NM --------- ---------- --------- ---------- Loss and loss expense ratio 52.0% 330.2% 17.7% Underwriting and administrative expense ratio 24.4% 42.8% 31.8% Combined ratio 76.4% 373.0% 49.5% NM - not meaningful
Gross premiums written increased by 98 percent for the current quarter compared with the same quarter last year. All three of the ACE Global Reinsurance operations (Bermuda, U.S. and London) contributed to the growth. ACE Tempest Re, where we write most of the property catastrophe business, had a 51 percent increase in gross premiums written to $80 million. Catastrophe related rates overall remained firm during the quarter, with rates up approximately 8 percent over the prior year. As returns on this business generally are adequate, we expect rates to remain essentially flat over the next several quarters barring any major catastrophe claim activity. Some of the business in the market continues to have inadequate rates and terms, and as such we continue to decline more business than we write. ACE Tempest U.K. which is principally focused on specialty reinsurance products had an increase in gross premiums written of 80 percent to $36 million for the current quarter compared with $20 million last year. ACE Tempest U.S., established in 2000 with an initial focus on writing P&C reinsurance, had an increase in gross premiums written of 229 percent to $69 million for the current quarter compared with $21 million last year. Net premiums written increased to $131 million for the quarter compared with $36 million last year ($59 million if we exclude the impact of accrued reinsurance ceded premiums related to the September 11th tragedy last year). This significant increase is primarily a result of the growth in gross premiums written in a segment that retains most of the gross premium that it writes. 39 The loss and loss expense ratio was 52.0 percent for the current quarter compared with 330.2 percent last year. This segment incurred $32 million in losses relating to the European floods in the current quarter and $213 million in losses relating to the September 11th tragedy last year. Removing the impact of the European floods and the September 11th tragedy, the loss and loss expense ratio would have been 35.5 percent and 17.7 percent for the current quarter and last year, respectively. This increase is primarily a result of changes in the mix of business as this segment transforms from a property catastrophe writer to a multi-line writer. The underwriting and administrative expense ratio declined to 24.4 percent for the current quarter from 42.8 percent last year. Excluding the impact of the September 11th tragedy, the underwriting and administrative expense ratio would have been 31.8 percent last year. This improvement is primarily the result of the increase in net premiums earned. Underwriting income for the Global Reinsurance segment increased to $45 million for the quarter compared with an underwriting loss of $189 million for the same quarter last year. Excluding the impact of the two events mentioned above, underwriting income would have increased to $77 million for the current quarter compared with $47 million last year. This increase is primarily a result of higher premium rates in the P&C insurance and reinsurance market since the September 11th tragedy. Net operating income increased to $67 million for the current quarter compared with a net operating loss of $143 million last year. Removing the impact of the European floods and the September 11th tragedy, net operating income would have improved to $96 million for the current quarter compared with $58 million last year. The increase is a result of higher underwriting income from all the divisions during the current quarter. Life Reinsurance Our principal business in this division is to provide reinsurance coverage to life insurance companies. In 2001, we concluded our first full year of operations for our life division. We price life reinsurance using actuarial and investment models that incorporate a number of factors, including assumptions for mortality, morbidity, expenses, demographics, persistency, investment returns and inflation. We assess the performance of our life reinsurance business based on net operating income, which is net income excluding net realized gains and losses from the sale of investments. The use of combined ratios is not an appropriate measure of the underwriting results of life reinsurance business.
Three Months Ended Percentage September 30 change from 2002 2001 prior year ----------- ----------- ------------ (in millions of U.S. dollars) Gross premiums written $ 58 $ 32 81% Net premiums written 57 32 78 Net premiums earned 57 32 78 Life and annuity benefits 60 29 107 Underwriting and administrative expenses 5 2 150 Net investment income 7 - NM ---------- --------- ---------- Net operating income (loss) $ (1) $ 1 NM ----------- --------- ---------- NM - not meaningful
40 The life reinsurance group wrote $58 million of business for the quarter ended September 30, 2002 compared with $32 million last year. The quarter ended September 30, 2001 included $7 million of recurring business compared with $28 million of recurring business in the current quarter. We continue to be focused on writing risk transfer treaty business where the principal risk is mortality and morbidity based. Our current product portfolio focuses mainly on life and variable products. We recently made the decision to cease pursuing large, one-time transaction business and the long-term disability business, as we no longer believe our efforts in these areas justify the potential returns. Financial Services The Financial Services segment consists of two broad categories: financial guaranty business and financial solutions business. The financial guaranty business includes municipal and non-municipal financial guaranty reinsurance, title cover, single-name and portfolio credit default swaps, mortgage guaranty reinsurance, trade credit reinsurance and residual value reinsurance. The financial solutions business includes insurance and reinsurance solutions to complex risks that generally cannot be adequately addressed by the traditional insurance marketplace. Each financial solutions contract is unique and specifically tailored for an individual client, but generally they are multi-year and contain some form of client participation. Both units write structured finance transactions which are recorded at higher loss and loss expense ratios than other business. These transactions are typically longer term contracts where profit emerges over the term of the contract and relies on investment income as a component of profitability. Due to the nature of the financial solutions business, premium volume can vary significantly from period to period and therefore premiums written in any one quarter are not indicative of premiums to be written in future quarters. We also write retroactive contracts, including LPTs, which indemnify ceding companies for events that have occurred in prior years. While these types of contracts are generally written in the Financial Services segment, they can also be written in other segments, including the life reinsurance group. These contracts, which meet the established criteria for reinsurance accounting under United States generally accepted accounting principles ("GAAP"), are recorded in the statement of operations when written and generally result in large one-time written and earned premiums with comparable incurred losses. These contracts, when written, can cause significant variances in gross premiums written, net premiums written, net premiums earned, net incurred losses as well as the loss and loss expense ratio and underwriting and administrative expense ratio. At the time one of these contracts is written, we make certain assumptions with respect to the ultimate amount and timing of payments in order to establish loss and loss expense reserves. As with most loss reserves, the actual amount and timing of payments may result in loss and loss expenses which are significantly greater or less than the reserves initially provided. It is generally expected that losses ultimately paid under retroactive contracts will exceed the premiums received, in some cases by large margins. Premiums are based in part on time-value-of money concepts because loss payments may occur over lengthy time periods. However, retroactive contracts do not have a significant impact on reported earnings in the period of inception. When writing a retroactive contract, the excess of the estimated ultimate losses over the premiums received is established as a deferred charge and amortized against income over the estimated future claim settlement period. We expect that these contracts will produce significant underwriting losses over time, but we also expect that this business will be profitable due to expected investment earnings on the premiums received. 41
Three Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 493 $ 385 $ 243 28% Net premiums written 476 263 121 81 Net premiums earned 373 374 270 - Losses and loss expenses 328 466 215 (30) Underwriting and administrative expenses 33 26 26 27 ---------- ---------- --------- ---------- Underwriting income (loss) $ 12 $ (118) $ 29 NM ---------- ---------- --------- ---------- Net investment income 46 43 43 7% Other income (expense) - (1) (1) NM Interest expense 3 4 4 (25) Amortization of goodwill - 1 1 NM Income tax expense 7 7 7 - ----------- --------- --------- ---------- Net operating income (loss) $ 48 $ (88) $ 59 NM ----------- --------- --------- ---------- Loss and loss expense ratio 88.0% 124.4% 79.4% Underwriting and administrative expense ratio 8.8% 7.2% 9.9% Combined ratio 96.8% 131.6% 89.3% NM - not meaningful
The Financial Services' net operating income increased by $136 million to $48 million for the current quarter compared with a net operating loss of $88 million last year. This segment was significantly affected by the September 11th tragedy during the quarter ended September 30, 2001. Excluding this event, net operating income would have been $59 million last year and on this basis net operating income decreased by $11 million or 19 percent compared with last year. The combined ratio decreased from 131.6 percent last year to 96.8 percent in the current quarter. Excluding the September 11th tragedy, the combined ratio increased in the current quarter compared with 89.3 percent last year. This increase is attributed primarily to increased LPTs and structured finance business which are recorded at higher loss and loss expense ratios than other business. The financial guaranty operation reported an increase in net operating income of 21 percent to $29 million for the current quarter, compared with $24 million for the quarter ended September 30, 2001. Gross premiums written increased by 285 percent to $144 million compared with $37 million for the same quarter last year. Most divisions contributed to the increased business during the current quarter. The structured finance operation wrote four, multi-year programs where we provide first loss protection on synthetic collateralized debt obligations totaling $103 million. Financial solutions reported net operating income of $19 million for the current quarter, a $131 million increase compared with net operating loss of $112 million for the quarter ended September 30, 2001. This operation was heavily impacted by the September 11th tragedy. Excluding the impact of this event, net operating income last year would have been $35 million. This decrease relates primarily to the increase in LPT volume from $135 million last year to $187 million for the current quarter. As previously stated, these transactions are recorded at higher loss and loss expense ratios than our other business. In addition, during the current quarter, we wrote a $38 million securitization transaction, which is being reserved at 100 percent loss ratio. 42 The loss and loss expense ratio decreased from 124.4 percent last year to 88.0 percent for the current quarter. Excluding the impact of the September 11th tragedy, the loss and loss expense ratio would have been 79.4 percent last year, reflecting an increase in the current quarter due to the impact of higher LPT volume and structured finance business. The increase in LPTs and the structured finance business also affected the underwriting and administrative expense ratio in the current quarter as these transactions typically incur lower commission costs than other business. The underwriting and administrative ratio decreased from 9.9 percent last year, excluding the September 11th tragedy, to 8.8 percent for the current quarter.
Results of Operations - Nine months ended September 30, 2002 and 2001 Consolidated Operating Results Nine Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 9,575 $ 7,466 $ 7,344 28% Net premiums written 6,084 4,510 4,459 35 Net premiums earned 4,861 4,153 4,139 17 Losses and loss expenses 3,142 3,448 2,798 (9) Life and annuity benefits 106 58 58 83 Policy acquisition costs 685 559 558 23 Administrative expenses 678 602 602 12 ---------- --------- ---------- ---------- Underwriting income (loss) $ 250 $ (514) $ 123 NM ---------- --------- ---------- ---------- Net investment income 600 593 593 1% Other income (expense) 4 1 1 300 Interest expense 146 153 153 (5) Amortization of goodwill - 59 59 NM Income tax expense 98 (21) 57 NM ---------- --------- ---------- ---------- Net operating income (loss) $ 610 $ (111) $ 448 NM ---------- --------- ---------- ---------- Debt prepayment expense (net of income tax) (17) - Non-recurring expenses (net of income tax) - (4) Net realized losses on investments (net of income tax) (348) (54) Cumulative effect of adopting a new accounting standard (net of income tax) - (23) ---------- --------- Net income (loss) $ 245 $ (192) ========== ========= Loss and loss expense ratio* 66.1% 84.3% 68.6% Underwriting and administrative expense ratio* 28.3% 28.3% 28.4% Combined ratio* 94.4% 112.6% 97.0% * Ratios exclude life reinsurance business NM - not meaningful
Gross premiums written increased by 28 percent for the nine months ended September 30, 2002 compared with the same period last year and our net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased by 35 percent. During the nine months ended September 30, 2001, we wrote several large retroactive contracts in the form of LPTs totaling $552 million compared with $212 million for the current period. Our net premiums earned, which reflect the portion of net premiums written recorded as revenues for the period, increased by 17 percent for the period compared with the same period last year. These increases are discussed in each segment section, but generally are due to a combination of price increases on renewal business and new business opportunities. 43 Certain operating entities within the Financial Services segment may write large multi-year contracts, including retroactive contracts in the form of LPTs. These contracts may make the comparison of premium trends more difficult. Excluding the Financial Services segment, gross written, net written and net earned premiums increased by 31 percent, 39 percent and 29 percent, respectively. The loss and loss expense ratio was 66.1 percent for the current period compared with 84.3 percent last year. Our current year loss ratio was impacted by an accumulation of losses incurred with respect to the floods in Europe in the third quarter. Our loss ratio for the nine months of 2001 was substantially impacted by the September 11th tragedy. If you remove the impact of the flood losses and our September 11th tragedy losses from our loss ratios, the ratios would have been 64 percent for the current period and 68.6 percent last year. This ratio is also influenced by changes in the mix of business written, particularly in the Financial Services segment where LPTs can cause variations in the loss ratio. Excluding the Financial Services segment, our loss ratios would have been 60.1 percent compared with 63.2 percent. The underwriting and administrative expense ratio was unchanged at 28.3 percent for the nine months ended September 30, 2002 and 2001. Underwriting income increased by $764 million to $250 million for the nine months of 2002 compared with an underwriting loss of $514 million during the same period last year. Excluding the September 11th tragedy, last year's underwriting income would have $123 million. This significant increase is principally a result of increased prices across most lines of business and a reduction in our combined ratio. Our net investment income was $600 million for the current period compared with $593 million last year. Investment income from strong operating cash flows have essentially been offset by lower reinvestment rates. Net operating income was $610 million for the nine months ended September 30, 2002 compared with a net operating loss of $111 million last year. As previously noted, the September 11th tragedy reduced our net operating income by $559 million, after tax, for the period ended September 30, 2001. Excluding the impact of this catastrophic event, net operating income would have been $448 million last year. This translates to a 36 percent increase in net operating income which was primarily due to growth in net premiums earned for the nine months ended September 30, 2002 compared with the same period last year. Additionally, we adopted FAS 142 on January 1, 2002 and accordingly have not amortized any goodwill in the current period, compared with $59 million of goodwill amortized for the period ended September 30, 2001. The debt prepayment expense of $17 million (net of income tax) incurred during the period resulted from our decision to prepay a portion of the ACE INA Subordinated Notes due in 2009. These subordinated notes bear interest at 11.2 percent. During 2001, we had non-recurring expenses of $4 million (net of income tax) relating to a contractual obligation due to a departing employee. Net realized losses on investments (net of income tax) were $348 million for the nine months ended September 30, 2002 compared with net realized losses of $54 million for the nine months ended September 30, 2001. The net realized losses incurred in the current period are discussed in detail in the net realized gains (losses) on investments section. As discussed later in this report, on January 1, 2001 we adopted FAS 133 and recorded an expense related to the cumulative effect of adopting this standard of $23 million, net of income tax of $12 million. 44
Segment Operating Results Insurance - North American Nine Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ -------------- (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 4,476 $ 3,424 $ 3,424 31% Net premiums written 2,100 1,518 1,540 38 Net premiums earned 1,733 1,360 1,382 27 Losses and loss expenses 1,176 1,082 963 9 Underwriting and administrative expenses 391 381 381 3 ---------- ---------- --------- -------- Underwriting income (loss) $ 166 $ (103) $ 38 NM ---------- ---------- --------- -------- Net investment income 306 326 326 (6)% Other income (expense) - 1 1 - Interest expense 24 26 26 (8) Income tax expense 115 68 84 69 ---------- ---------- --------- --------- Net operating income $ 333 $ 130 $ 255 156% ---------- ---------- --------- --------- Loss and loss expense ratio 67.9% 79.5% 69.7% Underwriting and administrative expense ratio 22.5% 28.1% 27.6% Combined ratio 90.4% 107.6% 97.3% NM - not meaningful
Gross premiums written for the segment increased by 31 percent for the period compared with the same period last year. Both ACE USA and ACE Bermuda have contributed to the increase. ACE USA's gross premiums written increased by 29 percent to $4.1 billion for the nine months ended September 30, 2002 compared with $3.2 billion for the same period last year. Most of ACE USA's operating divisions experienced strong premium growth during the period, attributed largely to rising prices which is a result of the reduced availability of insurance for larger property accounts and excess casualty coverages. In addition, demand and pricing have increased for E&O and D&O coverage due to recent corporate failures and allegations of public company management misconduct. These market conditions have also led to generally favorable changes in policy terms and conditions. ACE Bermuda has been successful in growing its core lines of business, reporting an increase in gross premiums written of 64 percent to $310 million for the period compared with $190 million last year. This significant increase is primarily a result of rate increases in the insurance and reinsurance market in general, due to the September 11th tragedy and recent corporate failures. This segment's loss and loss expense ratio was 67.9 percent for the current period compared with 79.5 percent for the same period last year. Excluding the impact of the September 11th tragedy, last year's loss ratio would have been 69.7 percent. This reduction is principally due to higher levels of net premiums earned, partially achieved by rate increases. The underwriting and administrative expense ratio declined to 22.5 percent from 28.1 percent last year. This decline is primarily a result of a change in product mix, as more E&O and D&O business with lower commission was written during the period. In addition, at ACE USA, Westchester Specialty generated commissions from reinsurance ceded to other insurance companies in order to reduce volatility in this unit's growing casualty and umbrella coverages. Administrative expenses increased in the current period principally due to the growth in new product lines and increased volume in existing product lines. 45
Underwriting income was $166 million for the nine months compared with an underwriting loss of $103 million for the same period last year. Excluding the September 11th tragedy, the Insurance-North American segment would have produced underwriting income of $38 million for the period ended September 30, 2001. The large increase in net earned premiums was principally responsible for the large increase in underwriting income. Net operating income has increased 156 percent for the period compared with last year. Excluding the impact of the September 11th tragedy, net operating income would have increased by 31 percent. This significant increase in net operating income in the current period is due to the increase in underwriting income in the segment. Insurance - Overseas General Nine Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 2,911 $ 2,361 $ 2,381 23% Net premiums written 1,920 1,533 1,579 25 Net premiums earned 1,722 1,430 1,476 20 Losses and loss expenses 1,083 984 917 10 Underwriting and administrative expenses 664 559 559 19 ---------- ---------- ---------- ----------- Underwriting income (loss) $ (25) $ (113) $ - NM ---------- ---------- ---------- ----------- Net investment income 77 82 82 (6)% Other income (expense) 3 - - NM Interest expense 2 2 2 - Amortization of goodwill - 3 3 NM Income tax expense (benefit) 9 (25) 2 NM ---------- ---------- ---------- ----------- Net operating income (loss) $ 44 $ (11) $ 75 NM ---------- ---------- ---------- ----------- Loss and loss expense ratio 62.9% 68.8% 62.1% Underwriting and administrative expense ratio 38.5% 39.1% 37.8% Combined ratio 101.4% 107.9% 99.9% NM - not meaningful
Gross premiums written for the segment increased by 23 percent for the period compared with the same period last year. ACE International's gross premiums written increased by 23 percent to $2 billion for the nine months ended September 30, 2002 compared with $1.6 billion last year. Geographically, Europe and Asia contributed the most to this growth, principally driven by strong rate increases in both the P&C and A&H businesses and additionally by the strengthening of foreign currencies relative to the U.S. dollar. ACE Global Markets' gross premiums written increased by 24 percent to $940 million for the nine months ended September 30, 2002 compared with $756 million last year. This significant increase is primarily due to rate increases in the property, professional and marine lines and new business written. We also increased our participation in Lloyd's syndicate 2488 from 90 percent in 2001 to 99.6 percent in 2002. 46 The loss and loss expense ratio declined to 62.9 percent for the nine months ended September 30, 2002 compared with 68.8 percent for the same period last year. This segment incurred $68 million in losses relating to the European floods in the current year and $67 million in losses relating to the September 11th tragedy last year. Removing the impact of the European floods and the September 11th tragedy, the loss and loss expense ratio would have been 58.9 percent and 62.1 percent for the current period and last year, respectively. The underwriting and administrative expense ratio for this segment was relatively stable at 38.5 percent for the nine months ended September 30, 2002 compared with 39.1 percent last year. Net operating income for the current period was $44 million compared with a net operating loss of $11 million last year. Last year's results were impacted by the September 11th tragedy. Excluding this event there would have been net operating income of $75 million last year. The decrease is attributable to the underwriting loss for the current period.
Global Reinsurance Property and Casualty Nine Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------- (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 774 $ 427 $ 427 81% Net premiums written 683 336 359 103 Net premiums earned 459 233 255 97 Losses and loss expenses 193 300 87 (36) Underwriting and administrative expenses 109 73 72 49 --------- --------- -------- ------- Underwriting income (loss) $ 157 $ (140) $ 96 NM --------- --------- --------- ------- Net investment income 71 51 51 37% Other income (expense) 1 - - NM Interest expense 9 - - NM Amortization of goodwill - 10 10 NM Income tax expense 1 (26) 9 NM --------- --------- -------- ------- Net operating income (loss) $ 219 $ (73) $ 128 NM --------- --------- -------- ------- Loss and loss expense ratio 42.0% 128.8% 34.2% Underwriting and administrative expense ratio 23.7% 31.0% 28.0% Combined ratio 65.7% 159.8% 62.2% NM - not meaningful
Gross premiums written increased by 81 percent for the nine months ended September 30, 2002, compared with the same period last year. ACE Tempest Re, ACE Tempest U.K. and ACE Tempest U.S. all contributed to this significant increase. ACE Tempest Re reported a 58 percent increase in gross premiums written to $429 million compared with $271 million for the nine months ended September 30, 2001. ACE Tempest U.K. increased its gross premiums written by 70 percent to $196 million for the current period compared with $115 million last year. At ACE Tempest U.S., gross premiums written grew by 260 percent to $148 million for the current period compared with $41 million for the nine months ended September 30, 2001. 47 Net premiums written more than doubled for the nine months ended September 30, 2002 compared with last year. Excluding the impact of the September 11th tragedy, net premiums written would have been $359 million for the nine months ended September 30, 2001. This increase is primarily a result of the growth in gross premiums written and additionally due to the reduced level of reinsurance purchased by ACE Tempest U.K. The loss and loss expense ratio improved from 128.8 percent last year to 42.0 percent in the current period. Removing the impact of the September 11th tragedy, the loss and loss expense ratio would have been 34.2 percent last year. This increase is due to losses associated with the European floods in the current period. The underwriting and administrative expense ratio declined to 23.7 percent for the nine months ended September 30, 2002, from 31.0 percent last year. Excluding the September 11th tragedy, the underwriting and administrative expense ratio would have been 28.0 percent last year. The improvement is a result of higher premium production levels during the period. This segment's underwriting income increased to $157 million for the nine months ended September 30, 2002, compared with an underwriting loss of $140 million for the same period last year. Excluding the impact of the September 11th tragedy, underwriting income would have been $96 million last year. This significant increase is primarily a result of higher premium rates in the P&C insurance and reinsurance market since the September 11th tragedy, although these increases are now beginning to stabilize. Net operating income increased to $219 million for the current period compared with a net operating loss of $73 million last year. Removing the impact of the European floods and the September 11th tragedy, net operating income would have improved to $248 million for the current period compared with $128 million last year. This increase is a result of higher underwriting income from all the divisions and the increase in net investment income.
Life Reinsurance Nine Months Ended Percentage September 30 change from 2002 2001 prior year ------------ ------------ ------------ (in millions of U.S. dollars) Gross premiums written $ 115 $ 63 83% Net premiums written 112 63 77 Net premiums earned 112 63 77 Life and annuity benefits 106 58 83 Underwriting and administrative expenses 20 4 400 Net investment income 19 - NM --------- --------- -------- Net operating income $ 5 $ 1 400% --------- --------- -------- NM - not meaningful
48 For the nine months ended September 30, 2002, the life reinsurance group reported $5 million in net operating income compared with $1 million for the same period last year. We are focused on writing risk transfer treaty business where the principal risk is mortality and morbidity based. Our current product portfolio focuses mainly on life and variable products.
Financial Services Nine Months Ended Percentage September 30 change from 2002 2001 2001 prior year ------------ ------------ ------------ ------------ (as reported) (ex WTC) (as reported) (in millions of U.S. dollars) Gross premiums written $ 1,299 $ 1,191 $ 1,049 9% Net premiums written 1,269 1,060 918 20 Net premiums earned 835 1,067 963 (22) Losses and loss expenses 690 1,082 831 (36) Underwriting and administrative expenses 100 79 79 27 ---------- ---------- ---------- --------- Underwriting income (loss) $ 45 $ (94) $ 53 NM ---------- ---------- ---------- --------- Net investment income 141 127 127 11% Interest expense 10 11 11 (9) Amortization of goodwill - 3 3 NM Income tax expense 24 18 18 33 ---------- ---------- ---------- --------- Net operating income $ 152 $ 1 $ 148 151% ---------- ---------- ---------- --------- Loss and loss expense ratio 82.6% 101.3% 86.2% Underwriting and administrative expense ratio 12.0% 7.5% 8.3% Combined ratio 94.6% 108.8% 94.5% NM - not meaningful
This segment's net operating income increased to $152 million for the nine months ended September 30, 2002 compared with $1 million for the same period last year. Last year's results were significantly affected by the September 11th tragedy. Excluding the impact of this event, net operating income would have been $148 million for the nine months ended September 30, 2001. Gross premiums written increased by 9 percent to $1.3 billion for the current period compared with $1.2 billion last year. This increase reflects the increased demand for credit derivatives partially offset by lower LPT volume experienced during the period. The financial guaranty operations were successful in increasing net operating income by 20 percent to $83 million for the nine months ended September 30, 2002 compared with $69 million for the same period last year. During the period, we benefited from an increase in municipal refunding coupled with a robust housing market, principally in the U.S. In addition, market demand for credit derivatives and trade credit insurance was strong so we were able to increase our writings in both these areas. The financial solutions operations had net premiums earned of $667 million for the nine months ended September 30, 2002, a 20 percent decline over the same period last year, which reported net premiums earned of $801 million. This unit was successful in writing several large multi-year, prospective, structured programs during the period, however, the premium for the same period last year was bolstered by several LPTs. The nine months ended September 30, 2001 included $552 million of LPTs compared with $212 million in the current period. 49 As previously stated, LPTs are typically recorded at higher loss ratios than our other lines of business and as a result the reduction in LPT business written in the nine months ended September 30, 2002 had the effect of reducing our loss and loss expense ratio compared with last year. The loss and loss expense ratio improved from 101.3 percent for the nine months ended September 30, 2001 to 82.6 percent for the current period. Excluding the September 11th tragedy, the loss and loss expense ratio was 86.2 percent last year. The underwriting and administrative expense ratio was 12.0 percent for the period ended September 30, 2002 compared with 7.5 percent last year. This increase is primarily attributed to the decrease in LPT volume in the current period compared with last year. LPTs typically incur lower commission costs than our other lines of business. Net Investment Income The following table provides an analysis of our net investment income by segment for the three and nine months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (in millions of U.S. dollars) Insurance - North American $ 101 $ 106 $ 306 $ 326 Insurance - Overseas General 28 25 77 82 Global Reinsurance - P&C 24 16 71 51 Global Reinsurance - Life 7 - 19 - Financial Services 46 43 141 127 Corporate and other (1) (7) 2 (14) 7 ---------- --------- --------- --------- Net investment income $ 199 $ 192 $ 600 $ 593 ========== ========= ========= ========= (1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
Net investment income is influenced by a number of factors, including the amounts and timing of inward and outward cash flows, the market level of interest rates as well as overall asset allocation. Net investment income increased by 4 percent for the quarter ended September 30, 2002 compared with the same quarter last year. The proceeds from our sale of Ordinary Shares in the fourth quarter of 2001 and positive operating cash flow over the past five quarters resulted in an increase in net investment income of approximately $28 million for the current quarter compared with the same quarter last year. This increase was offset by a decrease of $21 million in investment income principally due to investing at lower yields on cash and short-term deposits, the rollover of our portfolio at lower current yields and the use of funds to reduce our current debt levels. Net investment income increased by 1 percent for the nine months ended September 30, 2002 compared with the same period last year. Again, the proceeds from our equity offering in the fourth quarter of 2001 and 50 positive operating cash flow resulted in an increase in net investment income of approximately $69 million for the current period compared with the same period last year. This increase was offset by a $62 million decrease in investment income for the same reasons discussed above. Net Realized Gains (Losses) on Investments Our investment strategy takes a long-term view and our portfolio is actively managed to maximize total return within certain specific guidelines, which are designed to minimize risk. Our investment portfolio is reported at fair value, however the effect of market movements on our portfolio impact income (through net realized gains (losses) on investments) when securities are sold, when other than temporary impairments are recorded on invested assets or when derivatives, including financial futures and options, interest rate swaps and credit default swaps are marked to market. Changes in unrealized gains and losses, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income. The following table presents our pre-tax net realized gains (losses) on investments for the three and nine months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (in millions of U.S. dollars) Fixed maturities and short-term investments $ (16) $ 12 $ (55) $ 1 Equity securities (55) 9 (53) 33 Financial futures, options and interest rate swaps (113) (26) (197) (44) Fair value adjustment on credit derivatives (51) (29) (97) (14) Currency (2) (2) - (6) Other investments 2 (23) 2 (33) ------- ------- -------- --------- Total net realized gains (losses) on investments $ (235) $ (59) $ (400) $ (63) ======= ======= ======== =========
Net realized losses on fixed maturities and equity securities during the current quarter include regular trading losses and losses related to write-downs of certain fixed income and equity securities in our investment portfolio that were judged to have an other than temporary decline in their fair value. The write-down from the recognition of impairments was $84 million for the current quarter. Total net realized losses were substantially offset by $226 million of net unrealized gains. The write-down from the recognition of impairments for the nine months ended September 30, 2002 was $126 million. We use foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar holdings currently held in the portfolio not specifically targeted to match the currency of liabilities. These contracts are not designated as specific hedges and therefore, realized and unrealized gains and losses recognized on these contracts are recorded as net realized gains (losses) in the quarter in which the fluctuations occur, together with net foreign currency gains (losses) recognized when non-U.S. dollar securities are sold. We use fixed income futures contracts and interest rate swaps to manage duration exposure. Losses of $56 million were recognized on interest rate swaps during the third quarter of 2002. These losses were a result of the drop in interest rates that resulted in unrealized gains of $282 million in our fixed income portfolio. Net realized losses generated by our equity and fixed income index futures and option contracts amounted to $57 million for the current quarter, bringing the total net realized losses attributable to financial futures and option contracts and interest rate swaps to $113 million compared with losses of $26 million for the same quarter in 2001. The change in fair value of our credit derivatives, which principally comprise credit default swaps, for the quarter ended September 30, 2002 was a loss of $51 million compared with a loss of $29 million for the same quarter in 2001. 51 The level of such gains and losses is dependent upon a number of factors including changes in interest rates, credit spreads and other market factors. (See "Derivatives" below for additional information) Other Income and Expense Items - ------------------------------
Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (in millions of U.S. dollars) Other (income) expense $ 14 $ 2 $ 21 $ (1) ============ =========== =========== ============ Interest expense $ 48 $ 49 $ 146 $ 153 ============ =========== =========== ============ Income tax expense (benefit) $ (7) $ (76) $ 37 $ (31) ============ =========== =========== ============ Amortization of goodwill $ - $ 19 $ - $ 59 ============ =========== =========== ============
Other (income) expense includes $25 million ($17 million, net of income tax) in debt prepayment expense incurred in the second and third quarters of the current year as a result of the prepayment of a portion of the ACE INA Subordinated Notes due in 2009. This cost was mostly attributable to the decrease in interest rates since the original note was issued. Interest expense was relatively flat at $48 million for the quarter ended September 30, 2002 compared with last year. An increase in interest expense due to our issuance of $500 million of debt (discussed in the Capital Resources section below) late in the first quarter of 2002 was offset by lower short-term interest rates on our floating rate debt and a reduction in the debt outstanding. For the nine months ended September 30, 2002 interest expense decreased by 4 percent compared with last year. This decrease is primarily attributed to lower short-term interest rates on our floating rate debt for the current period as compared with the same period last year. For 2003, we expect that our effective tax rate will increase somewhat and be in the 18 percent to 20 percent range. Our effective tax rate is dependent upon the mix of earnings from different jurisdictions with various tax rates. In 2003, we expect higher growth in taxable jurisdictions. A different geographic mix of actual earnings would change the effective tax rate. In June 2001, FASB issued FAS 142 which primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. As required, we adopted FAS 142 on January 1, 2002 and ceased amortizing goodwill as at that date. Investments and Cash Our principal investment objective is to ensure that funds will be available to meet our insurance and reinsurance obligations. Within this broad liquidity constraint, our investment portfolio's structure seeks to maximize return subject to specifically approved guidelines of overall asset classes, credit quality, liquidity and volatility of expected returns. As such, our investment portfolio is invested primarily in fixed income securities with an average credit quality of AA as rated by S&P. The portfolio is externally managed by independent professional investment managers. The average duration of our fixed income securities, including the effect of interest rate swaps, is 3.1 years at September 30, 2002. At September 30, 2002, total investments and cash were $17.7 billion compared with $15.9 billion at December 31, 2001, an increase of $1.8 billion. The increase in total investments and cash primarily results from the net proceeds of our debt offering at the end of the first quarter, securities lending collateral of $546 million and strong operating cash flows on the strength of increased net premiums written. Offsetting these increases, we paid dividends of $142 million during the period and repaid $100 million of long-term debt and reduced our trust preferred security balance by $400 million. Our other investments principally comprise direct investments, investments in investment funds and investments in limited partnerships. For direct investments that meet the requirements for equity accounting, we accrue our portion of the net income or loss of the 52 investment. We carry other direct investments at fair value. Where fair values are not publicly available, the investments are carried at estimated fair value. Our investments in investment funds are carried at the net asset value as advised by the fund. We account for investments in limited partnerships using the equity method. We evaluate the carrying value of our investments and if they experience a decline in value that we consider other than temporary, we record a realized loss in the statement of operations. On May 28, 2002 we announced our intent to acquire 22 percent of the outstanding shares of Huatai Insurance Company of China ("Huatai"), for total consideration of approximately $150 million. Huatai is China's first nationally licensed joint stock P&C insurer. To comply with Chinese regulations, our investment was made by three of our subsidiary companies: ACE INA Holdings Inc., ACE Tempest Re and ACE US Holdings Inc. The following table identifies our invested assets at fair value, by type held at September 30, 2002 and December 31, 2001: September 30 December 31 2002 2001 ------------ ------------ (in millions of U.S. dollars) Fixed maturities available for sale $ 13,504 $ 13,000 Equity securities 401 467 Short-term investments 2,004 1,206 Other investments 645 591 Securities on loan 533 - Cash 650 672 ------------ ------------ Total investments and cash $ 17,737 $ 15,936 ============ ============ The following tables identify our fixed income portfolio, short-term investments, securities on loan and cash and cash equivalents at September 30, 2002. The first table shows the amount of these items by type while the second table shows them by credit rating, as rated by S&P. September 30 2002 Percentage Market Value of Total ------------- ----------- (in millions of U.S. dollars) Treasury $ 938 6% Agency 986 6 Corporate 5,940 36 Mortgage-backed securities 3,193 19 Asset-backed securities 428 2 Municipal update 1,162 7 Non-US 1,861 11 Cash and cash equivalents 2,183 13 ------------ ----------- Total $ 16,691 100% ============ =========== September 30 2002 Percentage Market Value of Total ------------- ----------- (in millions of U.S. dollars) AAA $ 7,861 47% AA 3,438 21 A 2,856 17 BBB 1,318 8 BB 565 3 B 636 4 Other 17 - ----------- ----------- Total $ 16,691 100% =========== =========== 53 Property and Casualty Loss Reserves We establish reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of our policies and agreements. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported ("IBNR"), and include estimates of expenses associated with processing and settling these claims. The table below presents a reconciliation of our unpaid losses and loss expenses for the nine months ended September 30, 2002:
Gross Reinsurance Losses Recoverable Net ---------- ------------ ----------- (in millions of U.S. dollars) Balance at December 31, 2001 $ 20,728 $ 10,327 $ 10,401 Losses and loss expenses incurred 5,582 2,440 3,142 Losses and loss expenses paid (4,879) (2,120) (2,759) Other (including foreign exchange revaluation) 210 45 165 ---------- ----------- ----------- Balance at September 30, 2002 $ 21,641 $ 10,692 $ 10,949 ========== = ========== ===========
The reserve for unpaid losses and loss expenses increased by $913 million to $21.6 billion at September 30, 2002 compared with $20.7 billion at December 31, 2001. The balance at September 30, 2002 includes $13.2 billion of case and loss expense reserves compared with $13.3 billion at December 31, 2001. The process of establishing reserves for P&C claims continues to be a complex and imprecise one, requiring the use of informed estimates and judgments. Our estimates and judgments may be revised as claims develop and as additional experience and other data become available and reviewed, as new or improved methodologies are developed or as current laws change. As part of our evaluation process of loss reserves, we engage an independent actuarial firm once a year to review the methods and assumptions we use in estimating the unpaid losses and loss expenses. This annual review covers different portions of our loss reserves on a rotating basis each year and is one of the factors we use to set our loss reserves. In addition, the Insurance Department of the Commonwealth of Pennsylvania required a biannual external actuarial review when Brandywine was established. That review is underway and is expected to be completed during the fourth quarter. We continually evaluate our estimates of reserves in light of developing information and in light of discussions and negotiations with our insureds. While we believe that our reserve for unpaid losses and loss expenses at September 30, 2002 is adequate, future developments may result in ultimate losses and loss expenses significantly greater or less than the reserve provided, which could have a material adverse effect on future operating results. See "Asbestos and Environmental Claims". Reinsurance One of the ways we manage our loss exposure is through the use of reinsurance. While reinsurance arrangements are designed to limit our losses from large exposures and to permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of our liability to our insureds. Accordingly, our loss and loss expense reserves on our balance sheet represents our total unpaid gross losses and reinsurance recoverables on our balance sheet represents anticipated recoveries of a portion of those gross unpaid losses as well as amounts recoverable from reinsurers with respect to claims, which we have already paid. The table below presents our net reinsurance recoverable at September 30, 2002 and December 31, 2001. 54 September 30 December 31 2002 2001 ------------ ------------ (in millions of U.S. dollars) Reinsurance recoverable on paid losses and loss expenses $ 1,190 $ 1,066 Reinsurance recoverable on unpaid losses and loss expenses 11,488 11,116 Reinsurance recoverable on future policy benefits 7 5 ---------- ----------- Gross reinsurance recoverable 12,685 12,187 Bad debt reserve (796) (789) ---------- ----------- Net reinsurance recoverable $ 11,889 $ 11,398 ========== =========== We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for unrecoverable reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. Reinsurance disputes continue to be significant, particularly on larger and more complex claims, including those related to asbestos and environmental pollution. Provisions have been established for amounts estimated to be uncollectible. Following is a breakdown of our reinsurance recoverable on paid losses at September 30, 2002: Bad Debt % of Category Amount Reserve Total Reserve ------------------- -------------- ------------- --------------- (in millions of U.S. dollars) General collections $ 720 $ 37 5.1% Other 470 303 64.5 ------------ ---------- ----------- Total $ 1,190 $ 340 28.6% ============ ========== =========== General collections balances represent amounts in the process of collection in the normal course of business, for which we have no indication of dispute or credit issues. We provide bad debt reserves based primarily on the application of historical loss experience to credit categories and historical dispute statistics. The other category includes amounts recoverable that are in dispute, or are from companies, who are in supervision, rehabilitation or liquidation. Our estimation of this reserve considers the credit quality of the reinsurer, and whether we have received collateral or other credit protections such as parental guarantees. In addition, we also consider any information we may have regarding the reinsurers plans to dispute amounts recoverable and make judgments based on our knowledge and experience regarding the specific items in dispute. The following tables provide a listing of our largest reinsurers with the first category representing the top 10 reinsurers and the second category representing the remaining reinsurers with balances greater than $20 million. The third category includes amounts due from over 2,500 companies each having balances of less than $20 million. Our bad debt reserve in the three categories is principally based on an analysis of the credit quality of the reinsurer, and collateral balances. The next category, mandatory pools and government agencies, are amounts backed by the U.S. Government. Insurance companies are required by law to participate. We have assumed no bad debts or disputed amounts for this category. Structured settlements are annuities purchased from life insurance companies to settle workers compensation claims. These amounts are assigned principally to large, highly rated life insurance companies. Since we retain the ultimate liability in the event that the assigned company fails to pay, we reflect the amount as a liability and a recoverable for GAAP purposes. These amounts are not subject to dispute and we establish our bad debt reserve based on the credit quality of the life insurers. The next category, captives, are companies established by our insurance clients to assume a significant portion of their direct insurance risk from us (i.e. they are structured to allow clients to self-insure a portion of their insurance risk). It is generally our policy to obtain 55 collateral equal to expected losses. Where appropriate, limited exceptions are granted but only with review and sign-off at a senior officer level. Our final category, other, includes amounts recoverable that are in dispute, or are from companies that are in supervision, rehabilitation, or liquidation. We establish our bad debt reserve for these categories based on a case by case analysis of individual situations, including credit and collateral analysis and consideration of our collection experience in similar situations and the reinsurance protection we purchased from National Indemnity Company ("NICO") in both the Westchester Specialty and CIGNA P&C acquisitions. The remaining limits under these contracts are available for both future loss reserve development and uncollectible recoverables.
June 30 Breakdown of Reinsurance Recoverable 2002 Bad Debt Reserve % of Gross ------------------------------------ -------- ----------------- ---------- (in millions of U.S. dollars) Categories Top 10 reinsurers $ 5,664 $ 47 0.8% Other reinsurers balances greater than $20 million 1,114 37 3.3 Other reinsurers balances less than $20 million 2,492 233 9.5 Mandatory pools and government agencies 811 - - Structured settlements 730 3 0.4 Captives 794 4 0.5 Other 829 473 57.1 ---------- -------- --------- Total $ 12,434 $ 797 6.4% ========== ======== ========= Top 10 Reinsurers Other Reinsurers Balances Greater Than $20 million ----------------- -------------------------------------------------- AXA AIG Overseas Partners Berkshire Group CNA Group PMA Reins Corp Employers Re Everest Rein Co Renaissance Reinsurance Ltd. Equitas Fairfax Holdings Royal & Sun Alliance Ins. Hannover Re Gerling Global Scan Re Munich Re Hartford SCOR St. Paul IRB - Brasil Re TOA Swiss Re Liberty Mutual White Mountain XL Capital Lloyd's Zurich Ins. Corp Asbestos and Environmental Claims Included in our liabilities for losses and loss expenses are liabilities for asbestos, environmental and latent injury damage claims and expenses, that are referred to as A&E. These claims are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily injury claims related to asbestos products and environmental hazards. These amounts include provision for both reported and IBNR claims. The table below presents loss reserve details for A&E exposures at September 30, 2002 and December 31, 2001: September 30, 2002 December 31, 2001 Gross Net Gross Net ------------------ ------------------ ------------------ ----------------- (in millions of U.S. dollars) Asbestos $ 1,097 $ 90 $ 1,119 $ 149 Environmental and other latent exposures 911 347 1,089 452 ------------ ----------- ----------- ----------- Total $ 2,008 $ 437 $ 2,208 $ 601 ============ =========== =========== ===========
56 Survival ratios attempt to measure the adequacy of A&E loss reserves by taking the current ending loss reserve and dividing by the average annual claim payments for the prior three years. We believe this is a very simplistic measure of a very complicated issue. However, we understand this ratio is used as a means to compare companies with A&E exposures. Thus, if we average our last 3 years of A&E claim payments and expect payments to continue at the same pace, our survival ratio is 7.8 years. Using the 2001 calendar year payments, our survival ratio is 9.1 years. These ratios take into account the remaining coverage under the NICO reinsurance contract. More information relating to our asbestos exposure including our asbestos reserving process follows. Background Our exposure to asbestos principally arises out of liabilities acquired when we purchased the P&C business of CIGNA in 1999 and when we purchased Westchester Specialty from Talegen in 1998. While we certainly have other insurance operations, exposure to asbestos liabilities are concentrated in these two areas of our business. Of these two areas of business, the larger exposure is contained within the liabilities acquired from the CIGNA acquisition. These liabilities reside in the various subsidiaries of Brandywine Holdings ("Brandywine"), which was created in 1995 by the restructuring of ACE INA's domestic operations into separate ongoing and run-off operations. As part of the acquisition of the CIGNA P&C business, NICO provided reinsurance protection against adverse development for the aggregate liabilities of Brandywine, including environmental and asbestos liabilities. As part of the acquisition of the Westchester business, NICO provided reinsurance protection for adverse development for all losses occurring prior to 1997. As of September 30, 2002 the remaining limit in the NICO reinsurance cover protecting Brandywine is $533 million. ACE Bermuda has a 10 percent retrocession from NICO that would equate to a $53.3 million participation in the remaining limits. As of September 30, 2002 the remaining limit in the NICO reinsurance cover protecting Westchester was approximately $600 million. Paying for the unimpaired A large majority of asbestos cases are dominated by claimants who are not physically sick by any accepted medical standard. Reports of pending claims by two major asbestos manufacturers in 2001 indicate that at least two-thirds are for harmless conditions with no evidence of impairment. Court decisions and legislation have begun to address the unimpaired claimants situation and the strain it puts on resources available to compensate truly impaired claimants. For instance, the federal judge presiding over all federal asbestos cases has dismissed without prejudice any and all claims that do not have an actual medical diagnosis of any asbestos-related disease. In addition, states such as Massachusetts, Maryland and Pennsylvania defer unimpaired claims until actual injury is demonstrated. Traditional tort common law prohibits compensation for emotional injuries without proof of objective manifestation of the injury. To date, unimpaired claimants have tended to receive compensation as part of large settlement pools where unimpaired claimants are packaged by plaintiffs' lawyers along with seriously injured claimants whose presence in the pool yields heightened compensation for the entire pool. We believe that a high level of concern by (1) a judiciary facing dockets crowded with asbestos claims; (2) some prominent plaintiffs' lawyers worrying about fair compensation for the truly injured who are becoming a diminishing percentage of all asbestos claims; and (3) defendants with peripheral contact to asbestos facing financial ruin, should result in unimpaired claimants being required to prove injury under traditional common law standards. 57 Peripheral and unidentified asbestos defendants The inability of the tort system to manage and resolve asbestos cases fairly has resulted in a large number of bankruptcies of asbestos defendants, nearly 60 at last count. Bankruptcy courts may provide a rational and workable claims administration facility for many asbestos defendants overwhelmed with claims, the majority of which are filed on behalf of unimpaired claimants. When the most culpable asbestos defendants file for bankruptcy, the remaining defendants become targets. Since the bankruptcy process may eliminate the defendants with the highest percentage of asbestos-related liability, claimants proceed against the peripheral co-defendants to force them to pick up the bankrupts' shares of liability. The issue for the co-defendants is whether the applicable state law makes them liable on a joint and several basis for the entire claim, including the bankrupts' shares of liability. Most states have enacted laws limiting at least some of the financial exposure for marginally responsible parties to the percentage of fault actually assigned those parties at trial. And in the context of the Federal Employers' Liability Act ("FELA"), the United States Supreme Court, in the Norfolk & Western Railway v. Ayers case, is considering whether to limit the liability of peripheral defendants as well as compensation for the unimpaired. We believe that a Supreme Court ruling on the merits of the claims and supporting analysis could be influential on state courts dealing with similar issues. Claimants' lawyers have been looking for new sources of compensation to relieve the pressure on limited resources caused by bankruptcies and unimpaired claims far beyond the original asbestos and building material defendants. A 2002 report of the RAND Institute for Civil Justice estimates that over 6,000 different defendants representing peripheral industries such as manufacturers of food and beverage, textiles, paper, glass, iron and steel and durable metal goods have already been sued. In view of the large number of defendants already identified in hugely diverse industries after years of research, we believe that most legitimate defendants with serious asbestos liability have been identified although we are unable to predict the extent to which peripheral defendants with decreasing degrees of potential liability may be named in future suits. High profile insureds We have provided various levels of liability coverage for 48 of the original group of target defendants generally thought to have the most serious asbestos exposure. The status of the 21 policyholders (out of the 48) with the greatest asbestos exposure is as follows: 13 have been resolved by us and the remaining eight are reserved at or near actual policy limits or limits agreed to with the policyholder. Of the remaining 27 policyholders, 20 are resolved or reserved for ultimate potential exposure at a level we believe will have little variability. Three of the remaining policyholders are fully reserved based on our view of legal precedent and our experience and judgment; however, there is a low likelihood of a risk that the potential outcome could have a high level of variability. The final four policyholders involve excess policies subject to the resolutions of liability and coverage issues by and with underlying insurers. Additional reserves have been established for target policyholders where exposure exists for potential operations or non-products exposures beyond the product liability limits. 58 Reserving process We conduct a reserve review of our asbestos reserves on a quarterly basis. This reserve review includes a detailed individual claim review and analysis of the policies at issue, legal precedents, as well as factual and investigative developments. In addition, the normal biannual outside actuary review required by the Pennsylvania regulator when Brandywine was established is underway to be completed during the fourth quarter. In the context of our asbestos reviews, many risk factors are considered. For the purpose of establishing our asbestos reserves, significant variables are our assumptions with respect to payments to unimpaired claimants and the liability of peripheral defendants. In calculating our reserves, we assume that relatively small amounts will be paid to unimpaired claimants and that the liability of peripheral defendants will be relatively moderate, with some court ordered or legislative limitation reflecting tangential responsibility. These assumptions are based, in part, on our view that the legislative and litigation situation will improve for defendants in the next few years. We also consider multiple recoveries by claimants against various defendants; the ability of a claimant to bring a claim in a state in which they have no residency or exposure; the ability of a policyholder to claim the right to non-products coverage; and whether high level excess policies have the potential to be accessed given the policyholders claim trends and liability situation. It should be noted that results in other asbestos cases announced by other carriers may very well have little or no relevance to us because other coverage exposures are highly dependent upon the specific facts of individual coverage and resolution status of disputes among carrier, policyholder and claimants. Based on the policies, the facts, the law and a careful analysis of the impact that these risk factors will likely have on any given account, management estimates the potential liability for indemnity, policyholder defense costs and coverage litigation expense. There are many complex variables that are considered when estimating the reserves for our inventory of asbestos accounts. The variables involved may directly impact the predicted outcome. Sometimes, the outcomes change significantly based on a small change in one risk factor related to just one account. Our current asbestos reserves are based upon an assessment of our policies, legal precedents and investigative facts, and how the various risk factors are likely to be played out as those issues are litigated. While reserving for these claims is inherently uncertain, we believe that the net reserves carried for these claims are adequate. Our reserve review process involves a continual evaluation of cases taking into account all currently known information as well as reasonable assumptions related to unknown information. When facts and circumstance change, including the impact of the risk factors, changes are made to reflect overall reserve adequacy. It is possible that adverse developments could cause us to re-evaluate our assumptions, which could lead us to increase our asbestos related reserves. The NICO reinsurance cover protecting Brandywine provides a layer of protection against such adverse developments. In the event the remaining NICO cover is insufficient to cover future adverse loss development, such development could have a material adverse effect on future operating results. LIQUIDITY AND CAPITAL RESOURCES Liquidity Liquidity is a measure of a company's ability to generate sufficient cash flows to meet the short-term and long-term cash requirements of its business operations. As a holding company, ACE's assets consist primarily of the investments in its subsidiaries as well as other investments. In addition to net investment income, its cash flows currently depend primarily on dividends or other statutorily permissible payments from its Bermuda-based operating subsidiaries. During the nine months ended September 30, 2002, ACE was able to meet all of its obligations, including the payment of dividends declared on its Ordinary Shares and FELINE PRIDES, with its net cash flow and the dividends received. Should the need arise, we have access to the debt markets and other available credit facilities which are discussed below. 59 There are currently no legal restrictions on the payment of dividends from retained earnings by the Bermuda subsidiaries, as the minimum statutory capital and surplus requirements are satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. However, the payment of dividends or other statutorily permissible distributions by the Bermuda subsidiaries is subject to the need to maintain shareholders' equity at levels adequate to support the insurance and reinsurance operations. During the quarter ended September 30, 2002, ACE Bermuda declared dividends of $65 million bringing the total dividends declared by ACE Bermuda during the nine months ended September 30, 2002 to $260 million. ACE Tempest Re did not declare any dividends during the period. ACE expects that a majority of its cash inflows for the remainder of 2002 will be from its Bermuda subsidiaries. Management assesses which subsidiaries to draw dividends from based on among other things, regulatory and legal restrictions and the subsidiary's financial condition, particularly its ability to provide dividends without compromising its operations. The payments of dividends from ACE's non-Bermuda based operating subsidiaries are also subject to laws and regulations, which vary by jurisdiction. The payment of any dividends from ACE Global Markets or its subsidiaries would be subject to applicable United Kingdom insurance laws and regulations including those promulgated by the Society of Lloyd's. ACE INA's and ACE Financial Services' U.S. insurance subsidiaries may pay dividends, without prior regulatory approval, only from earned surplus and subject to the maintenance of a minimum capital requirement. ACE INA's international subsidiaries are also subject to various insurance laws and regulations in the countries in which they operate. These laws and regulations include restrictions that limit the amount of dividends that can be paid without prior approval of the insurance regulatory authorities. During the nine months ended September 30, 2002, ACE did not receive any dividends from ACE Global Markets, ACE INA or ACE Financial Services nor does ACE expect to receive dividends from these subsidiaries during 2002. Under the Lloyd's accounting model, syndicates in Lloyd's operate each year as an annual venture. Each "year of account" is held open for three years. At the end of three years, the "year of account" purchases reinsurance from the next open year (this purchase is known as "reinsurance to close" or "RITC") and distributes the remaining funds to the investors in the syndicate. ACE Global Markets has historically reinvested these funds in operations, which have expanded each year. ACE INA has issued debt to provide partial financing for the ACE INA Acquisition and for other operating needs. This debt is serviced by dividends paid by ACE INA's insurance subsidiaries to ACE INA as well as other group resources. Because of the debt service requirements, ACE INA does not pay dividends to ACE. ACE Financial Services' U.S. insurance subsidiaries are limited in their dividend paying abilities due to their need to maintain their AA and AAA financial strength ratings. Our consolidated sources of funds consist primarily of net premiums written, net investment income and proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses and dividends and for the purchase of investments. After satisfying our cash requirements, excess cash flows from these underwriting and investing activities are used to build the investment portfolio and thereby increase future net investment income. 60 Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, generally substantially in advance, of the time claims are paid. Our consolidated net cash flow from operating activities was $1 billion for the three months ended September 30, 2002 bringing the total for 2002 to $1.6 billion compared with $961 million for the nine months ended September 30, 2001. Generally cash flows are affected by claim payments which, due to the nature of our operations, may comprise large loss payments on a limited number of claims and therefore can fluctuate significantly from year to year. The irregular timing of these loss payments, for which the source of cash can be from operations, available net credit facilities or routine sales of investments, can create significant variations in cash flows from operations between quarters. Net loss and loss expense payments were unchanged at $2.8 billion for the nine months ended September 30, 2002 and 2001. We believe that we have sufficient liquidity to meet our anticipated cash flow obligations, including those resulting from the September 11th tragedy. During the nine months ended September 30, 2002, we made gross claim payments of $487 million with respect to the September 11th tragedy. On a net basis, our payment with respect to this claim was $107 million during the current period and approximately 95 percent of the related recoverable has been collected. Although our ongoing operations continue to generate positive cash flows, our cash flows are impacted by a large book of loss reserves from businesses in run-off. The run-off operations generated negative cash flows of $415 million for the nine months ended September 30, 2002 compared with negative cash flows of $516 million for the same period last year, primarily due to claim payments. The run-off book of business continues to require cash to meet its liabilities and cash flows are very dependent on the timing of claim settlements. Both internal and external forces influence our financial condition, results of operations and cash flows. Claim settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us and the settlement of the liability for that loss. We believe that our cash balances, cash flow from operations, routine sales of investments and the liquidity provided by our credit facilities (discussed below) are adequate to meet expected cash requirements. Capital Resources Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at September 30, 2002 and December 31, 2001: September 30 December 31 2002 2001 ------------ ------------ (in millions of U.S. dollars) Shareholders' equity $ 6,448 $ 6,107 Mezzanine equity 311 311 Trust preferred securities 475 875 Long-term debt 1,749 1,349 Short-term debt 220 495 ------------ ----------- Total capitalization $ 9,203 $ 9,137 ============ =========== Ratio of debt to total capitalization 21.4% 20.2% 61 We believe our financial strength provides us with the flexibility and capacity to obtain funds externally through debt or equity financing on both a short-term and long-term basis. Our ability to access the capital markets is dependent on among other things market conditions and our perceived financial strength. We have accessed both the debt and equity markets from time to time. Historically, this has primarily been in connection with acquisitions, although we did issue Ordinary Shares in October 2001 to provide additional capital to support growth in our operations. Also, in March 2002 we issued $500 million of senior debt, primarily to repay our short-term debt and for general corporate purposes. As of September 30, 2002 we had reduced short-term debt by $275 million from the level at December 31, 2001. In addition, $50 million of ACE INA Subordinated Notes due 2009 were repaid during each of the second and third quarters of 2002 for a total repayment amount of $100 million. After tax premiums of $7 million and $10 million were paid to retire the ACE INA Notes in the second and third quarters, respectively. These costs were mostly attributable to the decrease in interest rates since the original note was issued. We expect to continue to reduce our long-term debt over the next several quarters, which may result in additional debt prepayment expense but which will also reduce our interest expense. During October 2002, we repaid the $75 million of ACE Financial Services debt, which was due to mature in November 2002. In 1999, ACE RHINOS Trust sold in a private placement, $400 million of Auction Rate Reset Preferred Securities ("Preferred Securities"). The sole assets of the Trust consist of $412 million of Auction Rate Reset Subordinated Notes Series A ("Subordinated Notes") issued by ACE INA. Proceeds of an Ordinary Share Offering in September 2000 were used to support our guarantee of the Subordinated Notes. During the quarter ended June 30, 2002 we repaid $200 million in principal amount of Preferred Securities. We repaid the remaining $200 million of these Preferred Securities during the quarter ended September 30, 2002, reducing our trust preferred security balance to $475 million. In addition, in 1999, we filed a registration statement with the Securities and Exchange Commission ("SEC") utilizing a "shelf" registration process relating to a number of different types of debt and equity securities. Under this shelf process, we may sell the securities described in the registration statement up to a total offering price of $4 billion. We have utilized the shelf to issue the mezzanine equity, the trust preferred securities, the short-term and long-term debt, as well as the equity offerings of $400 million in 2000 and $1.1 billion in 2001. At September 30, 2002, the amount available under this shelf filing was $127 million. Another registration statement was filed with the SEC on May 16, 2002 allowing us to sell securities up to a total offering price of $1.5 billion. Shareholders' Equity Fully diluted book value per share increased to $24.37 at September 30, 2002, compared with $23.59 at December 31, 2001. In calculating our diluted book value per share we include our in-the-money options together with the expected number of shares to be issued upon conversion of the Feline Prides in the denominator and the expected proceeds from these items in the numerator. Shareholder's equity increased by $341 million during the nine months ended September 30, 2002, due primarily to our net income and unrealized gains on our investment portfolio, offset by dividends declared during the period. As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities including Ordinary Shares, up to $250 million. As of September 30, 2002, this authorization had not been utilized. 62 On January 11, 2002 and April 12, 2002, we paid dividends of 15 cents per share to shareholders of record on December 31, 2001 and March 29, 2002, respectively. On July 12, 2002 and October 11, 2002 we paid dividends of 17 cents per share to shareholders of record on June 28, 2002 and September 27, 2002 respectively. We have paid dividends each quarter since we became a public company in 1993. However, the declaration, payment and value of future dividends is at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as our Board of Directors deems relevant. Mezzanine Equity On April 12, 2000, we publicly offered and issued 6,000,000 FELINE PRIDES. Underwriters exercised their over allotment option which resulted in the issuance of an additional 221,000 FELINE PRIDES on May 8, 2000 for aggregate net proceeds of $311 million. Each FELINE PRIDE initially consists of a unit referred to as an Income PRIDE. Each Income PRIDE consists of (i) one 8.25 percent Cumulative Redeemable Preferred Share, Series A, liquidation preference $50 per share, and (ii) a purchase contract pursuant to which the holder of the Income PRIDE agrees to purchase from us, on May 16, 2003, $311 million of Ordinary Shares at the applicable settlement rate. At maturity on May 16, 2003, if the market price of our Ordinary Shares is: o less than $18.9563, then we will issue 16.4 million Ordinary Shares, representing an issuance of 1.8991 Ordinary Shares per preferred share. o between $18.9563 and $26.3281, then we will issue Ordinary Shares at market price, representing a 1:1 issuance of Ordinary Shares to preferred shares. o more than $26.3281, then we will issue 11.8 million Ordinary Shares, representing an issuance of 2.637 Ordinary Shares per preferred share. The aggregate liquidation preference of the 8.25 percent Cumulative Redeemable Preferred Shares is $311 million. Unless deferred by us, the preferred shares pay dividends quarterly at a rate of 8.25 percent per year to May 16, 2003, and thereafter at the reset rate established pursuant to a re-marketing procedure. Under the re-marketing procedure, if a holder of a preferred share does not wish to cash settle his purchase contract obligation, he may return the preferred share to be re-marketed, which essentially means the preferred share is re-priced and sold into the market for one month. The proceeds of the sale are then used to satisfy the purchase contract obligation. The holder can also choose to cash settle, keep the preferred share and receive the new rate established for the month on the trust-preferred securities. If we elect to defer dividend payments on the preferred shares, the dividends will continue to accrue and we will be restricted from paying dividends on our Ordinary Shares and taking certain other actions. The preferred shares are not redeemable prior to June 16, 2003, on which date they must be redeemed by us in whole. 63 There will be no net cash flows to ACE as the cash received from the sale of the Ordinary Shares in the remarketing procedure will be equal to the cash required to redeem the preferred shares one month later. Contractual Obligations and Commitments The table below shows our contractual obligations and commitments including our payments due by period:
Payments Due By Period ---------------------- (in millions of U.S. dollars) Less than 1-3 4-5 After Total 1 Year Years Years 5 Years Operating leases $ 466 $ 83 $ 148 $ 85 $ 150 Short-term debt 220 220 - - - Long-term debt 1,749 - 400 799 550 Trust preferred securities 475 - - - 475 --------- --------- --------- --------- -------- Total contractual obligations and commitments $ 2,910 $ 303 $ 548 $ 884 $ 1,175 ========= ========= ========= ========= ========
During the first quarter of 2002, we issued $500 million, five-year senior debt, with a coupon rate of 6.0 percent, due April 1, 2007. These senior unsecured notes rank equally with all of our other senior obligations. The agreement governing this senior debt contains a customary limitation on liens as well as customary event of default provisions, which if breached could accelerate the maturity of such senior debt. The proceeds were used for general corporate purposes and to reduce other debt as described in Capital Resources. The notes are not redeemable before maturity and do not have the benefit of any sinking fund. Following the September 11th tragedy, our ability to access the commercial paper markets was disrupted, partly because certain of our debt ratings were placed on "negative watch". During the fourth quarter of 2001, as an alternative to raising commercial paper, we entered into securities repurchase agreements with various counterparties to raise short-term funds. Under these repurchase agreements, we agreed to sell securities and repurchase them at a date in the future for a predetermined price, thereby creating liquidity. The "negative watches" on our debt ratings were lifted during the first quarter of 2002 and our access to the commercial paper markets was restored. We raised commercial paper and the amounts due to brokers under the repurchase agreements at December 31, 2001 of $395 million were repaid during the first quarter of 2002. At September 30, 2002, short-term debt consisted of $145 million in commercial paper and the ACE Financial Services $75 million, 7.75 percent debentures. The debentures were repaid in October 2002. We continue to have access to substantial liquidity resources. During the year, we have substantially reduced our use of commercial paper. However, in the event of any future disruption in the commercial paper markets, we have access to our cash resources, our short-term investments and our substantial investment portfolio. We also have the ability to draw down on our existing revolving credit facilities which currently total $850 million as described below. In addition, we have the ability to enter into repurchase agreements to provide liquidity. The covenants of our existing credit facilities limit our borrowing under repurchase agreements to $800 million. 64 Credit Facilities In April 2002, we renewed, at substantially the same terms, our $800 million, 364-day revolving credit facility. This facility, together with our $250 million, five-year revolving credit facility, which was last renewed in May 2000, is available for general corporate purposes and each of the facilities may also be used for commercial paper back up. The five-year facility also permits the issuance of letters of credit. In 2000, an amount of $25 million was drawn under the five-year facility. This was repaid in April 2002. In September 2002, we reduced the availability under the 364-day facility from $800 million to $500 million. The higher amount was no longer required given our decreased use of commercial paper and our access to repurchase agreement financing. In November 2001, to fulfill the requirements of Lloyd's for open years of account, we renewed and increased a syndicated uncollateralized, five-year letter of credit ("LOC") facility in the amount of (pound)440 million (approximately $682 million). This facility was originally arranged in 1998. In addition to the covenants noted below, the facility requires that collateral be posted if the financial strength rating of the guarantor, ACE Bermuda, falls to S&P BBB+ or less. As previously noted, we will be reducing our capacity at Lloyd's to (pound)652 million ($1 billion) for the 2003 year of account from (pound)900 million ($1.4 billion) for the 2002 year of account. We are currently renegotiating this facility and expect renewal during November 2002. As our Bermuda-based subsidiaries are not admitted insurers and reinsurers in the United States, the terms of certain insurance and reinsurance contracts require them to provide LOCs to clients. In addition, ACE Global Markets are required to satisfy certain United States regulatory trust fund requirements which can be met by the issuance of LOCs. In September 2002 we arranged a $500 million unsecured syndicated, one year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced a then existing LOC facility in the amount of $450 million. Usage under this facility was $449 million at September 30, 2002 compared with $373 million at December 31, 2001. In September 2002 we also arranged a $350 million secured, syndicated, one year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced an LOC facility originally arranged in December 2001 in the amount of $500 million. Usage under this facility was $213 million at September 30, 2002 and $130 million at December 31, 2001. The LOCs issued under both of these facilities principally support unpaid losses and loss expenses already included on our balance sheet. All of the facilities described above require that we maintain certain covenants. These covenants include: (i) a minimum consolidated net worth of $3.6 billion plus 25 percent of cumulative net income since March 31, 2000 and; (ii) a maximum debt to total capitalization ratio of 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity except where the ratio of the sum of trust preferred securities and mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the surplus greater than 15 percent would be included in the debt to total capitalization ratio. Our failure to comply with the covenants under any credit facility would (subject to grace periods in the case of certain covenants) result in an event of default and we could be required to repay any outstanding borrowings (or to cash collateralize letters of credit) under such facility. An event of default under one or more credit facility with outstanding credit extensions of $25 million or more would result in an event of default under all of the facilities described above. At September 30, 2002, the minimum consolidated net worth requirement under the covenant was $3.9 billion and our actual consolidated net worth as calculated under the covenant was $6.1 billion and our ratio of debt to total capitalization was 0.214 to 1. 65 ACE Tempest Re also maintained an uncollateralized, syndicated revolving credit facility in the amount of $72.5 million, which was guaranteed by us. This facility expired in February of 2002 and was not renewed. No amounts had been drawn on this facility. At September 30, 2002, ACE Guaranty Corp. was party to a credit facility which provides up to $150 million specifically designed to provide rating agency qualified capital to further support ACE Guaranty Corp.'s claims-paying resources. This facility expires in October 2008. ACE Guaranty Corp. has not borrowed under this credit facility. ACE Guaranty Corp. is currently renegotiating this facility and extending the maturity date to 2009, so that it may continue to qualify as rating agency capital. We provide funds at Lloyd's, primarily in the form of letters of credit, to support underwriting capacity for Lloyd's syndicate 2488. Syndicate 2488 has a 2002 capacity of (pound)900 million ($1.4 billion). We also maintain various other LOC facilities; both collateralized and uncollateralized, for general corporate purposes. At September 30, 2002, the aggregate availability under these facilities was $521 million and usage was $367 million. More information regarding our contractual obligations, commitments and credit facilities can be found in our consolidated financial statements and related notes and Management's Discussion and Analysis of Results of Operations and Financial Condition included in our Annual Report on Form 10-K for the year ended December 31, 2001. NEW ACCOUNTING PRONOUNCEMENT In June 2001, FASB issued FAS 142 "Goodwill and Other Tangible Assets". FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. As required, we adopted FAS 142 on January 1, 2002, and ceased amortizing goodwill at that time. All goodwill recognized in our consolidated balance sheet at January 1, 2002 was assigned to one or more reporting units. FAS 142 requires that goodwill in each reporting unit be tested for impairment by June 30, 2002. Any impairment loss recognized as a result of a transitional impairment test of goodwill should be reported as the cumulative effect of a change in accounting principle. Management has determined there was no impairment in goodwill as a result of the test. 66 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential loss to various market risks, including changes in interest rates and foreign currency exchange rates. Our investment portfolio consists of both fixed income and equity securities, denominated in both U.S. and foreign currencies, which are sensitive to changes in interest rates, equity prices and foreign currency exchange rates. Therefore earnings would be effected by changes in interest rates, equity prices and foreign currency exchange rates. We use investment derivative instruments such as futures, options, interest rate swaps, and foreign currency forward contracts to manage the duration of our investment portfolio and foreign currency exposures. These instruments are sensitive to changes in interest rates and foreign currency exchange rates. The portfolio includes other market sensitive instruments which are subject to changes in market values, with changes in interest rates. Duration Management and Market Exposure Management We utilize financial futures, options, interest rate swaps and foreign currency forward contracts for the purpose of managing certain investment portfolio exposures. These instruments are recognized as assets or liabilities in our consolidated financial statements and changes in market value are included in net realized gains or losses on investments in the consolidated statements of operations. Our exposure to interest rate risk is concentrated in our investment portfolio, and to a lesser extent, our debt obligations. A hypothetical adverse parallel shift in the yield curve of 100 basis points would have resulted in a decrease in total return of 3.1 percent on our fixed income portfolio at September 30, 2002 compared with 3.2 percent at December 31, 2001. This equates to a decrease in market value of approximately $462 million on a fixed income portfolio valued at $15.1 billion at September 30, 2002, and $452 million on a fixed income portfolio valued at $14.2 billion at December 31, 2001. An immediate time horizon was used as this presents the worst case scenario. Our portfolio of equity securities, which we carry on our balance sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. In addition, we attain exposure to the equity markets through the use of derivative instruments which also have exposure to price risk. Our U.S. equity exposure in the portfolio is highly correlated with the S&P 500 index and changes in this index would approximate the impact on our portfolio. Our international equity portfolio has exposure to a broad range of non-U.S. equity markets, primarily in those countries where we have insurance operations. These portfolios are correlated to movement in each country's broad equity market. The combined equity exposure through both our equity portfolio and derivative instruments was valued at $575 million at September 30, 2002. A hypothetical 10 percent decline in the price of each stock in these portfolios and the index correlated to the derivative instruments would have resulted in a $57 million decline in fair value. Changes in fair value of these derivative instruments are recorded as realized gains or losses in the consolidated statements of operations. Changes in the fair value of our equity portfolio are recorded as unrealized appreciation (depreciation) and are included as other comprehensive income in shareholders' equity. Our exposure to foreign exchange risk is concentrated in our net invested assets denominated in foreign currencies. Our international operations use cash flows to purchase these investments to hedge insurance reserves and other liabilities denominated in the same currencies. At September 30, 2002, our net asset exposure to foreign currencies was not material. 67 DERIVATIVES As of January 1, 2001, we adopted FAS 133 which 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. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities on the consolidated balance sheet and measure those instruments at fair value. We maintain investments in derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement or to obtain an exposure to a particular financial market. If certain conditions are met, a derivative may be specifically designated as a fair value, cash flow or foreign currency hedge. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Upon application of FAS 133, hedging relationships must be designated and documented pursuant to the provisions of this statement. As of September 30, 2002, we had no derivatives that were designated as hedges. Certain products (principally credit protection oriented) issued by the Financial Services segment have been determined to meet the definition of a derivative under FAS 133. These products consist primarily of credit default swaps, index-based instruments and certain financial guarantee coverages. Effective January 1, 2001, we record these products at their fair values, which are determined principally through obtaining quotes from independent dealers and counterparties. During the nine months ended September 30, 2002, we have recorded in net realized gains (losses) on investments, a pretax loss of $97 million to reflect the change in the fair value of derivatives. During the nine months ended September 30, 2001, we recorded in net realized gains (losses) on investments, a pretax loss of $14 million to reflect the change in the fair value of derivatives, excluding $23 million recorded in the first quarter of 2001 related to the cumulative effect of adopting FAS 133. The level of gains and losses resulting from changes in the fair value of derivatives on a prospective basis is dependent upon a number of factors including changes in interest rates, credit spreads and other market factors. Our involvement with derivative instruments and transactions is primarily to offer protection to others or to mitigate our own risk and is not considered speculative in nature. ITEM 4. CONTROLS AND PROCEDURES Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within time periods specified in the rules and forms of the SEC. The Chief Executive Officer and the Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures within the last ninety days and have concluded that the disclosure controls and procedures are effective. There were no significant changes our internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated by the Chief Executive Officer and the Chief Financial Officer. 68 ACE LIMITED PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and in some jurisdictions, direct actions by allegedly injured persons seeking damages from policyholders. These lawsuits involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves which are discussed in the property and casualty loss reserves discussion. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from our business ventures. While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 1. Exhibits 10.1 Reimbursement agreement for $500,000,000 Letter of Credit Facility dated as of September 30, 2002, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc. 10.2 Reimbursement agreement for $350,000,000 Secured Letter of Credit Facility dated as of September 30, 2002, by ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. 2. Reports on Form 8K The Company filed a Form 8-K current report (date of earliest event reported: August 13, 2002) in connection with the filing of the certifications and voluntary sworn statements of Brian Duperreault, Chief Executive Officer, and Philip V. Bancroft, Chief Financial Officer, required pursuant to 18 U.S.C. ss. 1350 and to voluntarily comply with the Order issued by the Commission on June 27, 2002, ("Order Requiring the Filing of Sworn Statements Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934," File No. 4-460). 69 ACE LIMITED SIGNATURES Pursuant to the requirements 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. ACE LIMITED November 13, 2002 /s/ Brian Duperreault -------------------------------------------- Brian Duperreault Chairman and Chief Executive Officer November 13, 2002 /s/ Philip V. Bancroft -------------------------------------------- Philip V. Bancroft Chief Financial Officer 70 ACE LIMITED CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brian Duperreault, certify that: 1) I have reviewed this quarterly report on Form 10-Q of ACE Ltd. 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date") and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 13, 2002 /s/ Brian Duperreault - ------------------------------------ Chairman and Chief Executive Officer 71 ACE LIMITED CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Philip V. Bancroft, certify that: 1) I have reviewed this quarterly report on Form 10-Q of ACE Ltd. 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date") and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 13, 2002 /s/ Philip V. Bancroft - -------------------------- Chief Financial Officer 72 ACE LIMITED EXHIBIT INDEX Exhibit Description Numbered Number Page 1 . Exhibits 10.1 Reimbursement agreement for $500,000,000 Letter of Credit Facility dated as of September 30, 2002, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc. 10.2 Reimbursement agreement for $350,000,000 Secured Letter of Credit Facility dated as of September 30, 2002, by ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. 73 EX-10.1 3 reim500.txt Exhibit 10.1 Execution Copy ================================================================================ REIMBURSEMENT AGREEMENT among ACE LIMITED ACE BERMUDA INSURANCE LTD. ACE TEMPEST REINSURANCE LTD., as Account Parties, THE BANKS NAMED HEREIN, WACHOVIA BANK, NATIONAL ASSOCIATION, as Issuing Bank and as Administrative Agent JPMORGAN CHASE BANK and BANK OF AMERICA, N.A. as Co-Syndication Agents, and THE BANK OF NOVA SCOTIA and DEUTSCHE BANK AG, NEW YORK BRANCH as Co-Documentation Agents, $500,000,000 Letter of Credit Facility WACHOVIA SECURITIES, INC. Sole Book Runner and Lead Arranger Dated as of September 30, 2002 ================================================================================ Table of Contents Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01 Certain Defined Terms..........................................1 SECTION 1.02 Computation of Time Periods; Other Definitional Provisions....16 SECTION 1.03 Accounting Terms and Determinations...........................16 ARTICLE II AMOUNTS AND TERMS OF THE LETTERS OF CREDIT SECTION 2.01 The Letters of Credit.........................................17 SECTION 2.02 Issuance and Renewals and Drawings, Participations and Reimbursement with Respect to Letters of Credit...............18 SECTION 2.03 Repayment of Advances.........................................22 SECTION 2.04 Termination or Reduction of the LC Commitment Amounts.........23 SECTION 2.05 Fees..........................................................23 SECTION 2.06 Increased Costs, Etc..........................................25 SECTION 2.07 Payments and Computations.....................................26 SECTION 2.08 Taxes.........................................................27 SECTION 2.09 Sharing of Payments, Etc......................................29 SECTION 2.10 Use of Letters of Credit......................................29 SECTION 2.11 Defaulting Banks..............................................30 SECTION 2.12 Replacement of Affected Bank..................................31 SECTION 2.13 Certain Provisions Relating to the Issuing Bank and Letters of Credit.....................................................32 SECTION 2.14 Downgrade Event with Respect to a Bank........................33 SECTION 2.15 Downgrade Event or Other Event with Respect to the Issuing Bank..................................................35 SECTION 2.16 Non-Dollar Letters of Credit..................................36 ARTICLE III CONDITIONS OF LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01 Conditions Precedent to Effective Date........................37 SECTION 3.02 Conditions Precedent to Each Issuance, Extension or Increase of a Letter of Credit................................39 SECTION 3.03 Determinations Under Section 3.01.............................40 i ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01 Representations and Warranties of the Account Parties.........40 ARTICLE V COVENANTS OF THE ACCOUNT PARTIES SECTION 5.01 Affirmative Covenants.........................................44 SECTION 5.02 Negative Covenants............................................46 SECTION 5.03 Reporting Requirements........................................49 SECTION 5.04 Financial Covenants...........................................52 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01 Events of Default.............................................53 SECTION 6.02 Actions in Respect of the Letters of Credit upon Default......55 ARTICLE VII THE GUARANTY SECTION 7.01 The Guaranty..................................................56 SECTION 7.02 Guaranty Unconditional........................................56 SECTION 7.03 Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances.........................................57 SECTION 7.04 Waiver by the Account Parties.................................57 SECTION 7.05 Subrogation...................................................57 SECTION 7.06 Stay of Acceleration..........................................58 SECTION 7.07 Continuing Guaranty; Assignments..............................58 ARTICLE VIII THE AGENTS SECTION 8.01 Authorization and Action......................................58 SECTION 8.02 Agents' Reliance, Etc.........................................59 SECTION 8.03 Wachovia and Affiliates.......................................59 SECTION 8.04 Bank Credit Decision..........................................59 SECTION 8.05 Indemnification...............................................60 SECTION 8.06 Successor Administrative Agent................................60 ii ARTICLE IX MISCELLANEOUS SECTION 9.01 Amendments, Etc...............................................61 SECTION 9.02 Notices, Etc..................................................62 SECTION 9.03 No Waiver; Remedies...........................................62 SECTION 9.04 Costs and Expenses............................................62 SECTION 9.05 Right of Set-off..............................................63 SECTION 9.06 Binding Effect................................................64 SECTION 9.07 Assignments and Participations................................64 SECTION 9.08 Execution in Counterparts.....................................66 SECTION 9.09 No Liability of the Issuing Bank..............................67 SECTION 9.10 Confidentiality...............................................67 SECTION 9.11 Jurisdiction, Etc.............................................67 SECTION 9.12 Governing Law.................................................68 SECTION 9.13 Waiver of Jury Trial..........................................68 SECTION 9.14 Disclosure of Information.....................................68 Schedule I LC Commitment Amounts Schedule I - Part 2 Domestic Lending Offices Schedule II Existing Wachovia Letters of Credit Schedule III Existing Mellon Letter of Credit Schedule IV Replacement Letter of Credit Schedule 4.01(b) Subsidiaries Schedule 5.02(a) Liens Exhibit A Assignment and Acceptance Exhibit B Replacement Letter of Credit Insert Exhibit C-1 Form of Opinion of Maples and Calder Exhibit C-2 Form of Opinion of Mayer, Brown, Rowe & Maw Exhibit C-3 Form of Opinion of Conyers, Dill & Pearman iii REIMBURSEMENT AGREEMENT REIMBURSEMENT AGREEMENT dated as of September 30, 2002, among ACE Limited, a Cayman Islands company (the "Parent"), ACE Bermuda Insurance Ltd., a Bermuda company ("ACE Bermuda"), and ACE Tempest Reinsurance Ltd., a Bermuda company ("Tempest") (ACE Bermuda and Tempest, together with the Parent, the "Account Parties" and individually an "Account Party"), the banks, financial institutions and other institutional lenders listed on the signature pages hereof as the Initial Banks (the "Initial Banks"), Wachovia Bank, National Association ("Wachovia"), as Issuing Bank (as hereinafter defined), JPMorgan Chase Bank ("JPMorgan Chase"), as syndication agent, Bank of America, N.A. ("Bank of America"), as syndication agent (JPMorgan Chase and Bank of America, together with any successor syndication agent appointed pursuant to Article VIII, the "Syndication Agents"), The Bank of Nova Scotia ("Nova Scotia"), as documentation agent, Deutsche Bank AG, New York Branch ("Deutsche Bank"), as documentation agent (Nova Scotia and Deutsche Bank, together with any successor documentation agent appointed pursuant to Article VIII, the "Documentation Agents"), and Wachovia, as administrative agent (together with any successor administrative agent appointed pursuant to Article VIII, the "Administrative Agent" and, together with the Syndication Agents and the Documentation Agents, the "Agents") for the Banks. PRELIMINARY STATEMENTS: The Account Parties have requested that the Issuing Bank and the Banks make available to the Account Parties a credit facility in an amount up to $500,000,000 to provide for the issuance of letters of credit for the account of one or more of the Account Parties. The Issuing Bank and the Banks have indicated their willingness to agree to make such letters of credit available on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Account Parties" has the meaning specified in the recital of parties to this Agreement. "ACE Bermuda" has the meaning specified in the recital of parties to this Agreement. "ACE INA" means ACE INA Holdings Inc., a Delaware corporation. "Adjusted Consolidated Debt" means, at any time, an amount equal to (i) the then outstanding Consolidated Debt of the Parent and its Subsidiaries plus (ii) to the extent exceeding an amount equal to 15% of Total Capitalization, the then issued and outstanding amount of Preferred Securities (other than any Mandatorily Convertible Securities). "Administrative Agent" has the meaning specified in the recital of parties to this Agreement. "Administrative Agent's Account" means the account of the Administrative Agent maintained by the Administrative Agent at Wachovia Bank, National Association, Charlotte Plaza Building CP-23, 201 South College Street, Charlotte, North Carolina 28288-0680, Account No. 5000000027444, Re: ACE Ltd., Attn: Syndication Agency Services, or such other account as the Administrative Agent shall specify in writing to the Banks. "Advance" means a Letter of Credit Advance. "Affected Bank" means any Bank that (i) has made, or notified any Account Party that an event or circumstance has occurred which may give rise to, a demand for compensation under Section 2.06(a) or (b) or Section 2.08 (but only so long as the event or circumstance giving rise to such demand or notice is continuing) or (ii) is a Downgraded Bank. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term "control" (including the terms "controlling", "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to vote 5% or more of the Voting Interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise. "Agents" has the meaning specified in the recital of parties to this Agreement. "Agreement Currency" has the meaning specified in Section 2.16(g). "Applicable Account Party" with respect to any outstanding or proposed Letter of Credit means the Account Party for the account of which such Letter of Credit was or is proposed to be issued. "Applicable Commitment Fee Percentage" means, as of any date, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below: 2 - ------------------------------------------------------------------------------- Public Debt Rating Applicable Commitment Fee S&P/Moody's Percentage - --------------------------------------- --------------------------------------- Level 1 A+/A1 and above 0.060% - --------------------------------------- --------------------------------------- Level 2 A/A2 0.080% - --------------------------------------- --------------------------------------- Level 3 A-/A3 0.100% - --------------------------------------- --------------------------------------- Level 4 BBB+/Baa1 0.125% - --------------------------------------- --------------------------------------- Level 5 Lower than Level 4 0.150% - --------------------------------------- --------------------------------------- "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office. "Applicable Margin" means, as of any date, with respect to either Type of Letter of Credit, a percentage per annum determined by reference to such Type and the Public Debt Rating in effect on such date as set forth below: - ------------------------------- ----------------------- ----------------------- Applicable Margin Applicable Margin Public Debt Rating for Intercompany for Third Party S&P/Moody's Letters of Credit Letters of Credit - ------------------------------- ----------------------- ----------------------- Level 1 A+/A1 and above 0.300% 0.350% - ------------------------------- ----------------------- ----------------------- Level 2 A/A2 0.400% 0.425% - ------------------------------- ----------------------- ----------------------- Level 3 A-/A3 0.450% 0.475% - ------------------------------- ----------------------- ----------------------- Level 4 BBB+/Baa1 0.500% 0.525% - ------------------------------- ----------------------- ----------------------- Level 5 Lower than Level 4 0.600% 0.625% - ------------------------------- ----------------------- ----------------------- provided, however, that at all times during which the Available Amount with respect to Intercompany Letters of Credit exceeds $125,000,000, then for purposes of Section 2.05(c)(i) the Applicable Margin for the portion of the Available Amount of such Intercompany Letters of Credit in excess of $125,000,000 shall be determined as if such Letters of Credit were Third Party Letters of Credit. 3 "Approved Investment" means any Investment that was made by the Parent or any of its Subsidiaries pursuant to investment guidelines set forth by the board of directors of the Parent which are consistent with past practices. "Arranger" means Wachovia Securities, Inc. "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and accepted by the Administrative Agent, in accordance with Section 9.07 and in substantially the form of Exhibit A hereto. "Available Amount" of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time or at any future time (assuming compliance at such time or such future time with all conditions to drawing) (including without limitation amounts which have been the subject of drawings by the applicable beneficiary but which have not yet been paid by the Issuing Bank); provided that, except as otherwise expressly provided in this Agreement, the Available Amount of the Replacement Letter of Credit, determined at any time until the Initial Availability Time, shall be equal to zero (or to the excess, if any, by which the Available Amount thereof (determined as provided hereinabove) at such time exceeds the Available Amount of the Existing Mellon Letter of Credit at such time). At all times after the Initial Availability Time, the Available Amount of the Replacement Letter of Credit shall be determined as provided in this definition without regard to the foregoing proviso. "Bank of America" has the meaning specified in the recital of parties to this Agreement. "Bankruptcy Law" means any proceeding of the type referred to in Section 6.01(f) or Title 11, U.S. Code, or any similar foreign, federal or state law for the relief of debtors. "Banks" means the Initial Banks and each Person that shall become a Bank hereunder pursuant to Section 9.07(a), (b) and (c) for so long as such Initial Bank or Person, as the case may be, shall be a party to this Agreement. "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the rate of interest announced publicly by Wachovia in Charlotte, North Carolina from time to time, as Wachovia's prime rate (which may not be its best lending rate) or, if higher on the day in question, 1/2 of 1% above the Federal Funds Rate. "Business Day" means a day of the year on which banks are not required or authorized by law to close in Charlotte, North Carolina, New York, New York, London, England or Bermuda. "Capitalized Leases" means all leases that have been or should be, in accordance with GAAP, recorded as capitalized leases. "Change of Control" means the occurrence of any of the following: (a) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Interests of the Parent (or other securities convertible into such Voting Interests) representing 30% or more 4 of the combined voting power of all Voting Interests of the Parent; or (b) a majority of the board of directors of the Parent shall not be Continuing Members; or (c) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that results in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Parent. "Commitment Amount" means an LC Commitment Amount or the Letter of Credit Issuance Commitment Amount. "Committed Facility" means, at any time, the aggregate amount of the Banks' LC Commitment Amounts at such time. "Confidential Information" means information that any Loan Party furnishes to any Agent or any Bank, but does not include any such information that is or becomes generally available to the public other than as a result of a breach by any Agent or any Bank of its obligations hereunder or that is or becomes available to such Agent or such Bank from a source other than the Loan Parties that is not, to the best of such Agent's or such Bank's knowledge, acting in violation of a confidentiality agreement with a Loan Party. "Consolidated" refers to the consolidation of accounts in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income of the Parent and its Consolidated Subsidiaries, determined on a Consolidated basis for such period. "Consolidated Net Worth" means at any date the Consolidated stockholders' equity of the Parent and its Consolidated Subsidiaries determined as of such date, provided that such determination for purposes of Section 5.04 shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial Accounting Standards Board of the United States of America. "Contingent Obligation" means, with respect to any Person, any obligation or arrangement of such Person to guarantee or intended to guarantee any Debt, leases, dividends or other payment obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of a primary obligor, (b) the obligation to make take-or-pay or similar payments, if required, regardless of nonperformance by any other party or parties to an agreement or (c) any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that Contingent Obligations shall not include any obligations of any such Person 5 arising under insurance contracts entered into in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the instrument evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder), as determined by such Person in good faith. "Continuing Member" means a member of the Board of Directors of the Parent who either (i) was a member of the Parent's Board of Directors on the date of execution and delivery of this Agreement by the Parent and has been such continuously thereafter or (ii) became a member of such Board of Directors after such date and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Parent's Board of Directors. "Debenture" means debt securities issued by ACE INA or the Parent to a Special Purpose Trust in exchange for proceeds of Preferred Securities and common securities of such Special Purpose Trust. "Debt" of any Person means, without duplication for purposes of calculating financial ratios, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person's business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under Capitalized Leases (excluding imputed interest), (f) all obligations of such Person under acceptance, letter of credit or similar facilities, (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests (except for obligations to pay for Equity Interests within customary settlement periods) in such Person or any other Person or any warrants, rights or options to acquire such capital stock (excluding payments under a contract for the forward sale of ordinary shares of such Person issued in a public offering), valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Contingent Obligations of such Person in respect of Debt (of the types described above) of any other Person and (i) all indebtedness and other payment obligations referred to in clauses (a) through (h) above of another Person secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness or other payment obligations; provided, however, that the amount of Debt of such Person under clause (i) above shall, if such Person has not assumed or otherwise become liable for any such Debt, be limited to the lesser of the principal amount of such Debt or the fair market value of all property of such Person securing such Debt; 6 provided further that "Debt" shall not include obligations in respect of insurance or reinsurance contracts entered into in the ordinary course of business; provided further that, solely for purposes of Section 5.04 and the definitions of "Adjusted Consolidated Debt" and "Total Capitalization", "Debt" shall not include (x) any contingent obligations of any Person under or in connection with acceptance, letter of credit or similar facilities or (y) obligations of the Parent or ACE INA under any Debentures or under any subordinated guaranty of any Preferred Securities or obligations of a Special Purpose Trust under any Preferred Securities. "Default" means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. "Defaulted Amount" means, with respect to any Bank at any time, any amount required to be paid by such Bank to any Agent or any other Bank hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Bank to (a) the Issuing Bank pursuant to Section 2.02(e) to purchase a portion of a Letter of Credit Advance made by the Issuing Bank and (b) any Agent or the Issuing Bank pursuant to Section 8.05 to reimburse such Agent or the Issuing Bank for such Bank's ratable share of any amount required to be paid by the Banks to such Agent or the Issuing Bank as provided therein. "Defaulting Bank" means, at any time, any Bank that, at such time, (a) owes a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 6.01(f). "Deutsche Bank" has the meaning specified in the recital of parties to this Agreement. "Documentation Agents" has the meaning specified in the recital of parties to this Agreement. "Dollar Equivalent" has the meaning specified in Section 2.16(h). "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" opposite its name on Part 2 of Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Bank, as the case may be, or such other office of such Bank as such Bank may from time to time specify to any Account Party and the Administrative Agent. "Downgrade Account" has the meaning specified in Section 2.14(a). "Downgrade Event" means, with respect to any Bank, a reduction of the credit rating for the senior unsecured unsupported long-term debt of such Bank (or, if no such rating exists, then a reduction of the long-term issuer credit rating of such Bank) by S&P or Moody's. "Downgrade Notice" has the meaning specified in Section 2.14(a). "Downgraded Bank" means any Bank which has a credit rating of less than A- (in the case of S&P) or A3 (in the case of Moody's) for its senior unsecured unsupported long-term debt or which does not have any credit rating on such debt from one of S&P or Moody's; provided, that if at any time such Bank has no such senior unsecured unsupported long-term debt 7 rating from either rating service but does have a long-term issuer credit rating from either or both services, then such Bank shall not be considered a Downgraded Bank so long as such long-term issuer credit rating remains at or above A- (in the case of S&P) or A3 (in the case of Moody's). "Effective Date" means the first date on which the conditions set forth in Article III shall have been satisfied. "Eligible Assignee" means (i) a Bank, (ii) an Affiliate of a Bank, or (iii) a commercial bank, a savings bank or other financial institution that is approved by the Administrative Agent and the Issuing Bank and, unless an Event of Default has occurred and is continuing at the time any assignment is effected pursuant to Section 9.07, the Parent (such approvals not to be unreasonably withheld or delayed); provided, however, that neither any Loan Party nor any Affiliate of a Loan Party shall qualify as an Eligible Assignee under this definition. "Environmental Action" means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, any Environmental Permit or Hazardous Material or arising from alleged injury or threat to health, safety or the environment, including, without limitation, (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. "Environmental Law" means any Federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, writ, judgment, injunction, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law. "Equity Interests" means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means any Person that for purposes of Title IV of ERISA is a member of the controlled group of any Loan Party, or under common control with any Loan Party, within the meaning of Section 414 of the Internal Revenue Code or Section 4001 of ERISA. 8 "Events of Default" has the meaning specified in Section 6.01. "Existing Letters of Credit" means, collectively, the Existing Mellon Letter of Credit and the Existing Wachovia Letters of Credit. "Existing Mellon Letter of Credit" means the letter of credit originally issued by Mellon pursuant to the Mellon Reimbursement Agreement, renewed by Mellon pursuant to the Existing Reimbursement Agreement, and outstanding on the Effective Date, which letter of credit is listed on Schedule III hereto. "Existing Reimbursement Agreement" means the Reimbursement Agreement, dated as of August 24, 2001, among the Account Parties, the banks and other lenders named therein, Fleet National Bank, as Documentation Agent, and Wachovia, as Issuing Bank and as Administrative Agent, as amended. "Existing Wachovia Letters of Credit" means the letters of credit issued by Wachovia pursuant to the Existing Reimbursement Agreement and outstanding on the Effective Date, which letters of credit are listed on Schedule II hereto. "Expiration Date" shall mean September 29, 2003. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" means the fee letter dated August 23, 2002 among the Parent, Wachovia and the Arranger, as amended. "Fiscal Year" means the fiscal year of the Parent and its Consolidated Subsidiaries ending on December 31 in any calendar year. "Foreign Government Scheme or Arrangement" has the meaning specified in Section 4.01 (n) (iv). "Foreign Plan" has the meaning specified in Section 4.01 (n) (iv). "GAAP" has the meaning specified in Section 1.03. "Guaranty" means the undertaking by each of the Account Parties under Article VII. "Hazardous Materials" means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and 9 (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. "Hedge Agreements" means interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other hedging agreements. "Indemnified Party" has the meaning specified in Section 9.04(b). "Initial Availability Time" means, with respect to the Replacement Letter of Credit, the first time at which the applicable conditions to availability for drawing thereunder, as described on Exhibit B hereto, shall have been satisfied and the Replacement Letter of Credit becomes available for drawing in whole or in part. "Initial Banks" has the meaning specified in the recital of parties to this Agreement. "Intercompany Letter of Credit" means a Letter of Credit issued for the account of any Account Party (whether alone or jointly with any one or more other wholly owned Subsidiaries of the Parent) in favor of one or more beneficiaries each of which is a wholly owned Subsidiary of the Parent (whether or not any such beneficiary is an Account Party hereunder). "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Investment" in any Person means any loan or advance to such Person, any purchase or other acquisition of any Equity Interests or Debt or the assets comprising a division or business unit or a substantial part or all of the business of such Person, any capital contribution to such Person or any other direct or indirect investment in such Person, including, without limitation, any acquisition by way of a merger or consolidation and any arrangement pursuant to which the investor incurs Debt of the types referred to in clause (h) or (i) of the definition of "Debt" in respect of such Person; provided, however, that any purchase by any Loan Party or any Subsidiary of any catastrophe-linked instruments which are (x) issued for the purpose of transferring traditional reinsurance risk to the capital markets and (y) purchased by such Loan Party or Subsidiary in accordance with its customary reinsurance underwriting procedures, or the entry by any Loan Party or any Subsidiary into swap instruments relating to such instruments in accordance with such procedures, shall be deemed to be the entry by such Person into a reinsurance contract and shall not be deemed to be an Investment by such Person. "Issuing Bank" means (i) Mellon (solely with respect to the Existing Mellon Letter of Credit), (ii) Wachovia (with respect to all other Letters of Credit, including the Existing Wachovia Letters of Credit), and (iii) any "New Issuing Bank" appointed in accordance with Section 2.15. "JPMorgan Chase" has the meaning specified in the recital of parties to this Agreement. "Judgment Currency" has the meaning specified in Section 2.16(g). 10 "LC Commitment Amount" means, with respect to any Bank at any time, the amount set forth opposite such Bank's name on Schedule I hereto under the caption "LC Commitment Amount" or, if such Bank has entered into one or more Assignment and Acceptances, set forth for such Bank in the Register maintained by the Administrative Agent pursuant to Section 9.07(d) as such Bank's "LC Commitment Amount", as such amount may be reduced at or prior to such time pursuant to Section 2.04. "LC Participation Obligations" has the meaning specified in Section 2.14(a). "L/C Related Documents" has the meaning specified in Section 2.03(a)(ii). "Letter of Credit Advance" has the meaning specified in Section 2.02(f). "Letter of Credit Agreement" has the meaning specified in Section 2.02(a). "Letter of Credit Business Day" means a Business Day. "Letter of Credit Exposure" at any time means the sum at such time of (a) the aggregate outstanding amount of Letter of Credit Advances, (b) the aggregate Available Amounts of all outstanding Letters of Credit (including, without limitation, all outstanding Existing Letters of Credit) and (c) the aggregate Available Amounts of all Letters of Credit which have been requested by an Account Party to be issued hereunder but have not yet been so issued. "Letter of Credit Issuance Commitment Amount" means at any time the lesser of (a) $500,000,000 (or such lesser amount as may be agreed in writing among the Account Parties, the Administrative Agent and the Issuing Bank) and (b) the aggregate amount of the LC Commitment Amounts then in effect. "Letter of Credit Participating Interest" has the meaning specified in Section 2.02(d). "Letter of Credit Participating Interest Commitment" has the meaning specified in Section 2.02(d). "Letter of Credit Participating Interest Percentage" means, for any Bank, a fraction, expressed as a percentage, the numerator of which is such Bank's LC Commitment Amount and the denominator of which is the aggregate LC Commitment Amounts of all the Banks. "Letters of Credit" has the meaning specified in Section 2.01. "Lien" means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property. "Loan Documents" means (i) this Agreement, (ii) the Fee Letter and (iii) each Letter of Credit Agreement, in each case as amended. "Loan Parties" means the Account Parties. 11 "Mandatorily Convertible Preferred Securities" means units comprised of (i) Preferred Securities or preferred shares of Parent and (ii) a contract for the sale of ordinary shares of the Parent (including "Feline Prides(TM)", "Rhinos(TM)" or any substantially similar securities). "Margin Stock" has the meaning specified in Regulation U. "Material Adverse Change" means any material adverse change in the business, financial condition, operations or properties of the Parent and its Subsidiaries, taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, condition, operations or properties of the Parent and its Subsidiaries, taken as a whole, (b) the rights and remedies of the Administrative Agent, the Issuing Bank or any Bank under any Loan Document or (c) the ability of the Loan Parties, taken as a whole, to perform their obligations under the Loan Documents. "Material Financial Obligation" means a principal amount of Debt and/or payment obligations in respect of any Hedge Agreement of the Parent and/or one or more of its Subsidiaries arising in one or more related or unrelated transactions exceeding in the aggregate $25,000,000. "Mellon" means Mellon Bank, N.A. "Mellon Reimbursement Agreement" means the Reimbursement Agreement, dated as of September 8, 1999, among the Account Parties, the banks and other lenders named therein, the Documentation Agents named therein, and Mellon, as Issuing Bank and as Administrative Agent, as amended. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which any Loan Party or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Non-Dollar Letters of Credit" has the meaning specified in Section 2.16(a). "Nova Scotia" has the meaning specified in the recital of parties to this Agreement. "OECD" means the Organization for Economic Cooperation and Development. "Other Taxes" has the meaning specified in Section 2.08(b). "Overnight Rate" has the meaning specified in Section 2.16(h). "Parent" has the meaning specified in the recital of parties to this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation (or any successor). 12 "Pension Plan" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title IV of ERISA (other than any "multiemployer plan" as such term is defined in section 4001(a)(3) of ERISA), and to which any Loan Party or any ERISA Affiliate may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Permitted Liens" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced or which are being contested in good faith by appropriate proceedings: (a) Liens for taxes, assessments and governmental charges or levies not yet due and payable; (b) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 90 days; (c) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; and (d) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Preferred Interests" means, with respect to any Person, Equity Interests issued by such Person that are entitled to a preference or priority over any other Equity Interests issued by such Person upon any distribution of such Person's property and assets, whether by dividend or upon liquidation. "Preferred Securities" means (i) preferred securities issued by a Special Purpose Trust which shall provide, among other things, that dividends shall be payable only out of proceeds of interest payments on the Debentures, or (ii) other instruments that may be treated in whole or in part as equity for rating agency purposes while being treated as debt for tax purposes. "Pro Rata" means from and to the Banks in accordance with their respective Letter of Credit Participating Interest Percentages. "Pro Rata Share" means, for any Bank, its share determined Pro Rata, in accordance with the definition of the term "Pro Rata." "Public Debt Rating" means, as of any date, the higher rating that has been most recently announced by either S&P or Moody's, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Parent; provided that if at any time the difference between the ratings of such type most recently announced by S&P and Moody's is more than one rating grade, the Public Debt Rating shall be the rating that is 13 one grade below the higher of such two ratings. For purposes of the foregoing, (a) if only one of S&P and Moody's shall have in effect a rating for any class of non-credit enhanced long-term senior unsecured debt issued by the Parent, the Public Debt Rating shall be the available rating; (b) if neither S&P nor Moody's shall have in effect a rating for any class of non-credit enhanced long-term senior unsecured debt issued by the Parent, the Public Debt Rating shall be the rating which is three rating levels below the Parent's S&P financial strength rating at such time, provided that, in the event that the Parent's S&P financial strength rating is affirmed at (i) A+, the applicable Level will be Level 2 and (ii) A+ and on credit watch/review with negative implications, the applicable Level will be Level 3; (c) if any rating established by S&P or Moody's shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; and (d) if S&P or Moody's shall change the basis on which ratings are established, each reference herein to ratings announced by S&P or Moody's, as the case may be, shall refer to the then equivalent rating by S&P or Moody's, as the case may be. "Redeemable" means, with respect to any Equity Interest, any Debt or any other right or obligation, any such Equity Interest, Debt, right or obligation that (a) the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer or (b) is redeemable at the option of the holder. "Register" has the meaning specified in Section 9.07(d). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Replacement Letter of Credit" means the letter of credit issued by Wachovia pursuant to the Existing Reimbursement Agreement and outstanding on the Effective Date, which letter of credit (i) was issued in replacement of and substitution for the Existing Mellon Letter of Credit and includes language substantially as set forth on Exhibit B hereto and (ii) is listed on Schedule IV hereto. "Required Banks" means, at any time, Banks owed or holding at least a majority in interest of the sum of (a) aggregate principal amount of the Letter of Credit Advances outstanding at such time and (b) the aggregate Available Amount of all Letters of Credit outstanding at such time, or, if no such principal amount and no Letters of Credit are outstanding at such time, Banks having LC Commitment Amounts constituting at least a majority in interest of the aggregate of the LC Commitment Amounts; provided, however, that if any Bank shall be a Defaulting Bank at such time, there shall be excluded from the determination of Required Banks at such time (A) the aggregate principal amount of the interest of such Bank in Letter of Credit Advances and outstanding at such time, (B) such Bank's Pro Rata Share of the aggregate Available Amount of all Letters of Credit outstanding at such time and (C) the Unused LC Commitment Amount of such Bank at such time. "Responsible Officer" means the Chairman, Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Treasurer or General Counsel of the Parent. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. 14 "Securitization Transaction" means any sale, assignment or other transfer by Parent or any Subsidiary of any accounts receivable, premium finance loan receivables, lease receivables or other payment obligations owing to Parent or such Subsidiary or any interest in any of the foregoing, together in each case with any collections and other proceeds thereof, any collection or deposit accounts related thereto, and any collateral, guaranties or other property or claims in favor of Parent or such Subsidiary supporting or securing payment by the obligor thereon of, or otherwise related to, any such receivables. "Significant Subsidiary" means a Subsidiary of Parent that is a "significant subsidiary" of the Parent under Regulation S-X promulgated by the Securities and Exchange Commission. "Solvent" and "Solvency" mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Special Purpose Trust" means a special purpose business trust established by the Parent or ACE INA of which the Parent or ACE INA will hold all the common securities, which will be the issuer of the Preferred Securities, and which will loan to the Parent or ACE INA (such loan being evidenced by the Debentures) the net proceeds of the issuance and sale of the Preferred Securities and common securities of such Special Purpose Trust. "Subsidiary" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture or limited liability company or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. "Subsidiary Guarantors" means the Account Parties (other than the Parent). "Syndication Agents" has the meaning specified in the recital of parties to this Agreement. "Taxes" has the meaning specified in Section 2.08(a). 15 "Tempest" has the meaning specified in the recital of parties to this Agreement. "Third Party Letter of Credit" means a Letter of Credit other than an Intercompany Letter of Credit. "Total Capitalization" means, at any time, an amount (without duplication) equal to (i) the then outstanding Consolidated Debt of the Parent and its Subsidiaries plus (ii) Consolidated stockholders equity of the Parent and its Subsidiaries plus (without duplication) (iii) the then issued and outstanding amount of Preferred Securities (including Mandatorily Convertible Preferred Securities) and (without duplication) Debentures. "Type", with respect to any Letter of Credit, means and refers to whether such Letter of Credit is an Intercompany Letter of Credit or a Third Party Letter of Credit. "Unused LC Commitment Amount" means, with respect to any Bank at any time, (a) such Bank's LC Commitment Amount at such time minus (b) such Bank's Pro Rata Share of (i) the aggregate Available Amount of all Letters of Credit hereunder (including, without limitation, all Existing Letters of Credit) and (ii) the aggregate principal amount of all Letter of Credit Advances made by the Issuing Bank pursuant to Section 2.02(f) and outstanding at such time (whether held by the Issuing Bank or the Banks). "Voting Interests" means shares of capital stock issued by a corporation, or equivalent Equity Interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. "Wachovia" has the meaning specified in the recital of parties to this Agreement. "Welfare Plan" means a welfare plan, as defined in Section 3(1) of ERISA, that is maintained for employees of any Loan Party or in respect of which any Loan Party could have liability. "Withdrawal Liability" has the meaning specified in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02 Computation of Time Periods; Other Definitional Provisions. In this Agreement and the other Loan Documents in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". References in the Loan Documents to any agreement or contract "as amended" shall mean and be a reference to such agreement or contract as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with its terms. SECTION 1.03 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from 16 time to time in the United States of America ("GAAP"), applied on a basis consistent (except for changes concurred in by the Parent's independent public accountants) with the most recent audited consolidated financial statements of the Parent and its Subsidiaries delivered to the Banks; provided that, if the Parent notifies the Administrative Agent that the Parent wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Parent that the Required Banks wish to amend Article V for such purpose), then the Parent's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective (and, concurrently with the delivery of any financial statements required to be delivered hereunder, the Parent shall provide a statement of reconciliation conforming such financial information to such generally accepted accounting principles as previously in effect), until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Parent and the Required Banks. ARTICLE II AMOUNTS AND TERMS OF THE LETTERS OF CREDIT SECTION 2.01 The Letters of Credit. The Issuing Bank agrees, on the terms and subject to the conditions herein set forth, to issue standby letters of credit (the "Letters of Credit") for the account of any Account Party on any Letter of Credit Business Day from time to time during the period from the Effective Date to the Expiration Date. The agreement of the Issuing Bank in the preceding sentence includes the agreement of Mellon (in its capacity as Issuing Bank with respect to the Existing Mellon Letter of Credit) to maintain the Existing Mellon Letter of Credit as a Letter of Credit hereunder. From and after the Effective Date, the Existing Letters of Credit shall be Letters of Credit hereunder. Letters of Credit may be issued as Intercompany Letters of Credit or Third Party Letters of Credit, subject to the terms and conditions of this Agreement. The Issuing Bank shall have no obligation to issue, and no Account Party will request the issuance of, any Letter of Credit hereunder if either (a) at the time of issuance of such Letter of Credit and after giving effect thereto, the Letter of Credit Exposure would exceed the Letter of Credit Issuance Commitment Amount, or (b) any Bank's Pro Rata Share of the Available Amount of such Letter of Credit exceeds, immediately before the time of such issuance, an amount equal to such Bank's Pro Rata Share of the total Unused LC Commitment Amounts of the Banks at such time (as such amount shall be advised by the Administrative Agent to the Issuing Bank as contemplated by Section 2.02). Unless all the Banks consent otherwise in writing, the Issuing Bank shall have no obligation to issue, and no Account Party shall request the issuance of, any Letter of Credit hereunder if the Available Amount of such Letter of Credit exceeds, immediately before the time of such issuance, an amount equal to the total Unused LC Commitment Amounts of the Banks at such time (as such amount shall be advised by the Administrative Agent to the Issuing Bank as contemplated by Section 2.02). The Issuing Bank shall have no obligation to issue, and no Account Party shall request the issuance of, any Letter of Credit except within the following limitations: (i) subject to the provisions of Section 2.16, each Letter of Credit shall be denominated in U.S. dollars, (ii) each Letter of Credit shall be payable only against sight drafts (and not time drafts) and (iii) no Letter of Credit shall have an expiration date (including all rights of the Applicable Account Party or the beneficiary to require renewal) later than one year after the date of issuance thereof, but a Letter of Credit may by its terms be automatically renewable annually 17 unless the Issuing Bank notifies the beneficiary thereof of its election not to renew such Letter of Credit (which the Issuing Bank agrees to do on and subject to the terms of Section 2.02(c)). 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. Letters of Credit may be issued for the account of any Subsidiary of the Parent that is not an Account Party hereunder, provided that the Parent shall be a joint applicant and account party with respect to any such Letter of Credit. SECTION 2.02 Issuance and Renewals and Drawings, Participations and Reimbursement with Respect to Letters of Credit. (a) Request for Issuance. An Account Party may from time to time request, upon at least three Letter of Credit Business Days' notice (given not later than 11:00 A.M. Charlotte, North Carolina time on the last day permitted therefor), the Issuing Bank to issue or renew (other than any automatic renewal thereof) a Letter of Credit by: (i) delivering to the Issuing Bank either (x) a written request to such effect or (y) a request made in electronic form through the Issuing Bank's remote access system and in accordance with the terms and conditions (including any written agreements between the Issuing Bank and any Account Party) applicable thereto, in each case specifying the date on which such Letter of Credit is to be issued (which shall be a Letter of Credit Business Day), the expiration date thereof, the Available Amount thereof, the name and address of the beneficiary thereof and the form thereof, and in each case with a copy of such request (or, in the case of clause (y) above, a written or electronic summary thereof) to the Administrative Agent; and (ii) in the case of the issuance of a Letter of Credit, delivering to the Issuing Bank a completed agreement and application with respect to such Letter of Credit as the Issuing Bank may specify for use in connection with such requested Letter of Credit (a "Letter of Credit Agreement"), together with such other certificates, documents and other papers or information as are specified in such Letter of Credit Agreement or as may be required pursuant to the Issuing Bank's customary practices for the issuance of letters of credit (including requirements relating to requests made through the Issuing Bank's remote access system). The Administrative Agent shall, promptly upon receiving a copy of the notice referred to in clause (i) above, notify the Banks of such proposed Letter of Credit (which notice shall specify the Available Amount and term of such proposed Letter of Credit) or such proposed renewal of a Letter of Credit (which notice shall specify the term of such renewal), and shall determine, as of 11:00 A.M. (Charlotte, North Carolina time) on the Business Day immediately preceding 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 Administrative 18 Agent to cease issuing or renewing Letters of Credit as contemplated by this Agreement, the Administrative Agent shall immediately notify the Issuing Bank (in writing or by telephone immediately confirmed in writing) that the Issuing Bank is not authorized to issue or renew, as the case may be, such Letter of Credit. If the Issuing Bank issues or renews a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Applicable Account Party shall otherwise direct, and shall promptly notify the Administrative Agent thereof and furnish a copy thereof to the Administrative Agent. The Issuing Bank may issue Letters of Credit through any of its branches or Affiliates (whether domestic or foreign) that issue letters of credit, and each Account Party authorizes and directs the Issuing Bank to select the branch or Affiliate that will issue or process any Letter of Credit. (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 issued for its account or increase (or, with the consent of the beneficiary, decrease) the Available Amount of or the amount available to be drawn on such Letter of Credit. Such extension or increase shall for all purposes hereunder (including for purposes of Section 2.02(a)) 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, Renewal and Amendment. As between the Issuing Bank, on the one hand, and the Agents and the Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing or renewing a proposed Letter of Credit unless it shall have received notice from the Administrative Agent as provided in Section 2.02(a) hereof that it is not authorized to do so (and, in the case of automatic renewals, ten days shall have passed following the date of the Issuing Bank's receipt of such notice), notwithstanding any subsequent notices to the Issuing Bank, any knowledge of a Default, any knowledge of failure of any condition specified in Article III 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 Agreements, or waive compliance with any condition of issuance, renewal or payment, without the consent of, and without liability to, any Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases the Available Amount of or the amount available to be drawn on an outstanding Letter of Credit shall be subject to Section 2.01. With respect to each Letter of Credit that remains outstanding at any time after the Expiration Date and that provides by its terms for automatic renewal, the Issuing Bank shall notify the beneficiary thereof, in accordance with the terms specified for such notice in such Letter of Credit, of the Issuing Bank's election not to renew such Letter of Credit. Notwithstanding anything in this Section 2.02 or elsewhere in this Agreement to the contrary, (x) no Account Party will request that the Existing Mellon Letter of Credit be amended (other than to reduce the Available Amount thereunder), renewed or extended, and the Account Parties hereby request that Mellon, as Issuing Bank with respect to the Existing Mellon Letter of Credit, provide timely notice of non-renewal to the beneficiary thereof (to the extent the Existing Mellon Letter of Credit remains outstanding up until the deadline for notice of non-renewal), and in any event if the Existing Mellon Letter of Credit shall nevertheless be outstanding at any time after the Expiration Date, Mellon hereby agrees to provide such notice of non-renewal to the beneficiary thereof, and (y) all Letters of Credit issued under this Agreement (excluding the Existing Mellon Letter of Credit, but including any Letters of Credit issued in replacement of or in substitution for the Existing Mellon Letter of Credit) shall be issued by Wachovia (or any New Issuing Bank, as the case may be) in its capacity as 19 Issuing Bank. Solely with respect to the Existing Mellon Letter of Credit and any Letter of Credit Agreements delivered in connection therewith, Mellon (in its capacity as issuer of the Existing Mellon Letter of Credit) shall have all rights and benefits afforded to, and shall be bound by all duties and obligations of, the "Issuing Bank" under this Agreement, and for such purpose all references herein to the "Issuing Bank" shall be deemed to be references to Mellon in such capacity. (d) Letter of Credit Participating Interests. Concurrently with the issuance of each Letter of Credit (and upon the Effective Date, with respect to each Existing Letter of Credit, and without any further action by any party to this Agreement), 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 Agreement, all reimbursement obligations with respect to such Letter of Credit, and all collateral, guarantees and other rights from time to time directly or indirectly securing the foregoing (such interest of each Bank being referred to herein as a "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 Advances made by a Bank other than the Issuing Bank and other than Letter of Credit commissions under Section 2.05(c)(i), payable from time to time under or in connection with a Letter of Credit or Letter of Credit Agreement shall be for the sole account of the Issuing Bank. On the date that any assignee becomes a party to this Agreement in accordance with Section 9.07 hereof, Letter of Credit Participating Interests in all outstanding Letters of Credit held by the Bank from which such assignee acquired its interest hereunder shall be proportionately reallocated between such assignee and such assignor Bank (and, to the extent such assignor Bank is the Issuing Bank, the assignee Bank shall be deemed to have acquired a Letter of Credit Participating Interest from the Issuing Bank to such extent). Notwithstanding any other provision hereof except the next succeeding sentence, each Bank hereby agrees that its obligation to participate in each Letter of Credit, its obligation to make the payments specified in Section 2.02(e), 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. Notwithstanding anything to the contrary herein contained, no Bank shall have any participation or funding obligation with respect to any drawing under the Replacement Letter of Credit unless the Existing Mellon Letter of Credit shall have been cancelled or shall have terminated, in each case without any unreimbursed drawing thereunder. 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. (e) 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 2.03(a), the Issuing Bank may notify the Administrative Agent thereof (which notice may 20 be by telephone), and the Administrative Agent shall forthwith notify each Bank (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Administrative Agent's close of business on the date such notice is given (if notice is given by 2:00 P.M. Charlotte, North Carolina time) or 10:00 A.M. Charlotte, North Carolina time the following day (if notice is given after 2:00 P.M. Charlotte, North Carolina time or in the case of any Bank whose Applicable Lending Office is located in Europe), each Bank will pay to the Administrative 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. Amounts received by the Administrative Agent for the account of the Issuing Bank shall be forthwith transferred, in immediately available funds, to the Issuing Bank. If and to the extent that any Bank fails to make such payment to the Administrative Agent for the account of 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 such payment is due from such Bank to the Issuing Bank to but not including the date of repayment to the Issuing Bank (before and after judgment) at a rate per annum for each day (i) from and including the date such payment is due from such Bank to the Issuing Bank to and including the second Business Day thereafter equal to the Federal Funds Rate and (ii) thereafter equal to the Base Rate. For avoidance of doubt, it is understood and agreed by the Banks that Letters of Credit issued prior to the Expiration Date may, by their terms, remain outstanding after the Expiration Date and that the obligations of the Banks to make payments under this Section 2.02(e) shall continue from and after the Expiration Date until the expiration or termination of all Letters of Credit, subject to and in accordance with the terms hereof. (f) Letter of Credit Advances. The term "Letter of Credit Advance" is used in this Agreement in accordance with the meanings set forth in this paragraph 2.02(f). The making of any payment by the Issuing Bank under a Letter of Credit is sometimes referred to herein as the making of a Letter of Credit Advance by the Issuing Bank in the amount of such payment. The making of any payment by a Bank for the account of the Issuing Bank under Section 2.02(e) on account of an unreimbursed drawing on a Letter of Credit is sometimes referred to herein as the making of a Letter of Credit Advance to the Applicable Account Party by such Bank. The making of such a Letter of Credit Advance by a Bank with respect to an unreimbursed drawing on a Letter of Credit shall reduce, by a like amount, the outstanding Letter of Credit Advance of the Issuing Bank with respect to such unreimbursed drawing. (g) Letter of Credit Reports. The Issuing Bank will furnish to the Administrative Agent prompt written notice of each issuance or renewal of a Letter of Credit (including the Available Amount and expiration date thereof), amendment to a Letter of Credit, cancellation of a Letter of Credit and payment on a Letter of Credit. The Administrative Agent will furnish (A) to each Bank prior to the tenth Business Day of each calendar quarter a written report summarizing issuance, renewal and expiration dates of Letters of Credit issued or renewed during the preceding calendar quarter and payments and reductions in Available Amount during such calendar quarter on all Letters of Credit and (B) to each Bank prior to the tenth Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit. 21 (h) Replacement Letter of Credit. With respect to any Replacement Letter of Credit, Wachovia (in its capacity as Issuing Bank) will deliver to the beneficiary thereof the written confirmation that the Replacement Letter of Credit is operative for drawing, as contemplated by the provisions of Exhibit B hereto, promptly upon its receipt of written confirmation from Mellon (in its capacity as Issuing Bank), which shall be in form and substance satisfactory to Wachovia, that the Existing Mellon Letter of Credit has been validly cancelled. SECTION 2.03 Repayment of Advances. (a) Account Parties' Reimbursement Obligation. (i) Each Account Party hereby agrees to reimburse the Issuing Bank (by making payment to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.07) in the amount of each payment made by the Issuing Bank under any Letter of Credit issued for such Account Party's account, such reimbursement to be made on the date such payment under such Letter of Credit is made by the Issuing Bank (but not earlier than the date which is one Business Day after notice of such payment under such Letter of Credit or of the drawing giving rise to such payment under such Letter of Credit is given to such Account Party). Such reimbursement obligation shall be payable without further notice, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. To the extent such payment by such Account Party is not timely made as provided in the first sentence of this clause (i), such Account Party hereby agrees to pay to the Administrative Agent, for the respective accounts of the Issuing Bank and the Banks which have funded their respective shares of such amount remaining unpaid by such Account Party, on demand, interest thereon at a rate per annum for each day equal to 2% plus the Base Rate in effect on such day. (ii) The obligation of each Account Party to reimburse the Issuing Bank for any payment made by the Issuing Bank under any Letter of Credit, and the obligation of each Bank under Section 2.02(e) with respect thereto, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, the applicable Letter of Credit Agreement and any other applicable agreement or instrument under all circumstances, including, without limitation, the following circumstances: (A) any lack of validity or enforceability of any Loan Document, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (all of the foregoing being, collectively, the "L/C Related Documents"); (B) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of any Account Party or any other Person in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; 22 (C) the existence of any claim, set-off, defense or other right that any Account Party or any other Person may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for which any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction; (D) any statement or any other document presented under a 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; (E) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; (F) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from the Guaranty or any other guarantee, for all or any of the obligations of any Account Party or any other Person in respect of the L/C Related Documents; or (G) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Account Party or a guarantor. (b) Rescission. If any amount received by the Issuing Bank on account of any Letter of Credit Advance 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 Bank will (except to the extent a corresponding amount received by such Bank on account of its Letter of Credit Advance relating to the same payment on a Letter of Credit has been avoided, rescinded or otherwise returned or paid over by such Bank), promptly upon notice from the Administrative Agent or the Issuing Bank, pay over to the Administrative 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. SECTION 2.04 Termination or Reduction of the LC Commitment Amounts. The Parent may, upon at least three Business Days' notice to the Administrative Agent, terminate in whole or reduce in part the unused portion of the LC Commitment Amounts; provided, however, that each partial reduction (i) shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) shall be made ratably among the Banks in accordance with their LC Commitment Amounts and (iii) shall automatically reduce the Issuing Bank's Letter of Credit Issuance Commitment Amount, as contemplated by the definition of that term. SECTION 2.05 Fees. (a) Commitment Fee. The Account Parties jointly and severally agree to pay to the Administrative Agent for the account of the Banks a commitment fee, from the Effective Date in the case of each Initial Bank and from the 23 effective date specified in the Assignment and Acceptance pursuant to which it became a Bank in the case of each other Bank until the Expiration Date, payable in arrears quarterly on the last Business Day of each March, June, September and December commencing December 31, 2002 and on the Expiration Date, at the rate of the Applicable Commitment Fee Percentage on the average daily Unused LC Commitment Amount of each Bank during such quarter (or shorter period); provided, however, that no commitment fee shall accrue on the LC Commitment Amount of a Defaulting Bank so long as such Bank shall be a Defaulting Bank; and provided further that, solely for purposes of this Section 2.05(a), to the extent the Replacement Letter of Credit has a positive Available Amount prior to the Initial Availability Time, such Available Amount shall not be taken into account (i.e., shall not be deemed usage) in the calculation of the Unused LC Commitment Amounts of the Banks until the Initial Availability Time. (b) Administrative Agent's Fees. The Account Parties jointly and severally agree to pay to the Administrative Agent for its own account such fees as may from time to time be agreed between the Parent and the Administrative Agent. (c) Letter of Credit Fees, Etc. (i) The Account Parties jointly and severally agree to pay to the Administrative Agent for the account of each Bank a commission, payable in arrears quarterly on the last Business Day of each March, June, September and December commencing December 31, 2002, and on the Expiration Date, on such Bank's Pro Rata Share of the average daily aggregate Available Amount during such quarter (or shorter period) of all Letters of Credit of each Type outstanding from time to time at the rate equal to the then Applicable Margin with respect to such Type of Letters of Credit; provided, however, that, solely for purposes of this Section 2.05(c)(i), to the extent the Replacement Letter of Credit has a positive Available Amount prior to the Initial Availability Time, the Replacement Letter of Credit shall not be deemed outstanding until the Initial Availability Time. (ii) The Account Parties jointly and severally agree to pay to the Issuing Bank, for its own account, (x) the facing fee referred to the Fee Letter, on the terms set forth therein, and (y) the Issuing Bank's customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, relating to letters of credit as are from time to time in effect; provided, however, that for purposes of clause (x) above, the Replacement Letter of Credit shall not be deemed issued and outstanding until the Initial Availability Time. With respect to the Existing Mellon Letter of Credit, Mellon shall be entitled to receive the fees and other amounts provided for under this Section 2.05(c)(ii) (to the extent not previously paid to Mellon pursuant to the Mellon Reimbursement Agreement or the Existing Reimbursement Agreement) as if the Existing Mellon Letter of Credit were issued hereunder on the Effective Date. With respect to the Existing Wachovia Letters of Credit, Wachovia shall be entitled to receive the fees and other amounts provided for under this Section 2.05(c)(ii) (to the extent not previously paid to Wachovia pursuant to the Existing Reimbursement Agreement) as if the Existing Wachovia Letters of Credit were issued hereunder on the Effective Date. 24 SECTION 2.06 Increased Costs, Etc. (a) If, due to either (i) the introduction of or any change in or in the interpretation of, in each case after the date hereof, any law or regulation or (ii) the compliance with any guideline or request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to issue or of issuing or maintaining or participating in Letters of Credit or the making of Letter of Credit Advances (excluding, for purposes of this Section 2.06, any such increased costs resulting from (x) Taxes or Other Taxes (as to which Section 2.08 shall govern) and (y) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Bank is organized or has its Applicable Lending Office or any political subdivision thereof), then the Account Parties jointly and severally agree to pay, from time to time, within five days after demand by such Bank (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, to the Administrative Agent for the account of such Bank additional amounts sufficient to compensate such Bank for such increased cost. A certificate as to the amount of such increased cost, submitted to the Account Parties by such Bank, shall be conclusive and binding for all purposes, absent manifest error. (b) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation, in each case after the date hereof, or (ii) the compliance with any guideline or request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the amount of capital required or expected to be maintained by any Bank or any corporation controlling such Bank as a result of or based upon the existence of such Bank's commitment to lend hereunder and other commitments of such type, then, within five days after demand by such Bank or such corporation (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, the Account Parties jointly and severally agree to pay to the Administrative Agent for the account of such Bank, from time to time as specified by such Bank, additional amounts sufficient to compensate such Bank in the light of such circumstances, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank's commitment to issue or participate in Letters of Credit hereunder or to the issuance or maintenance of or participation in any Letters of Credit. A certificate as to such amounts submitted to the Account Parties by such Bank shall be conclusive and binding for all purposes, absent manifest error. (c) Each Bank shall promptly notify the Account Parties and the Administrative Agent of any event of which it has actual knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in such Bank's good faith judgment, otherwise disadvantageous to such Bank) to mitigate or avoid any obligation by the Account Parties to pay any amount pursuant to subsection (a) or (b) above or pursuant to Section 2.08 (and, if any Bank has given notice of any such event and thereafter such event ceases to exist, such Bank shall promptly so notify the Account Parties and the Administrative Agent). Without limiting the foregoing, each Bank will designate a different Applicable Lending Office 25 if such designation will avoid (or reduce the cost to the Account Parties of) any event described in the preceding sentence and such designation will not, in such Bank's good faith judgment, be otherwise disadvantageous to such Bank. (d) Notwithstanding the provisions of subsections (a) and (b) above or Section 2.08 (and without limiting subsection (c) above), if any Bank fails to notify the Account Parties of any event or circumstance that will entitle such Bank to compensation pursuant subsection (a) or (b) above or Section 2.08 within 120 days after such Bank obtains actual knowledge of such event or circumstance, then such Bank shall not be entitled to compensation from the Account Parties for any amount arising prior to the date which is 120 days before the date on which such Bank notifies the Account Parties of such event or circumstance. For avoidance of doubt, it is noted that the term "Bank" as used in this Section 2.06 and in other Sections of this Agreement includes the Issuing Bank in its capacity as such. SECTION 2.07 Payments and Computations. (a) The Account Parties shall make each payment hereunder irrespective of any right of counterclaim or set-off (except as otherwise provided in Section 2.11), not later than 11:00 A.M. (Charlotte, North Carolina time) on the day when due, in U.S. dollars, to the Administrative Agent at the Administrative Agent's Account in same day funds, with payments being received by the Administrative Agent after such time being deemed to have been received on the next succeeding Business Day. The Administrative Agent will promptly thereafter cause like funds to be distributed (i) if such payment by such Account Party is in respect of principal, interest, commitment fees or any other amount then payable hereunder to more than one Bank, to such Banks for the account of their respective Applicable Lending Offices ratably in accordance with the amounts of such respective amount then payable to such Banks and (ii) if such payment by such Account Party is in respect of any amount then payable hereunder to one Bank, to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(d), from and after the effective date of such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder in respect of the interest assigned thereby to the Bank assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) Each Account Party hereby authorizes each Bank, if an Event of Default under Section 6.01(a) has occurred and is continuing, to charge from time to time against any or all of such Account Party's accounts with such Bank any amount that resulted in such Event of Default. (c) All computations of interest on Letter of Credit Advances (and any other amount payable by reference to the Base Rate) when the Base Rate is determined by reference to Wachovia's prime rate shall be made by the Administrative Agent on the basis of a year of 365 or, if applicable, 366 days; all other computations of interest, fees and Letter of Credit commissions shall be made by the Administrative Agent on the basis of a year of 360 days. All such computations shall be made for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Administrative Agent of an interest rate, fee or commission hereunder shall be conclusive and binding for all purposes, absent manifest error. 26 (d) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be. SECTION 2.08 Taxes. (a) Any and all payments by any Loan Party hereunder shall be made, in accordance with Section 2.07, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and each Agent, taxes that are imposed on its overall net income by the United States and taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction under the laws of which such Bank or such Agent, as the case may be, is organized or any political subdivision thereof and, in the case of each Bank, taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder being herein referred to as "Taxes"). If any Loan Party shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or to any Bank or any Agent, (i) the sum payable by such Loan Party shall be increased as may be necessary so that after such Loan Party and the Administrative Agent have made all required deductions (including deductions applicable to additional sums payable under this Section 2.08) such Bank or such Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Loan Party shall make all such deductions and (iii) such Loan Party shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, each Loan Party shall pay any present or future stamp, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or from the execution, delivery or registration of, performance under, or otherwise with respect to, this Agreement or any other Loan Document (herein referred to as "Other Taxes"). (c) Each Loan Party shall indemnify each Bank and each Agent for and hold them harmless against the full amount of Taxes and Other Taxes, and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.08, imposed on or paid by such Bank or such Agent (as the case may be) and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. This indemnification payment shall be made within 30 days from the date such Bank or such Agent (as the case may be) makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, each Loan Party shall furnish to the Administrative Agent, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing such payment. In the case of any payment hereunder by or on behalf of a Loan 27 Party through an account or branch outside the United States or by or on behalf of a Loan Party by a payor that is not a United States person, if such Loan Party determines that no Taxes are payable in respect thereof, such Loan Party shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at such address, an opinion of counsel acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of subsections (d) and (e) of this Section 2.08, the terms "United States" and "United States person" shall have the meanings specified in Section 7701(a)(9) and 7701(a)(10) of the Internal Revenue Code, respectively. (e) Each Bank organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Bank or the Issuing Bank, as the case may be, and on the date of the Assignment and Acceptance pursuant to which it becomes a Bank in the case of each other Bank, and from time to time thereafter as requested in writing by the Parent (but only so long thereafter as such Bank remains lawfully able to do so), provide each of the Administrative Agent and the Parent with two original Internal Revenue Service forms W-8BEN or W-8ECI or (in the case of a Bank that has certified in writing to the Administrative Agent that it is not a "bank" as defined in Section 881(c)(3)(A) of the Internal Revenue Code) form W-8 (and, if such Bank delivers a form W-8, a certificate representing that such Bank is not a "bank" for purposes of Section 881(c)(3)(A) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the Parent and is not a controlled foreign corporation related to the Parent (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Bank is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or, in the case of a Bank providing a form W-8, certifying that such Bank is a foreign corporation, partnership, estate or trust. If the forms provided by a Bank at the time such Bank first becomes a party to this Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Bank provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that if, at the effective date of the Assignment and Acceptance pursuant to which a Bank becomes a party to this Agreement, the Bank assignor was entitled to payments under subsection (a) of this Section 2.08 in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Bank assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service form W-8BEN, W-8ECI or W-8 (and the related certificate described above), that the Bank reasonably considers to be confidential, the Bank shall give notice thereof to the Parent and shall not be obligated to include in such form or document such confidential information. (f) For any period with respect to which a Bank which may lawfully do so has failed to provide the Parent with the appropriate form described in subsection (e) above (other than if such failure is due to a change in law occurring after the date on which a form originally was required to be 28 provided or if such form otherwise is not required under subsection (e) above), such Bank shall not be entitled to indemnification under subsection (a) or (c) of this Section 2.08 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Bank become subject to Taxes because of its failure to deliver a form required hereunder, the Parent shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (g) Each Bank represents and warrants to the Account Parties that, as of the date such Bank becomes a party to this Agreement, such Bank is entitled to receive payments hereunder from the Account Parties without deduction or withholding for or on account of any Taxes. SECTION 2.09 Sharing of Payments, Etc. If any Bank shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise, other than as a result of an assignment pursuant to Section 9.07) (a) on account of obligations due and payable to such Bank hereunder at such time in excess of its ratable share (according to the proportion of (i) the amount of such obligations due and payable to such Bank at such time to (ii) the aggregate amount of the obligations due and payable to all Banks hereunder at such time) of payments on account of the obligations due and payable to all Banks hereunder at such time obtained by all the Banks at such time or (b) on account of obligations owing (but not due and payable) to such Bank hereunder at such time in excess of its ratable share (according to the proportion of (i) the amount of such obligations owing to such Bank at such time to (ii) the aggregate amount of the obligations owing (but not due and payable) to all Banks hereunder at such time) of payments on account of the obligations owing (but not due and payable) to all Banks hereunder at such time obtained by all of the Banks at such time, such Bank shall forthwith purchase from the other Banks such interests or participating interests in the obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each other Bank shall be rescinded and such other Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank's ratable share (according to the proportion of (i) the purchase price paid to such Bank to (ii) the aggregate purchase price paid to all Banks) of such recovery together with an amount equal to such Bank's ratable share (according to the proportion of (i) the amount of such other Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. Each Account Party agrees that any Bank so purchasing an interest or participating interest from another Bank pursuant to this Section 2.09 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such interest or participating interest, as the case may be, as fully as if such Bank were the direct creditor of such Account Party in the amount of such interest or participating interest, as the case may be. SECTION 2.10 Use of Letters of Credit. The Letters of Credit shall be used for the general corporate purposes of the Account Parties and their respective Subsidiaries. 29 SECTION 2.11 Defaulting Banks. (a) In the event that, at any one time, (i) any Bank shall be a Defaulting Bank, (ii) such Defaulting Bank shall owe a Defaulted Amount to any Agent or any of the other Banks and (iii) any Account Party shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Bank, then the Administrative Agent may, on its behalf or on behalf of such other Banks and to the fullest extent permitted by applicable law, apply at such time the amount so paid by such Account Party to or for the account of such Defaulting Bank to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Banks, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent and such other Banks and, if the amount of such payment made by such Account Party shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent, such other Agents and such other Banks, in the following order of priority: (i) first, to the Agents for any Defaulted Amounts then owing to the Agents; (ii) second, to the Issuing Bank for any amount then due and payable to it, in its capacity as such, by such Defaulting Bank, ratably in accordance with such amounts then due and payable to the Issuing Bank; and (iii) third, to any other Banks for any Defaulted Amounts then owing to such other Banks, ratably in accordance with such respective Defaulted Amounts then owing to such other Banks. Any portion of such amount paid by such Account Party for the account of such Defaulting Bank remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) of this Section 2.11. (b) In the event that, at any one time, (i) any Bank shall be a Defaulting Bank, (ii) such Defaulting Bank shall not owe a Defaulted Amount and (iii) any Account Party, any Agent or other Bank shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Bank, then such Account Party or such Agent or such other Bank shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow and the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow 30 under this subsection (b) shall be deposited by the Administrative Agent in an account with Wachovia in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (b). The terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be Wachovia's standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (b). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Advances required to be made by such Defaulting Bank and to pay any amount payable by such Defaulting Bank hereunder and under the other Loan Documents to the Administrative Agent or any other Bank, as and when such Advances or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Advances and amounts required to be made or paid at such time, in the following order of priority: (i) first, to the Agents for any amounts then due and payable by such Defaulting Bank to the Agents hereunder; (ii) second, to the Issuing Bank for any amount then due and payable to it, in its capacity as such, by such Defaulting Bank, ratably in accordance with such amounts then due and payable to such Issuing Bank; and (iii) third, to any other Banks for any amount then due and payable by such Defaulting Bank to such other Banks hereunder, ratably in accordance with such respective amounts then due and payable to such other Banks. In the event that any Bank that is a Defaulting Bank shall, at any time, cease to be a Defaulting Bank, any funds held by the Administrative Agent in escrow at such time with respect to such Bank shall be distributed by the Administrative Agent to such Bank and applied by such Bank to the obligations owing to such Bank at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such obligations outstanding at such time. (c) The rights and remedies against a Defaulting Bank under this Section 2.11 are in addition to other rights and remedies that any Agent or any Bank may have against such Defaulting Bank with respect to any Defaulted Amount. SECTION 2.12 Replacement of Affected Bank. At any time any Bank is an Affected Bank, the Account Parties may replace such Affected Bank as a party to this Agreement with one or more other Banks and/or Eligible Assignees, and upon notice from the Account Parties such Affected Bank shall assign pursuant to an Assignment and Acceptance, and without recourse or warranty, its LC Commitment Amount, its Letter of Credit Advances, its obligations to fund Letter of Credit payments, its participation in, and its rights and obligations with respect to, Letters of Credit, and all of its other rights and obligations hereunder to such other Banks and/or Eligible Assignees for a purchase price equal to the sum of the principal amount of the Letter of Credit Advances so assigned, all accrued and unpaid interest thereon, such Affected Bank's ratable share of all accrued and unpaid fees payable pursuant to Section 2.05 and all other obligations owed to such Affected Bank hereunder. 31 SECTION 2.13 Certain Provisions Relating to the Issuing Bank and Letters of Credit. (a) Letter of Credit Agreements. The representations, warranties and covenants by the Account Parties under, and the rights and remedies of the Issuing Bank under, any Letter of Credit Agreement 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 and applicable law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Agreement shall inure to the benefit of each Bank to the extent of its Letter of Credit Participating Interest Commitment and Letter of Credit Advances as fully as if such Bank was a party to such Letter of Credit Agreement. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Agreement, this Agreement shall prevail. (b) Certain Provisions. The Issuing Bank shall have no duties or responsibilities to any Agent or any Bank except those expressly set forth in this Agreement, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the Banks and the Agents under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Agent, any Bank 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 Loan Document or Letter of Credit, except to the extent resulting from the gross negligence or willful misconduct of the Issuing Bank, as finally determined by a court of competent jurisdiction. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice to any Agent or any Bank relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan 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 Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide any 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 Loan Document. (c) Administration. The Issuing Bank may rely upon any notice or other communication of any nature (written, electronic or oral, including but not limited to telephone conversations and transmissions through the Issuing Bank's remote access system, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan 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, 32 any Agent or any Bank, such matter may be established by a certificate of such Account Party, such Agent or such Bank, 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 Default unless the Issuing Bank has received notice from a Bank, an Agent or an Account Party referring to this Agreement, describing such Default, and stating that such notice is a "notice of default". (d) 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), in accordance with its Pro Rata Share, 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 Loan Document or any Letter of Credit, 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 to the extent 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. (e) 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 Loan Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the term "Banks" and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account to any Person, 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 Account Party and any stockholder, subsidiary or affiliate of any Account Party, as though the Issuing Bank were not the Issuing Bank hereunder. SECTION 2.14 Downgrade Event with Respect to a Bank. (a) If a Downgrade Event shall occur with respect to (i) any Downgraded Bank or (ii) any other Bank and, as a result thereof, such other Bank becomes a Downgraded Bank, then the Issuing Bank may, by notice to such Downgraded Bank, the Administrative Agent and the Parent within 45 days after such Downgrade Event (any such notice, a "Downgrade Notice"), request that the Account Parties use reasonable efforts to replace such Bank as a party to this Agreement pursuant to Section 2.12. If such Bank is not so replaced within 45 days after receipt by the Account Parties of such Downgrade Notice, then (x) if no Default exists and such Downgraded Bank has not exercised its right to remain a Bank hereunder pursuant to clause (y) below, the following shall occur concurrently: 33 (A) the Committed Facility shall be reduced by the amount of the LC Commitment Amount of such Downgraded Bank, (B) the Account Parties shall prepay all amounts owed to such Downgraded Bank hereunder or in connection herewith (C) if, upon the reduction of the Committed Facility under clause (A) above and the payment under clause (B) above, the sum of the principal amount of all Advances plus the Available Amount of all Letters of Credit (valuing the Available Amount of, and Letter of Credit Advances of the Issuing Bank in respect of, any Non-Dollar Letter of Credit at the Dollar Equivalent thereof as of the time of such calculation) would exceed the amount of the Committed Facility, then the Account Parties will immediately eliminate such excess by paying Advances and/or causing the Available Amount of one or more Letters of Credit to be reduced, and (D) upon completion of the events described in clauses (A), (B) and (C) above, such Downgraded Bank shall cease to be a party to this Agreement; or (y) if a Default exists or, not later than 30 days after receipt of such Downgrade Notice, such Downgraded Bank notifies the Account Parties, the Issuing Bank and the Administrative Agent that such Downgraded Bank elects to provide (in a manner reasonably satisfactory to the Issuing Bank) cash collateral to the Issuing Bank for (or if such Downgraded Bank is unable, without regulatory approval, to provide cash collateral, a letter of credit reasonably satisfactory to the Issuing Bank covering) its contingent obligations to reimburse the Issuing Bank for any payment under any Letter of Credit as provided in Section 2.02(e) (its "LC Participation Obligations"), such Downgraded Bank shall be obligated to (and each Bank agrees that in such circumstances it will) deliver to the Issuing Bank (I) immediately, cash collateral (or, as aforesaid, a letter of credit) in an amount equal to its LC Participation Obligations and (II) from time to time thereafter (so long as it is a Downgraded Bank), cash collateral (or, as aforesaid, a letter of credit) sufficient to cover any increase in its LC Participation Obligations as a result of any proposed issuance of or increase in a Letter of Credit. Any funds provided by a Downgraded Bank for such purpose shall be maintained in a segregated deposit account in the name of the Issuing Bank at the Issuing Bank's principal office in the United States (a "Downgrade Account"). The funds so deposited in any Downgrade Account (or any drawing under such a letter of credit) shall be used only in accordance with the following provisions of this Section 2.14. (b) If any Downgraded Bank shall be required to fund its participation in a payment under a Letter of Credit pursuant to Section 2.02(e), then the Issuing Bank shall apply the funds deposited in the applicable Downgrade Account by such Downgraded Bank (or any drawing under such a letter of credit) to fund such participation. The deposit of funds in a Downgrade Account by any Downgraded Bank (or any drawing under such a letter of credit) shall not constitute a Letter of Credit Advance (and the Downgraded Bank shall not be entitled to interest on such funds except as provided in clause (c) below) unless and until (and then only to the extent that) such 34 funds (or any drawing under such a letter of credit) are used by the Issuing Bank to fund the participation of such Downgraded Bank pursuant to the first sentence of this clause (b). (c) Funds in a Downgrade Account shall be invested in such investments as may be agreed between the Issuing Bank and the applicable Downgraded Bank, and the income from such investments shall be distributed to such Downgraded Bank from time to time (but not less often than monthly) as agreed between the Issuing Bank and such Downgraded Bank. The Issuing Bank will (i) from time to time, upon request by a Downgraded Bank, release to such Downgraded Bank any amount on deposit in the applicable Downgrade Account in excess of the LC Participation Obligations of such Downgraded Bank (or, if applicable, not draw under any such letter of credit in excess of the L/C Participation Obligations of such Downgraded Bank) and (ii) upon the earliest to occur of (A) the effective date of any replacement of such Downgraded Bank as a party hereto pursuant to an Assignment and Acceptance, (B) the termination of such Downgraded Bank's LC Commitment Amount pursuant to clause (a) or (C) the first Letter of Credit Business Day after receipt by the Issuing Bank of evidence (reasonably satisfactory to the Issuing Bank) that such Bank is no longer a Downgraded Bank, release to such Bank all amounts on deposit in the applicable Downgrade Account (or, if applicable, return such letter of credit to such Bank for cancellation). (d) At any time any Downgraded Bank is required to maintain cash collateral with the Issuing Bank pursuant to this Section 2.14, the Issuing Bank shall have no obligation to issue or increase any Letter of Credit unless such Downgraded Bank has provided sufficient funds as cash collateral to the Issuing Bank to cover all LC Participation Obligations of such Downgraded Bank (including in respect of the Letter of Credit to be issued or increased). SECTION 2.15 Downgrade Event or Other Event with Respect to the Issuing Bank. At any time that the Issuing Bank is a Downgraded Bank or at such other times as the Issuing Bank and the Account Parties may agree, the Account Parties may, upon not less than three Letter of Credit Business Days' notice to the Issuing Bank (in this Section sometimes referred to as the "Old Issuing Bank") and the Administrative Agent, designate any Bank (so long as such Bank has agreed to such designation) as an additional "Issuing Bank" hereunder (in this Section sometimes referred to as the "New Issuing Bank"). Such notice shall specify the date (which shall be a Letter of Credit Business Day) on which the New Issuing Bank is to become an additional "Issuing Bank" hereunder. From and after such date, all new Letters of Credit requested to be issued hereunder shall be issued by the New Issuing Bank. From and after such date (and until the first date on which no Letters of Credit issued by the Old Issuing Bank are outstanding and no reimbursement obligations are owed to the Old Issuing Bank, on which date the Old Issuing Bank shall cease to be an Issuing Bank hereunder), references in this Agreement to the "Issuing Bank" shall be deemed to refer (a) to the Old Issuing Bank, with respect to Letters of Credit issued by it, (b) to the New Issuing Bank, with respect to Letters of Credit issued or to be issued by it, and (c) to each of the Old Issuing Bank and the New Issuing Bank, with respect to other matters. Notwithstanding the fact that an Old Issuing Bank shall cease to be an "Issuing Bank" hereunder, all of the exculpatory, indemnification and similar provisions hereof in favor of the "Issuing Bank" shall inure to such Old Issuing Bank's benefit as to any actions taken or omitted by it while it was an "Issuing Bank" under this Agreement. The Account Parties agree that after any appointment of a New Issuing Bank hereunder, the Account Parties shall use reasonable commercial efforts to promptly replace (or otherwise cause the applicable beneficiary 35 to return to the Old Issuing Bank for cancellation) each letter of credit issued by the Old Issuing Bank with a new Letter of Credit issued by the New Issuing Bank. SECTION 2.16 Non-Dollar Letters of Credit. (a) The Account Parties, the Administrative Agent, the Issuing Bank and the Banks (i) agree that the Issuing Bank may (in its sole discretion) issue Letters of Credit ("Non-Dollar Letters of Credit") in currencies other than U.S. dollars and (ii) further agree as set forth in the following paragraphs of this Section with respect to such Non-Dollar Letters of Credit. (b) The Account Parties agree that their reimbursement obligations under Section 2.03(a) and any resulting Letter of Credit Advance, in each case in respect of a drawing under any Non-Dollar Letter of Credit, (i) shall be payable in Dollars at the Dollar Equivalent of such obligation in the currency in which such Non-Dollar Letter of Credit was issued (determined on the date of payment by the Account Parties or, in the event of payment by the Banks pursuant to Section 2.02(e), on the date of such payment by the Banks), and (ii) shall bear interest at a rate per annum equal to the Base Rate plus 2%, for each day from and including the date on which the Applicable Account Party is to reimburse the Issuing Bank pursuant to Section 2.03(a) to but excluding the date such obligation is paid in full. (c) Each Bank agrees that its obligation to pay the Issuing Bank such Bank's Pro Rata Share of the unreimbursed portion of any payment by the Issuing Bank under Section 2.02(e) in respect of a drawing under any Non-Dollar Letter of Credit shall be payable in Dollars at the Dollar Equivalent of such obligation in the currency in which such Non-Dollar Letter of Credit was issued (calculated on the date of payment), and any such amount which is not paid when due shall bear interest at a rate per annum equal to the Overnight Rate plus, beginning on the third Business Day after such amount was due, 2%. (d) For purposes of determining whether there is availability for the Account Parties to request any Advance or to request the issuance or extension of, or any increase in, any Letter of Credit, the Dollar Equivalent amount of the Available Amount of each Non-Dollar Letter of Credit shall be calculated as of the date such Advance is to be made or such Letter of Credit is to be issued, extended or increased. (e) For purposes of determining the letter of credit fee under Section 2.05(c), the Dollar Equivalent amount of the Available Amount of any Non-Dollar Letter of Credit shall be determined on each of (1) the date of an issuance, extension or change in the Available Amount of such Non-Dollar Letter of Credit, (2) the date of any payment by the Issuing Bank in respect of a drawing under such Non-Dollar Letter of Credit, (3) the last Business Day of each March, June, September and December and (4) each day on which the LC Commitment Amounts are to be reduced pursuant to Section 2.04 (it being understood that no requested reduction shall be permitted to the extent that, after making a calculation pursuant to this clause (e), such reduction would be greater than the unused portion of the LC Commitment Amounts). (f) If, on the last Business Day of each March, June, September and December, the sum of the principal amount of all Advances plus the Available Amount of all Letters of Credit (valuing the Available Amount of, and Letter of Credit Advances in respect of, any Non-Dollar Letter of 36 Credit at the Dollar Equivalent thereof as of such day) would exceed the amount of the Committed Facility, then the Account Parties will immediately eliminate such excess by paying Advances and/or causing the Available Amount of one or more Letters of Credit to be reduced. (g) If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due in respect of any Non-Dollar Letter of Credit in one currency into another currency, the rate of exchange used shall be that at which in accordance with its normal banking procedures the Issuing Bank could purchase the first currency with such other currency on the Letter of Credit Business Day preceding that on which final judgment is given. The obligation of any Account Party in respect of any such sum due from it to the Issuing Bank or any Bank hereunder shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement and the applicable Non-Dollar Letter of Credit (the "Agreement Currency"), be discharged only to the extent that on the Letter of Credit Business Day following receipt by the Issuing Bank or such Bank of any sum adjudged to be so due in the Judgment Currency, the Issuing Bank or such Bank may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Issuing Bank or such Bank in the Agreement Currency, the Applicable Account Party agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Issuing Bank or such Bank, as applicable, against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Issuing Bank or such Bank in such currency, the Issuing Bank and each Bank agrees to return the amount of any excess to the Applicable Account Party (or to any other Person who may be entitled thereto under applicable law). (h) For purposes of this Section, "Dollar Equivalent" means, in relation to an amount denominated in a currency other than U.S. dollars, the amount of U.S. dollars which could be purchased with such amount by the Issuing Bank in accordance with its customary procedures (and giving effect to any transaction costs) at the quoted foreign exchange spot rate of the Issuing Bank at the time of determination; and "Overnight Rate" means, for any day, the rate of interest per annum at which overnight deposits in the applicable currency, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by the Issuing Bank to major banks in the London or other applicable offshore interbank market. The Overnight Rate for any day which is not a Letter of Credit Business Day (or on which dealings are not carried on in the applicable offshore interbank market) shall be the Overnight Rate for the immediately preceding Letter of Credit Business Day. ARTICLE III CONDITIONS OF LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01 Conditions Precedent to Effective Date. The occurrence of the Effective Date, and the obligation of the Issuing Bank to issue any Letter of Credit on the Effective Date, is subject to the satisfaction of the following conditions precedent: 37 (i) The Administrative Agent shall have received the following, each dated the Effective Date (unless otherwise specified), in form and substance reasonably satisfactory to the Administrative Agent (unless otherwise specified) and in sufficient copies for each Bank: (A) Certified copies of the resolutions of the Board of Directors of each Loan Party approving the transactions contemplated by the Loan Documents and each Loan Document to which it is or is to be a party, and of all documents evidencing other necessary corporate action and governmental and other third party approvals and consents, if any, with transactions contemplated by the Loan Documents and each Loan Document to which it is or is to be a party. (B) A copy of a certificate of the Secretary of State or other appropriate official of the jurisdiction of incorporation of each Loan Party, dated reasonably near the Effective Date, certifying as to the good standing (or existence) of such Loan Party. (C) A certificate of each Loan Party, signed on behalf of such Loan Party by its President or a Vice President (or equivalent officer if such Loan Party has no Vice President) and its Secretary or any Assistant Secretary (the statements made in which certificate shall be true on and as of the Effective Date), certifying as to (1) a true and correct copy of the constitutional documents of such Loan Party as in effect on the date on which the resolutions referred to in Section 3.01(a)(i)(A) were adopted and on the Effective Date, (2) the due incorporation and good standing or valid existence of such Loan Party as a corporation organized under the laws of the jurisdiction of its incorporation, and the absence of any proceeding for the dissolution or liquidation of such Loan Party, (3) the truth of the representations and warranties contained in the Loan Documents as though made on and as of the Effective Date and (4) the absence of any event occurring and continuing, or resulting from the Effective Date, that constitutes a Default. (D) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying the names and true signatures of the officers of such Loan Party authorized to sign each Loan Document to which it is or is to be a party and the other documents to be delivered hereunder and thereunder. (E) A favorable opinion of (1) Maples and Calder, Cayman Islands counsel for the Parent, in substantially the form of Exhibit C-1 hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request, (2) Mayer, Brown, Rowe & Maw, New York counsel for the Loan Parties, in substantially the form of Exhibit C-2 hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request, and (3) Conyers Dill & Pearman, Bermuda counsel for ACE Bermuda and Tempest, in substantially the form of Exhibit C-3 hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request. 38 (ii) There shall exist no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries pending or threatened before any court, governmental agency or arbitrator that (x) could be reasonably expected to have a Material Adverse Effect or (y) would reasonably be expected to materially adversely affect the legality, validity or enforceability of any Loan Document or the other transactions contemplated by the Loan Documents. (iii) No development or change shall have occurred after December 31, 2001, and no information shall have become known after such date, that has had or could reasonably be expected to have a Material Adverse Effect. (iv) The Account Parties shall have paid all accrued fees of the Administrative Agent and the Banks and all accrued expenses of the Administrative Agent (including the accrued fees and expenses of counsel to the Administrative Agent and local counsel on behalf of all of the Banks), in each case to the extent then due and payable. (v) The Administrative Agent shall have received evidence satisfactory to it that all obligations of any Account Party outstanding under the Existing Reimbursement Agreement (other than fees and expenses of Wachovia's counsel) have been repaid and satisfied in full and that, concurrently with the effectiveness of this Agreement, the LC Commitment Amounts (as defined therein) under the Existing Reimbursement Agreement have been reduced to zero; Mellon shall have agreed, by its execution and delivery of this Agreement, that the Existing Mellon Letter of Credit shall become a Letter of Credit hereunder as of the Effective Date; and Wachovia shall have agreed, by its execution and delivery of this Agreement, that the Existing Wachovia Letters of Credit issued under the Existing Reimbursement Agreement shall become Letters of Credit hereunder as of the Effective Date. SECTION 3.02 Conditions Precedent to Each Issuance, Extension or Increase of a Letter of Credit. The obligation of the Issuing Bank to issue, extend or increase a Letter of Credit (including any issuance on the Effective Date) shall be subject to the further conditions precedent that on the date of such issuance, extension or increase (a) the following statements shall be true (and each request for issuance, extension, or increase, and the acceptance by the Account Party that requested such issuance, extension or increase shall constitute a representation and warranty by such Account Party that both on the date of such notice and on the date of such issuance, extension or increase such statements are true): (i) the representations and warranties contained in each Loan Document are correct in all material respects on and as of such date, before and after giving effect to such issuance, extension or increase, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other the date of such issuance, extension or increase, in which case as of such specific date (provided, however, that the representation and warranty contained in the last sentence of Section 4.01(g) shall be excluded from this clause (i) at all times after (but shall be included on and as of) the Effective Date); and 39 (ii) no Default has occurred and is continuing, or would result from such issuance, extension or increase; and (b) the Administrative Agent shall have received such other approvals, opinions or documents as any Bank or the Issuing Bank through the Administrative Agent may reasonably request. SECTION 3.03 Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Bank shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Banks unless an officer of the Administrative Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Bank prior to the Effective Date specifying its objection thereto, provided that such Bank has been given at least one Business Day's notice that the final form of such document or matter is available for its review. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01 Representations and Warranties of the Account Parties. Each Account Party represents and warrants as follows: (a) Each Loan Party and each of its Subsidiaries (i) is duly organized or formed, validly existing and, to the extent such concept applies, in good standing under the laws of the jurisdiction of its incorporation or formation, (ii) is duly qualified and in good standing as a foreign corporation or other entity in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed would not be reasonably likely to have a Material Adverse Effect and (iii) has all requisite power and authority (including, without limitation, all governmental licenses, permits and other approvals) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted, except where the failure to have any license, permit or other approval would not be reasonably likely to have a Material Adverse Effect. All of the outstanding Equity Interests in each Account Party (other than the Parent) have been validly issued, are fully paid and non-assessable and (except for any Preferred Securities issued after the date of this Agreement) are owned, directly or indirectly, by the Parent free and clear of all Liens. (b) Set forth on Schedule 4.01(b) hereto is a complete and accurate list of all Subsidiaries of each Loan Party as of the Effective Date. (c) The execution, delivery and performance by each Loan Party of each Loan Document to which it is or is to be a party and the consummation of the transactions contemplated by the Loan Documents, are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene such Loan Party's constitutional documents, (ii) violate any law, rule, regulation 40 (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties or (iv) except for the Liens created under the Loan Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries. No Loan Party or any of its Subsidiaries is in violation of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which could be reasonably likely to have a Material Adverse Effect. (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for (i) the due execution, delivery, recordation, filing or performance by any Loan Party of any Loan Document to which it is or is to be a party or the other transactions contemplated by the Loan Documents, or (ii) the exercise by the Administrative Agent or any Bank of its rights under the Loan Documents, except for the authorizations, approvals, actions, notices and filings which have been duly obtained, taken, given or made and are in full force and effect. (e) This Agreement has been, and each other Loan Document when delivered hereunder will have been, duly executed and delivered by each Loan Party party thereto. This Agreement is, and each other Loan Document when delivered hereunder will be, the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms. (f) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or threatened before any court, governmental agency or arbitrator that (i) could be reasonably likely to have a Material Adverse Effect or (ii) would reasonably be expected to affect the legality, validity or enforceability of any Loan Document or the transactions contemplated by the Loan Documents. (g) The Consolidated balance sheets of the Parent and its Subsidiaries as at December 31, 2001, and the related Consolidated statements of income and of cash flows of the Parent and its Subsidiaries for the fiscal year then ended, accompanied by an unqualified opinion of PricewaterhouseCoopers LLP, independent public accountants, and the Consolidated balance sheets of the Parent and its Subsidiaries as at June 30, 2002, and the related Consolidated statements of income and cash flows of the Parent and its Subsidiaries for the six months then ended, duly certified by the Chief Financial Officer of the Parent, copies of which have been furnished to each Bank, fairly present, subject, in the case of said balance sheet as at June 30, 2002, and said statements of income and cash flows for the six months then ended, to year-end audit adjustments, the Consolidated financial condition of the Parent and its Subsidiaries as at such dates and the Consolidated results of operations of the Parent and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles applied on a consistent basis (subject, in the case of the June 30, 2002 balance sheet and statements, to the absence of footnotes). Since December 31, 2001, there has been no Material Adverse Change. 41 (h) [Reserved.] (i) No written information, exhibit or report furnished by or on behalf of any Loan Party to any Agent or any Bank in connection with the negotiation and syndication of the Loan Documents or pursuant to the terms of the Loan Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein not misleading as at the date it was dated (or if not dated, so delivered). (j) Margin Stock will constitute less than 25% of the value of those assets of any Account Party which are subject to any limitation on sale, pledge or other disposition hereunder. (k) Neither any Loan Party nor any of its Subsidiaries is an "investment company", or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended. Neither the making of any Advances, nor the issuance of any Letters of Credit, nor the application of the proceeds or repayment thereof by any Account Party, nor the consummation of the other transactions contemplated by the Loan Documents, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder. (l) Neither any Loan Party nor any of its Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction that is reasonably likely to have a Material Adverse Effect. (m) Each Loan Party is, individually and together with its Subsidiaries, Solvent. (n) Except to the extent that any and all events and conditions under clauses (i) through (vi) below of this paragraph (n) in the aggregate are not reasonably expected to have a Material Adverse Effect: (i) Schedule B (Actuarial Information) to the most recent annual report (Form 5500 Series) for each Pension Plan, copies of which have been filed with the Internal Revenue Service, is complete and accurate and fairly presents the funding status of such Pension Plan, and since the date of such Schedule B there has been no material adverse change in such funding status. (ii) Neither any Loan Party nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan. (iii) Neither any Loan Party nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (iv) With respect to each scheme or arrangement mandated by a government other than the United States (a "Foreign Government Scheme or Arrangement") and with respect to each employee benefit 42 plan that is not subject to United States law maintained or contributed to by any Loan Party or with respect to which any Subsidiary of any Loan Party may have liability under applicable local law (a "Foreign Plan"): (x) Any employer and employee contributions required by law or by the terms of any Foreign Government Scheme or Arrangement or any Foreign Plan have been made, or, if applicable, accrued, in accordance with normal accounting practices. (y) The fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the date hereof, with respect to all current and former participants in such Foreign Plan according to the actuarial assumptions and valuations most recently used to account for such obligations in accordance with applicable generally accepted accounting principles. (z) Each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities. (v) To the extent the assets of any Loan Party are or are deemed under applicable law to be "plan assets" within the meaning of Department of Labor Regulation ss. 2510.3-101, the execution, delivery and performance of the Loan Documents and the consummation of the transactions contemplated therein will not result in a non-exempt prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code. (vi) During the twelve-consecutive-month period to the date of the execution and delivery of this Agreement and prior to the request for any Letter of Credit to be issued hereunder, no steps have been taken to terminate any Pension Plan, no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a lien under section 302(f) of ERISA and no minimum funding waiver has been applied for or is in effect with respect to any Pension Plan. No condition exists or event or transaction has occurred or is reasonably expected to occur with respect to any Pension Plan which could result in any Loan Party or any ERISA Affiliate incurring any material liability, fine or penalty. (o) In the ordinary course of its business, each Account Party reviews the effect of Environmental Laws on the operations and properties of such Account Party and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating 43 expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, and any actual or potential liabilities to third parties and any related costs and expenses). On the basis of this review, each Account Party has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a Material Adverse Effect. The operations and properties of each Loan Party and each of its Subsidiaries comply in all material respects with all applicable Environmental Laws and Environmental Permits, except for non-compliances which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; Hazardous Materials have not been released, discharged or disposed of on any property currently or formerly owned or operated by any Loan Party or any of its Subsidiaries that would reasonably be expected to have a Material Adverse Effect; and there are no Environmental Actions pending or threatened against any Loan Party or its Subsidiaries, and no circumstances exist that could be reasonably likely to form the basis of any such Environmental Action, which (in either case), individually or in the aggregate with all other such pending or threatened actions and circumstances, would reasonably be expected to have a Material Adverse Effect. (p) Each Loan Party and each of its Subsidiaries has filed, has caused to be filed or has been included in all material federal tax returns and all other material tax returns required to be filed and has paid all taxes shown thereon to be due, together with applicable interest and penalties, except to the extent contested in good faith and by appropriate proceedings (in which case adequate reserves have been established therefor in accordance with GAAP). (q) Set forth on Schedule II hereto is a list of all letters of credit that were issued (or deemed issued) under the Existing Reimbursement Agreement and that are outstanding as of the Effective Date. ARTICLE V COVENANTS OF THE ACCOUNT PARTIES SECTION 5.01 Affirmative Covenants. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, each Account Party will: (a) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, compliance with Environmental Laws, Environmental Permits, ERISA and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970. (b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all lawful material claims that, if unpaid, might by law become a Lien upon its property; provided, however, that neither any Account Party nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained. 44 (c) Maintenance of Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Parent or such Subsidiary operates (it being understood that the foregoing shall not apply to maintenance of reinsurance or similar matters which shall be solely within the reasonable business judgment of the Parent and its Subsidiaries). (d) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its existence, legal structure, legal name, rights (charter and statutory), permits, licenses, approvals, privileges and franchises; provided, however, that the Parent and its Subsidiaries may consummate any merger or consolidation permitted under Section 5.02(c) and provided further that neither the Parent nor any of its Subsidiaries shall be required to preserve any right, permit, license, approval, privilege or franchise if the Board of Directors of the Parent or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Parent or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Parent, such Subsidiary or the Banks. (e) Visitation Rights. At any reasonable time and from time to time upon prior notice, permit the Administrative Agent (upon request made by any Agent or any Bank), or any agents or representatives thereof, at the expense (so long as no Default has occurred and is continuing) of such Agent or such Bank, as the case may be, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Parent and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Parent and any of its Subsidiaries with any of their officers or directors and with, so long as a representative of the Parent is present, their independent certified public accountants. (f) Keeping of Books. Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Parent and each such Subsidiary sufficient to permit the preparation of financial statements in accordance with GAAP. (g) Maintenance of Properties, Etc. Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (h) Transactions with Affiliates. Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under the Loan Documents with any of their Affiliates (other than any such transactions between Loan Parties or wholly owned Subsidiaries of Loan Parties) on terms that are fair and reasonable and no less favorable than it would obtain in a comparable arm's-length transaction with a Person not an Affiliate. (i) Pari Passu Ranking. Ensure that at all times the claims of the Banks, the Issuing Bank and the Agents against it under the Loan Documents will rank at least pari passu with the claims of all its other unsecured and 45 unsubordinated creditors, except for claims which are preferred by any bankruptcy, insolvency, liquidation or other similar laws of general application or are mandatorily preferred by law applying to insurance companies generally. SECTION 5.02 Negative Covenants. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, each of the Account Parties will not, at any time: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on or with respect to any of its properties of any character (including, without limitation, accounts) whether now owned or hereafter acquired, or assign or permit any of its Subsidiaries to assign, any accounts or other right to receive income, except: (i) Permitted Liens; (ii) Liens described on Schedule 5.02(a) hereto; (iii) purchase money Liens upon or in real property or equipment acquired or held by the Parent or any of its Subsidiaries in the ordinary course of business to secure the purchase price of such property or equipment or to secure Debt incurred solely for the purpose of financing the acquisition, construction or improvement of any such property or equipment to be subject to such Liens, or Liens existing on any such property or equipment at the time of acquisition or within 180 days following such acquisition (other than any such Liens created in contemplation of such acquisition that do not secure the purchase price), or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount; provided, however, that no such Lien shall extend to or cover any property other than the property or equipment being acquired, constructed or improved, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced; (iv) Liens arising in connection with Capitalized Leases; provided that no such Lien shall extend to or cover any assets other than the assets subject to such Capitalized Leases; (v)(A) any Lien existing on any asset of any Person at the time such Person becomes a Subsidiary and not created in contemplation of such event, (B) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Parent or any of it Subsidiaries in accordance with Section 5.02(c) and not created in contemplation of such event and (C) any Lien existing on any asset prior to the acquisition thereof by the Parent or any of its Subsidiaries and not created in contemplation of such acquisition; (vi) Liens securing obligations under credit default swap transactions determined by reference to, or Contingent Obligations in respect of, Debt issued by the Parent or one of its Subsidiaries; such Debt not to exceed an aggregate principal amount of $550,000,000; 46 (vii) Liens arising in the ordinary course of its business which (A) do not secure Debt and (B) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (viii) Liens on cash and Approved Investments securing Hedge Agreements arising in the ordinary course of business; (ix) other Liens securing Debt or other obligations outstanding in an aggregate principal or face amount not to exceed at any time 5% of Consolidated Net Worth; (x) Liens consisting of deposits made by the Parent or any insurance Subsidiary with any insurance regulatory authority or other statutory Liens or Liens or claims imposed or required by applicable insurance law or regulation against the assets of the Parent or any insurance Subsidiary, in each case in favor of policyholders of the Parent or such insurance Subsidiary or an insurance regulatory authority and in the ordinary course of the Parent's or such insurance Subsidiary's business; (xi) Liens on Investments and cash balances of the Parent or any insurance Subsidiary (other than capital stock of any Subsidiary) securing obligations of the Parent or any insurance Subsidiary in respect of (i) letters of credit obtained in the ordinary course of business and/or (ii) trust arrangements formed in the ordinary course of business for the benefit of cedents to secure reinsurance recoverables owed to them by the Parent or any insurance Subsidiary; (xii) the replacement, extension or renewal of any Lien permitted by clause (iii) or (vi) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount (other than in respect of fees, expenses and premiums, if any) or change in any direct or contingent obligor) of the Debt secured thereby; (xiii) Liens securing obligations owed by any Loan Party to any other Loan Party or owed by any Subsidiary of the Parent (other than a Loan Party) to the Parent or any other Subsidiary; (xiv) Liens incurred in the ordinary course of business in favor of financial intermediaries and clearing agents pending clearance of payments for investment or in the nature of set-off, banker's lien or similar rights as to deposit accounts or other funds; (xv) judgment or judicial attachment Liens, provided that the enforcement of such Liens is effectively stayed; (xvi) Liens arising in connection with Securitization Transactions; provided that the aggregate principal amount of the investment or claim held at any time by all purchasers, assignees or other transferees of (or of interests in) receivables and other rights to payment in all Securitization Transactions (together with the aggregate principal amount of any other obligations secured by such Liens) shall not exceed U.S. $250,000,000; 47 (xvii) Liens arising in connection with certain equity proceeds received on or about September 12, 2000 (plus interest accrued thereon) placed in a segregated account in support of (or pledged as collateral for) Parent's guaranty of the $412,372,000 principal amount of Auction Rate Reset Subordinated Notes Series A issued by ACE INA to ACE RHINOS Trust on June 30, 1999; (xviii) Liens on securities arising out of repurchase agreements with a term of not more than three months entered into with "Lenders" (as such term is defined in the Five Year Credit Agreement) or their Affiliates or with securities dealers of recognized standing; provided that the aggregate amount of all assets of the Parent and its Subsidiaries subject to such agreements shall not at any time exceed $800,000,000. For purposes of this clause (xviii), "Five Year Credit Agreement" shall mean the Second Amended and Restated Five Year Credit Agreement dated as of April 5, 2002 among the Parent, ACE Bermuda, Tempest, ACE INA Holdings Inc. and ACE Guaranty Re Inc., as borrowers, various financial institutions, and JPMorgan Chase Bank, as administrative agent, as amended, modified, supplemented or restated from time to time; and (xix) Liens securing up to an aggregate amount of $200,000,000 of obligations of Tempest, the Parent or any wholly owned Subsidiary, arising out of catastrophe bond financing. (b) Change in Nature of Business. Make any material change in the nature of the business of the Parent and its Subsidiaries, taken as a whole, as carried on at the date hereof. (c) Mergers, Etc. Merge into or amalgamate or consolidate with any Person or permit any Person to merge into it, or permit any of its Subsidiaries to do so, except that: (i) any Subsidiary of the Parent may merge into or amalgamate or consolidate with any other Subsidiary of the Parent, provided that, in the case of any such merger, amalgamation or consolidation, the Person formed by such merger, amalgamation or consolidation shall be a wholly owned Subsidiary of the Parent, provided further that, in the case of any such merger, amalgamation or consolidation to which an Account Party is a party, the Person formed by such merger, amalgamation or consolidation shall be such Account Party; (ii) any Subsidiary of any Account Party may merge into or amalgamate or consolidate with any other Person or permit any other Person to merge into or amalgamate or consolidate with it; provided that the Person surviving such merger shall be a wholly owned Subsidiary of the Account Party; (iii) in connection with any sale or other disposition permitted under Section 5.02(d), any Subsidiary of the Parent may merge into or amalgamate or consolidate with any other Person or permit any other Person to merge into or amalgamate or consolidate with it; and (iv) the Parent or any Account Party may merge into or amalgamate or consolidate with any other Person; provided that, in 48 the case of any such merger, amalgamation or consolidation, the Person formed by such merger, amalgamation or consolidation shall be the Parent or such Account Party, as the case may be; provided, however, that in each case, immediately after giving effect thereto, no event shall occur and be continuing that constitutes a Default. (d) Sales, Etc., of Assets. Sell, lease, transfer or otherwise dispose of, or permit any other Account Party to sell, lease, transfer or otherwise dispose of, all or substantially all of its assets (excluding sales of investment securities in the ordinary course of business). (e) Restricted Payments. In the case of the Parent, declare or pay any dividends, purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Interests now or hereafter outstanding, return any capital to its stockholders, partners or members (or the equivalent Persons thereof) as such, make any distribution of assets, Equity Interests, obligations or securities to its stockholders, partners or members (or the equivalent Persons thereof) as such or issue or sell any Equity Interests or accept any capital contributions, or permit any of its Subsidiaries to do any of the foregoing, or permit any of its Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for value any Equity Interests in the Parent or to issue or sell any Equity Interests therein, except that, so long as no Default shall have occurred and be continuing at the time of any action described in clause (i) or (ii) below or would result therefrom: (i) the Parent may (A) declare and pay dividends and distributions payable only in common stock of the Parent, (B) issue and sell shares of its capital stock, (C) purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Interests in an aggregate amount during the term of this Agreement not exceeding $300,000,000 and (D) declare and pay cash dividends to its stockholders, (ii) (A) any Loan Party (other than the Parent) may declare and pay cash dividends to another Loan Party and (B) any Subsidiary of the Parent (other than any Loan Party) may (x) declare and pay cash dividends to the Parent or any other wholly owned Subsidiary of the Parent of which it is a Subsidiary and (y) accept capital contributions from its parent, and (iii) a Special Purpose Trust may issue Preferred Securities and pay dividends thereon with the proceeds of payments of interest on the Debentures. (f) Accounting Changes. Make or permit, or permit any of its Subsidiaries to make or permit, any change in accounting policies or reporting practices, except as permitted by GAAP. SECTION 5.03 Reporting Requirements. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, the Parent will furnish to the Agents and the Banks: 49 (a) Default Notice. As soon as possible and in any event within two days after the occurrence of each Default or any event, development or occurrence reasonably likely to have a Material Adverse Effect continuing on the date of such statement, a statement of the chief financial officer of the Parent setting forth details of such Default, event, development or occurrence and the action that the Parent or the applicable Subsidiary has taken and proposes to take with respect thereto. (b) Annual Financials. (i) As soon as available and in any event within 90 days after the end of each Fiscal Year (or, if earlier, within five Business Days after such date as the Parent is required to file its annual report on Form 10-K for such Fiscal Year with the Securities and Exchange Commission), a copy of the annual Consolidated audit report for such year for the Parent and its Subsidiaries, including therein a Consolidated balance sheet of the Parent and its Subsidiaries as of the end of such Fiscal Year and Consolidated statements of income and cash flows of the Parent and its Subsidiaries for such Fiscal Year, all reported on in a manner reasonably acceptable to the Securities and Exchange Commission in each case and accompanied by an opinion of PricewaterhouseCoopers LLP or other independent public accountants of recognized standing reasonably acceptable to the Required Banks, together with (i) a certificate of the Chief Financial Officer of the Parent stating that no Default has occurred and is continuing, or if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Parent has taken a proposes to take with respect thereto, and (ii) a schedule in form reasonably satisfactory to the Administrative Agent of the computations used by the Parent in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Section 5.04. (ii) As soon as available and in any event within 120 days after the end of each Fiscal Year, a copy of the annual Consolidated audit report for such year for each Subsidiary Guarantor and its Subsidiaries, including therein a Consolidated balance sheet of such Subsidiary Guarantor and its Subsidiaries as of the end of such Fiscal Year and a Consolidated statement of income and a Consolidated statement of cash flows of such Subsidiary Guarantor and its Subsidiaries for such Fiscal Year, in each case accompanied by an opinion acceptable to the Required Banks of PricewaterhouseCoopers LLP or other independent public accountants of recognized standing acceptable to the Required Banks. (c) Quarterly Financials. As soon as available and in any event within 45 days after the end of each of the first three quarters of each Fiscal Year (or, if earlier, within five Business Days after such date as the Parent is required to file its quarterly report on Form 10-Q for such fiscal quarter with the Securities and Exchange Commission), Consolidated balance sheets of the Parent and its Subsidiaries as of the end of such quarter and Consolidated statements of income and a Consolidated statement of cash flows of the Parent and its Subsidiaries for the period commencing at the end of the previous fiscal quarter and ending with the end of such fiscal quarter and Consolidated statements of income and a Consolidated statement of cash flows of the Parent and its Subsidiaries for the period commencing at the end of the previous Fiscal Year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding Fiscal Year, all in reasonable detail and duly certified (subject to the absence of footnotes and normal year-end audit 50 adjustments) by the Chief Financial Officer of the Parent as having been prepared in accordance with GAAP, together with (i) a certificate of said officer stating that no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Parent has taken and proposes to take with respect thereto and (ii) a schedule in form reasonably satisfactory to the Administrative Agent of the computations used by the Parent in determining compliance with the covenants contained in Section 5.04. (d) Litigation. Promptly after the commencement thereof, notice of all actions, suits, investigations, litigation and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting any Loan Party or any of its Subsidiaries of the type described in Section 4.01(f). (e) Securities Reports. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that the Parent sends to its stockholders generally, copies of all regular, periodic and special reports, and all registration statements, that any Loan Party or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or with any national securities exchange, and (to the extent not otherwise provided) copies of all certifications of the Parent's principal executive officer and principal financial officer made pursuant to Section 302 or 906 of the Sarbanes-Oxley Act of 2002, as amended. (f) ERISA. (i) ERISA Events. Promptly and in any event within 10 days after any Loan Party or any ERISA Affiliate institutes any steps to terminate any Pension Plan or becomes aware of the institution of any steps or any threat by the PBGC to terminate any Pension Plan, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could result in the requirement that any Loan Party or any ERISA Affiliate furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could result in any Loan Party or any ERISA Affiliate incurring any material liability, fine or penalty, or any material increase in the contingent liability of any Loan Party or any ERISA Affiliate with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto. (ii) Plan Annual Reports. Promptly upon request of any Agent or any Bank, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Pension Plan. (iii) Multiemployer Plan Notices. Promptly and in any event within 15 Business Days after receipt thereof by any Loan Party or any ERISA Affiliate from the sponsor of a Multiemployer Plan, copies of each notice concerning (A) the imposition of Withdrawal Liability by any such Multiemployer Plan, (B) the reorganization or termination, within the meaning of Title IV of ERISA, of any such Multiemployer Plan or (C) the amount of liability incurred, or that may be incurred, by such Loan Party or any ERISA Affiliate in connection with any event described in clause 51 (A) or (B); provided, however, that such notice and documentation shall not be required to be provided (except at the specific request of any Agent or any Bank, in which case such notice and documentation shall be promptly provided following such request) if such condition or event is not reasonably expected to result in any Loan Party or any ERISA Affiliate incurring any material liability, fine, or penalty. (g) [Reserved.] (h) Statutory Statements. As soon as available and in any event within 20 days after submission, each statutory statement of the Loan Parties (or any of them) in the form submitted to The Insurance Division of the Office of Registrar of Companies of Bermuda. (i) Regulatory Notices, Etc. Promptly after any Responsible Officer of the Parent obtains knowledge thereof, (i) a copy of any notice from the Bermuda Minister of Finance, the Registrar of Companies or the Supervisor of Insurance or any other person of the revocation, the suspension or the placing of any restriction or condition on the registration as an insurer of any Account Party under the Bermuda Insurance Act 1978 (and related regulations) or of the institution of any proceeding or investigation which could result in any such revocation, suspension or placing of such a restriction or condition, (ii) copies of any correspondence by, to or concerning any Loan Party relating to an investigation conducted by the Bermuda Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Act 1981 (and related regulations) or otherwise and (iii) a copy of any notice of or requesting or otherwise relating to the winding-up or any similar proceeding of or with respect to any Loan Party. (j) Other Information. Such other information respecting the business, condition (financial or otherwise), operations, performance, properties or prospects of any Loan Party or any of its Subsidiaries as the Administrative Agent, or any Bank through the Administrative Agent, may from time to time reasonably request. SECTION 5.04 Financial Covenants. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, the Parent will: (a) Adjusted Consolidated Debt to Total Capitalization Ratio. Maintain at all times a ratio of Adjusted Consolidated Debt to Total Capitalization of not more than 0.35 to 1.0. (b) Consolidated Net Worth. Maintain at all times Consolidated Net Worth in an amount not less than the sum of (i) $3,600,000,000 plus (ii) 25% of Consolidated Net Income for each fiscal quarter of the Parent ending on or after March 31, 2000 for which such Consolidated Net Income is positive. 52 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01 Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) (i) any Account Party shall fail to pay any principal of any Advance when the same shall become due and payable or (ii) any Account Party shall fail to pay any interest on any Advance, or any Loan Party shall fail to make any other payment under any Loan Document, in each case under this clause (ii) within five Business Days after the same becomes due and payable; or (b) any representation or warranty made by any Loan Party (or any of its officers) under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made; or (c) any Account Party shall fail to perform or observe any term, covenant or agreement contained in Section 2.10, 5.01(d) (with respect to the Parent) or (e), 5.02 or 5.04; or (d) any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in any Loan Document on its part to be performed or observed if such failure shall remain unremedied for 30 days after the earlier of the date on which (i) a Responsible Officer becomes aware of such failure or (ii) written notice thereof shall have been given to such Loan Party by any Agent or any Bank; or (e) the Parent or any of its Significant Subsidiaries shall fail to pay any Material Financial Obligation (but excluding Debt outstanding hereunder) of the Parent or such Significant Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Material Financial Obligation; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Material Financial Obligation and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Material Financial Obligation or otherwise to cause, or to permit the holder thereof to cause, such Material Financial Obligation to mature; or any such Material Financial Obligation shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Material Financial Obligation shall be required to be made, in each case prior to the stated maturity thereof; or (f) any Loan Party or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Loan Party or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, 53 in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur; or any Loan Party or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or (g) any judgment or order for the payment of money in excess of $100,000,000 shall be rendered against any Loan Party or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (h) any non-monetary judgment or order shall be rendered against any Loan Party or any of its Subsidiaries that could be reasonably likely to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (i) any provision of any Loan Document after delivery thereof pursuant to Section 3.01 shall for any reason cease to be valid and binding on or enforceable against any Loan Party party to it (other than as a result of a transaction permitted hereunder), or any such Loan Party shall so state in writing; or (j) a Change of Control shall occur; or (k) Any Loan Party or any ERISA Affiliate shall incur or shall be reasonably expected to incur liability in excess of $25,000,000 in the aggregate with respect to any Pension Plan or any Multiemployer Plan in connection with the occurrence of any of the following events or existence of any of the following conditions: (i) Institution of any steps by any Loan Party, any ERISA Affiliate or any other Person, including, without limitation, the PBGC to terminate a Pension Plan if as a result of such termination a Loan Party or any ERISA Affiliate could be required to make a contribution to such Pension Plan, or could incur a liability or obligation; or (ii) A contribution failure occurs with respect to any Pension Plan sufficient to give rise to a lien under section 302(f) of ERISA; or (iii) Any condition shall exist or event shall occur with respect to a Pension Plan that is reasonably expected to result in any Loan Party or any ERISA Affiliate being required to furnish a bond or security to the PBGC or such Pension Plan, or incurring a liability or obligation; or (l) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan; or 54 (m) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, and as a result of such reorganization or termination the aggregate annual contributions of the Loan Parties and the ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years of such Multiemployer Plans immediately preceding the plan year in which such reorganization or termination occurs; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Required Banks, by notice to the Account Parties, declare the obligation of the Issuing Bank to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and/or (ii) shall at the request, or may with the consent, of the Required Banks, by notice to the Account Parties, declare all amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Account Parties; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to any Account Party under the Federal Bankruptcy Code, (x) the obligation of the Issuing Bank to issue Letters of Credit shall automatically be terminated, (y) all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Account Parties and (z) the obligation of the Account Parties to provide cash collateral under Section 6.02 shall automatically become effective. SECTION 6.02 Actions in Respect of the Letters of Credit upon Default. If any Event of Default shall have occurred and be continuing, the Administrative Agent may, or shall at the request of the Required Banks, after having taken any of the actions described in Section 6.01(ii) or otherwise, make demand upon the Account Parties to, and forthwith upon such demand the Account Parties will, pay to the Administrative Agent on behalf of the Banks in same day funds at the Administrative Agent's office designated in such demand, an amount equal to the aggregate Available Amount of all Letters of Credit then outstanding as cash collateral. If at any time during the continuance of an Event of Default the Administrative Agent determines that such funds are subject to any right or claim of any Person other than the Administrative Agent and the Banks or that the total amount of such funds is less than the aggregate Available Amount of all Letters of Credit, the Account Parties will, forthwith upon demand by the Administrative Agent, pay to the Administrative Agent, as additional cash collateral, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, that the Administrative Agent determines to be free and clear of any such right and claim. Upon the drawing of any Letter of Credit, such funds shall be applied to reimburse the Issuing Bank or Banks, as applicable, to the extent permitted by applicable law. 55 ARTICLE VII THE GUARANTY SECTION 7.01 The Guaranty. (a) Each Account Party hereby jointly and severally, unconditionally, absolutely and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all amounts payable by each of the other Account Parties under the Loan Documents including, without limitation, the principal of and interest (including, to the greatest extent permitted by law, post-petition interest) on reimbursement obligations owing by such other Account Parties pursuant to this Agreement with respect to Letters of Credit and fees, expenses, indemnities or any other obligations, whether now existing or hereafter incurred, created or arising and whether direct or indirect, absolute or contingent, or due or to become due. Upon failure by an Account Party to pay punctually any such amount, each other Account Party agrees to pay forthwith on demand the amount not so paid at the place and in the manner specified in this Agreement. (b) Each Account Party (other than the Parent), and by its acceptance of this Guaranty, the Administrative Agent and each other Bank, hereby confirms that it is the intention of all such Persons that this Guaranty and the obligations of each Account Party hereunder not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar foreign, federal or state law to the extent applicable to this Guaranty and the obligations of each Account Party (other than the Parent) hereunder. To effectuate the foregoing intention, the Administrative Agent, the other Banks and the Account Parties hereby irrevocably agree that the obligations of each Account Party (other than the Parent) under this Article VII at any time shall be limited to the maximum amount as will result in the obligations of such Account Party under this Guaranty not constituting a fraudulent transfer or conveyance. SECTION 7.02 Guaranty Unconditional. The obligations of each Account Party under this Article VII shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other obligor under any of the Loan Documents, by operation of law or otherwise; (ii) any modification or amendment of or supplement to any of the Loan Documents; (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any other obligor under any of the Loan Documents; (iv) any change in the corporate existence, structure or ownership of any obligor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other obligor or its assets or any resulting release or discharge of any obligation of any other obligor contained in any of the Loan Documents; 56 (v) the existence of any claim, set-off or other rights which any obligor may have at any time against any other obligor, the Administrative Agent, any Bank or any other corporation or person, whether in connection with any of the Loan Documents or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against any other obligor for any reason of any of the Loan Documents, or any provision of applicable law or regulation purporting to prohibit the payment by any other obligor of principal interest or any other amount payable under any of the Loan Documents; or (vii) any other act or omission to act or delay of any kind by any obligor, the Administrative Agent, any Bank or any other corporation or person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of or defense to an Account Party's obligations under this Article VII. SECTION 7.03 Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances. Each Account Party's obligations under this Article VII shall remain in full force and effect until the commitments of the Banks hereunder shall have terminated, no Letters of Credit shall be outstanding and all amounts payable by the other Account Parties under the Loan Documents shall have been paid in full. If at any time any payment of the principal of or interest on any reimbursement obligation or any other amount payable by an Account Party under the Loan Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of such Account Party or otherwise, each other Account Party's obligations under this Article VII with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 7.04 Waiver by the Account Parties. Each Account Party irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any corporation or person against any other obligor or any other corporation or person. SECTION 7.05 Subrogation. Each Account Party hereby unconditionally and irrevocably agrees not to exercise any rights that it may now have or hereafter acquire against any other Account Party, any other Loan Party or any other insider guarantor that arise from the existence, payment, performance or enforcement of such Account Party's obligations under or in respect of this Guaranty or any other Loan Document, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of any Bank against any other Account Party, any other Loan Party or any other insider guarantor or any collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any other Account Party, any other Loan Party or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all amounts payable under this Guaranty shall have been paid in full in cash, no Letters of Credit shall be outstanding and the commitments of the Banks hereunder shall have expired or been terminated. If any amount shall be paid to any Account Party in violation 57 of the immediately preceding sentence at any time prior to the latest of (a) the payment in full in cash of all amounts payable under this Guaranty, and (b) the Expiration Date, such amount shall be received and held in trust for the benefit of the Banks, shall be segregated from other property and funds of such Account Party and shall forthwith be paid or delivered to the Administrative Agent in the same form as so received (with any necessary endorsement or assignment) to be credited and applied to all amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Loan Documents, or to be held as collateral for any amounts payable under this Guaranty thereafter arising. If (i) any Account Party shall make payment to any Bank of all or any amounts payable under this Guaranty, (ii) all amounts payable under this Guaranty shall have been paid in full in cash, and (iii) the Expiration Date shall have occurred, the Banks will, at such Account Party's request and expense, execute and deliver to such Account Party appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Account Party of an interest in the obligations resulting from such payment made by such Account Party pursuant to this Guaranty. SECTION 7.06 Stay of Acceleration. If acceleration of the time for payment of any amount payable by any Account Party under any of the Loan Documents is stayed upon the insolvency, bankruptcy or reorganization of such Account Party, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by the other Account Parties under this Article VII forthwith on demand by the Administrative Agent made at the request of the requisite proportion of the Banks. SECTION 7.07 Continuing Guaranty; Assignments. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of all amounts payable under this Guaranty and (ii) the Expiration Date, (b) be binding upon each Account Party, its successors and assigns and (c) inure to the benefit of and be enforceable by the Banks and their successors, transferees and assigns. Without limiting the generality of clause (c) of the immediately preceding sentence, any Bank may assign or otherwise transfer all or any portion of its rights and obligations under this Agreement (including, without limitation, all or any portion of its Letter of Credit Participating Interest Commitment and the Advances owing to it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Bank herein or otherwise, in each case as and to the extent provided in Section 9.07. ARTICLE VIII THE AGENTS SECTION 8.01 Authorization and Action. Each Bank (in its capacity as a Bank) hereby appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to such Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by the Loan Documents, no Agent shall be required to exercise any discretion or take any action, but shall be required to act (in the case of the Administrative Agent) or to refrain from acting (and shall be fully protected in so acting or 58 refraining from acting) upon the instructions of the Required Banks or all the Banks where unanimity is required, and such instructions shall be binding upon all Banks; provided, however, that no Agent shall be required to take any action that exposes such Agent to personal liability or that is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Bank prompt notice of each notice given to it by any Account Party pursuant to the terms of this Agreement. SECTION 8.02 Agents' Reliance, Etc. Neither any Agent nor any of its respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, each Agent: (a) may consult with legal counsel (including counsel for any Loan Party), independent public accountants and other experts selected by it and 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; (b) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations (whether written or oral) made in or in connection with the Loan Documents; (c) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of any Loan Party or to inspect the property (including the books and records) of any Loan Party; (d) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; and (e) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram or telecopy) reasonably believed by it to be genuine and signed or sent by the proper party or parties. SECTION 8.03 Wachovia and Affiliates. With respect to its LC Commitment Amounts, and the Advances, Wachovia shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not an Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include Wachovia in its individual capacity. Wachovia and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, any Loan Party, any of its Subsidiaries and any Person that may do business with or own securities of any Loan Party or any such Subsidiary, all as if Wachovia were not an Agent and without any duty to account therefor to the Banks. SECTION 8.04 Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any 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 this Agreement. 59 SECTION 8.05 Indemnification. (a) Each Bank severally agrees to indemnify each Agent and its officers, directors, employees, agents, advisors and Affiliates (to the extent not promptly reimbursed by the Account Parties) from and against such Bank's ratable share (determined as provided below) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against such Agent or any such other Person in any way relating to or arising out of the Loan Documents or any action taken or omitted by such Agent under the Loan Documents; provided, however, that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's or other Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank agrees to reimburse each Agent promptly upon demand for its ratable share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Account Parties under Section 9.04, to the extent that such Agent is not promptly reimbursed for such costs and expenses by the Account Parties. (b) For purposes of this Section 8.05, the Banks' respective ratable shares of any amount shall be determined, at any time, according to the sum of (i) the aggregate principal amount of the Advances outstanding at such time and owing to the respective Banks, (ii) their respective Pro Rata Shares of the aggregate Available Amounts of all Letters of Credit outstanding at such time and (iii) their respective Unused LC Commitment Amounts at such time. The failure of any Bank to reimburse any Agent promptly upon demand for its ratable share of any amount required to be paid by the Banks to such Agent as provided herein shall not relieve any other Bank of its obligation hereunder to reimburse such Agent for its ratable share of such amount, but no Bank shall be responsible for the failure of any other Bank to reimburse such Agent for such other Bank's ratable share of such amount. Without prejudice to the survival of any other agreement of any Bank hereunder, the agreement and obligations of each Bank contained in this Section 8.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents. SECTION 8.06 Successor Administrative Agent. Any Agent may resign at any time by giving written notice thereof to the Banks and the Parent and may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal of the Administrative Agent, the Required Banks shall have the right to appoint a successor Administrative Agent, subject (so long as no Event of Default exists) to the consent of the Parent (which consent shall not be unreasonably withheld). If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Required Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent such successor Administrative Agent shall succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under the Loan Documents. If within 45 days after written notice is given of the retiring Administrative Agent's resignation or removal under this Section 8.06 no successor Administrative Agent shall have been appointed and shall have accepted such appointment, then on such 45th day (i) the retiring 60 Administrative Agent's resignation or removal shall become effective, (ii) the retiring Administrative Agent shall thereupon be discharged from its duties and obligations under the Loan Documents and (iii) the Required Banks shall thereafter perform all duties of the retiring Administrative Agent under the Loan Documents until such time, if any, as the Required Banks appoint a successor Administrative Agent as provided above. After any retiring Agent's resignation or removal hereunder as Agent shall have become effective, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If Nova Scotia or Deutsche Bank ceases to be a Bank hereunder, it shall be deemed to have resigned as Documentation Agent and no replacement shall be appointed. If JPMorgan Chase or Bank of America ceases to be a Bank hereunder, it shall be deemed to have resigned as Syndication Agent and no replacement shall be appointed. ARTICLE IX MISCELLANEOUS SECTION 9.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Issuing Bank and the Required Banks (and, in the case of an amendment, the Parent), and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Banks (other than (A) any Bank that is, at such time, a Defaulting Bank, and (B) in the case of clauses (vi) and (vii) below, any Bank which is not and will not be (and is not and will not be owed any obligation which is or will be) affected thereby), do any of the following at any time: (i) waive any of the conditions specified in Section 3.01 or, in the case of the Effective Date, Section 3.02, (ii) change the number of Banks or the percentage of (x) the LC Commitment Amounts, (y) the aggregate unpaid principal amount of the Advances or (z) the aggregate Available Amount of outstanding Letters of Credit that, in each case, shall be required for the Banks or any of them to take any action hereunder, (iii) reduce or limit the obligations of any Account Party under Section 7.01 or release such Account Party or otherwise limit such Account Party's liability with respect to the obligations owing to the Agents and the Banks, (iv) amend this Section 9.01, (v) increase the LC Commitment Amounts of the Banks, extend the Expiration Date or subject the Banks to any additional obligations, (vi) reduce the principal of, or interest on, any reimbursement obligation or any fees or other amounts payable hereunder, or increase any Bank's LC Commitment Amount, (vii) postpone any date fixed for any payment of principal of, or interest on, any reimbursement obligation or any fees or other amounts payable hereunder, or (viii) limit the liability of any Loan Party under any of the Loan Documents; provided further that no amendment, waiver or consent shall, unless in writing and signed by an Agent in addition to the Banks required above to take such action, affect the rights or duties of such Agent under this Agreement or the other Loan Documents. 61 SECTION 9.02 Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic or telecopy communication) and mailed, telegraphed, telecopied or delivered, if to any Account Party, at its address set forth below on the signature pages hereof; if to any Initial Bank, at its Domestic Lending Office specified opposite its name on Part 2 of Schedule I hereto; if to any other Bank, at its Domestic Lending Office specified in the Assignment and Acceptance pursuant to which it became a Bank; if to Wachovia (in its capacity as Issuing Bank) at its address at 401 Linden Street, Mail Code NC-6034, Winston-Salem, North Carolina 27101, Attn: International Operations -- Standby Letter of Credit Department, Telecopy No. (336) 735-0952; if to Mellon (in its capacity as Issuing Bank) at its address at One Mellon Center, Pittsburgh, Pennsylvania 15258, Attn: Karla Maloof, Telecopy No. (412) 234-8087, with a copy to Letter of Credit Operations, at the same address; and if to the Administrative Agent, at its address at Charlotte Plaza Building CP-23, 201 South College Street, Charlotte, North Carolina 28288-0680, Attn: Syndication Agency Services, Telecopy No. (704) 383-0288; or, as to any party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telegraphed or telecopied, be effective when deposited in the mails, delivered to the telegraph company or transmitted by telecopier, respectively, except that notices and communications to the Administrative Agent pursuant to Article II, III or VIII shall not be effective until received by the Administrative Agent. Manual delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of an original executed counterpart thereof. SECTION 9.03 No Waiver; Remedies. No failure on the part of any Bank or any Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04 Costs and Expenses. (a) Each of the Account Parties agrees to pay on demand (i) all reasonable costs and expenses of the Administrative Agent and of the Issuing Bank in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents (including, without limitation, (A) all due diligence, collateral review, syndication, transportation, computer, duplication, appraisal, audit, insurance, consultant, search, filing and recording fees and expenses and (B) the reasonable fees and expenses of a single counsel for the Administrative Agent and a single counsel for the Issuing Bank with respect thereto, with respect to advising the Administrative Agent as to its rights and responsibilities, or the perfection, protection or preservation of rights or interests, under the Loan Documents, with respect to negotiations with any Loan Party or with other creditors of any Loan Party or any of its Subsidiaries arising out of any Default or any events or circumstances that may give rise to a Default and with respect to presenting claims in or otherwise participating in or monitoring any bankruptcy, insolvency or other similar proceeding involving creditors' rights generally and any proceeding ancillary thereto) and (ii) all reasonable costs and expenses of each Agent, the Issuing Bank and each Bank in connection with the enforcement of the Loan Documents, whether in any action, suit or litigation, or any bankruptcy, insolvency or other similar proceeding affecting creditors' rights generally (including, without limitation, the 62 reasonable fees and expenses of counsel for the Administrative Agent, the Issuing Bank and each Bank with respect thereto). (b) Each of the Account Parties jointly and severally agrees to indemnify and hold harmless each Agent, the Arranger, the Issuing Bank, each Bank and each of their Affiliates and their respective officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) this Agreement, the actual or proposed use of the proceeds of the Advances, the Loan Documents or any of the transactions contemplated thereby, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by any Loan Party, its directors, shareholders or creditors or an Indemnified Party or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated by the Loan Documents are consummated. Each of the Account Parties also agrees not to assert any claim against any Agent, the Arranger, any Bank or any of their Affiliates, or any of their respective officers, directors, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the credit facilities provided hereunder, the actual or proposed use of the proceeds of the Advances or the Letters of Credit, the Loan Documents or any of the transactions contemplated by the Loan Documents. (c) Without prejudice to the survival of any other agreement of any Loan Party hereunder or under any other Loan Document, the agreements and obligations of the Account Parties contained in Section 2.07 and this Section 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under any of the other Loan Documents. SECTION 9.05 Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare amounts owing hereunder to be due and payable pursuant to the provisions of Section 6.01, each Agent and each Bank and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and otherwise apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Agent, such Bank or such Affiliate to or for the credit or the account of any Account Party against any and all of the obligations of such Account Party now or hereafter existing under the Loan Documents, irrespective of whether such Agent or such Bank shall have made any demand under this Agreement and although such obligations may be unmatured. Each Agent and each Bank agrees promptly to notify each Account Party after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Agent and each 63 Bank and their respective Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Agent, such Bank and their respective Affiliates may have. SECTION 9.06 Binding Effect. This Agreement shall become effective when it shall have been executed by each Account Party, the Issuing Bank and each Agent and the Administrative Agent shall have been notified by each Initial Bank that such Initial Bank has executed it and thereafter shall be binding upon and inure to the benefit of each Account Party, each Agent, the Issuing Bank and each Bank and their respective successors and assigns, except that no Account Party shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Banks. SECTION 9.07 Assignments and Participations. (a) Each Bank may, and so long as no Default shall have occurred and be continuing, if demanded by any Account Party (following a demand by such Bank pursuant to Section 2.12) upon at least five Business Days notice to such Bank and the Administrative Agent, will, assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its LC Commitment Amount, its Letter of Credit Participating Interest Commitment and the Letter of Credit Advances owing to it); provided, however, that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations of such Bank hereunder, except for any non-pro rata assignment made by a Downgraded Bank after a request by the Issuing Bank pursuant to Section 2.14 (and any subsequent non-pro rata assignment of the interest so assigned or by the Downgraded Bank) and any other non-pro rata assignment approved by the Administrative Agent and any Account Party, (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Bank or an Affiliate of any Bank or an assignment of all of a Bank's rights and obligations under this Agreement, the aggregate amount of the LC Commitment Amounts being assigned to such Eligible Assignee pursuant to such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 unless it is an assignment of the entire amount of such assignor's LC Commitment Amount, (iii) each such assignment shall be to an Eligible Assignee, (iv) each assignment made as a result of a demand by any Account Party pursuant to Section 2.12 shall be arranged by such Account Party after consultation with the Administrative Agent and shall be either an assignment of all of the rights and obligations of the assigning Bank under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Bank under this Agreement, (v) no Bank shall be obligated to make any such assignment as a result of a demand by any Account Party pursuant to Section 2.12 unless and until such Bank shall have received one or more payments from either such Account Party or other Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances made by such Bank, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Bank under this Agreement, (vi) as a result of such assignment, no Account Party shall be subject to additional amounts under Section 2.06 or 2.08 and (vii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and 64 recording in the Register, an Assignment and Acceptance, together with a processing and recordation fee of $2,500.00. (b) Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank, hereunder and (ii) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.06, 2.08 and 9.04 to the extent any claim thereunder relates to an event arising prior to such assignment and any other rights that are expressly provided hereunder to survive) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (c) By executing and delivering an Assignment and Acceptance, each Bank assignor thereunder and each assignee thereunder confirm to and agree with each other and the other parties thereto and hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of any of its obligations under any Loan Document or any other instrument or document furnished pursuant thereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any Agent, such assigning Bank 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 this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Loan Documents as are delegated to such Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank. (d) The Administrative Agent, acting for this purpose (but only for this purpose) as the agent of the Account Parties, shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the LC Commitment Amount of, and principal amount of the Advances owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, 65 absent manifest error, and the Account Parties, the Agents and the Banks shall treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by any Account Party or any Agent or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Parent and to the parties to such Assignment and Acceptance. (f) Each Bank may sell participations to one or more Persons (other than any Loan Party or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its LC Commitment Amount, its Letter of Credit Participating Interest Commitment and the Advances owing to it; provided, however, that (i) such Bank's obligations under this Agreement (including, without limitation, its Letter of Credit Participating Interest Commitment) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Account Parties, the Agents 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 and (iv) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, reimbursement obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, postpone any date fixed for any payment of principal of, or interest on, the reimbursement obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. Each Bank shall, as agent of the Account Parties solely for the purposes of this Section, record in book entries maintained by such Bank, the name and amount of the participating interest of each Person entitled to receive payments in respect of any participating interests sold pursuant to this Section. (g) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07, disclose to the assignee or participant or proposed assignee or participant any information relating to any Account Party furnished to such Bank by or on behalf of any Account Party; provided, however, that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Confidential Information received by it from such Bank. (h) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. SECTION 9.08 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate 66 counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement. SECTION 9.09 No Liability of the Issuing Bank. Each Account Party assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Issuing Bank nor any of its officers, directors, employees or agents shall be liable or responsible for: (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing Bank against presentation of documents that do not strictly comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that such Account Party shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to such Account Party, to the extent of any direct, but not consequential, damages suffered by such Account Party that such Account Party proves were caused by (i) the Issuing Bank's willful misconduct or gross negligence as determined in a final, non-appealable judgment by a court of competent jurisdiction in determining whether documents presented under any Letter of Credit comply with the terms of the Letter of Credit or (ii) the Issuing Bank's willful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. SECTION 9.10 Confidentiality. Neither any Agent nor any Bank shall disclose any Confidential Information to any Person without the consent of the Parent, other than (a) to such Agent's or such Bank's Affiliates and their officers, directors, employees, agents and advisors and to actual or prospective Eligible Assignees and participants, and then only on a confidential basis, (b) as required by any law, rule or regulation or judicial process, (c) as requested or required by any state, Federal or foreign authority or examiner regulating such Bank and (d) to any rating agency when required by it, provided that, prior to any such disclosure, such rating agency shall undertake to preserve the confidentiality of any Confidential Information relating to the Loan Parties received by it from such Bank. SECTION 9.11 Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto 67 agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Loan Documents in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 9.12 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 9.13 Waiver of Jury Trial. Each of the Account Parties, the Agents and the Banks irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to any of the Loan Documents, the Advances or the actions of any Agent or any Bank in the negotiation, administration, performance or enforcement thereof. SECTION 9.14 Disclosure of Information. Each Account Party agrees and consents to the Administrative Agent's and the Arranger's disclosure of information relating to this transaction to Gold Sheets and other similar bank trade publications. Such information will consist of deal terms and other information customarily found in such publications. The Parent shall have the right to review and approve any such disclosure made by the Administrative Agent or the Arranger before such disclosure is made (such approval not to be unreasonably withheld). [Remainder of page intentionally left blank] 68 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. ACE LIMITED The Common Seal of ACE Limited was hereunto affixed in the presence of: -------------------------------------------- Director -------------------------------------------- Secretary ACE BERMUDA INSURANCE LTD. The Common Seal of ACE Bermuda Insurance Ltd. was hereunto affixed in the presence of: -------------------------------------------- Director -------------------------------------------- Secretary ACE TEMPEST REINSURANCE LTD. The Common Seal of ACE Tempest Reinsurance Ltd. was hereunto affixed in the presence of: -------------------------------------------- Director -------------------------------------------- Secretary Address for each Account Party: ACE Global Headquarters 17 Woodbourne Avenue Hamilton HM08 Bermuda Telecopy: (441) 296-0087 (signatures continued) S-1 WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Issuing Bank and as an Initial Bank By: _________________________________________ Title: ______________________________________ JPMORGAN CHASE BANK, as Syndication Agent and as an Initial Bank By: _________________________________________ Title: ______________________________________ BANK OF AMERICA, N.A. as Syndication Agent and as an Initial Bank By: _________________________________________ Title: ______________________________________ THE BANK OF NOVA SCOTIA, as Documentation Agent and as an Initial Bank By: _________________________________________ Title: ______________________________________ DEUTSCHE BANK, AG, NEW YORK BRANCH as Documentation Agent and as an Initial Bank By: _________________________________________ Title: ______________________________________ (signatures continued) S-2 MELLON BANK, N.A., as Issuing Bank and as an Initial Bank By: _________________________________________ Title: ______________________________________ NATIONAL AUSTRALIA BANK LIMITED, as an Initial Bank By: _________________________________________ Title: ______________________________________ FLEET NATIONAL BANK, as an Initial Bank By: _________________________________________ Title: ______________________________________ ROYAL BANK OF CANADA , as an Initial Bank By: _________________________________________ Title: ______________________________________ BARCLAYS BANK PLC, as an Initial Bank By: _________________________________________ Title: ______________________________________ (signatures continued) S-3 COMERICA BANK, as an Initial Bank By: _________________________________________ Title: ______________________________________ STATE STREET BANK AND TRUST COMPANY, as an Initial Bank By: _________________________________________ Title: ______________________________________ ABN AMRO BANK, N.V., as an Initial Bank By: _________________________________________ Title: ______________________________________ HSBC BANK USA, as an Initial Bank By: _________________________________________ Title: ______________________________________ BANK ONE, N.A., as an Initial Bank By: _________________________________________ Title: ______________________________________ (signatures continued) S-4 THE BANK OF BERMUDA LIMITED, as an Initial Bank By: _________________________________________ Title: ______________________________________ THE BANK OF N.T. BUTTERFIELD & SON LIMITED, as an Initial Bank By: _________________________________________ Title: ______________________________________ S-5 SCHEDULE I LC COMMITMENT AMOUNTS ---------------------- Wachovia Bank, National Association $40,000,000 JPMorgan Chase Bank 37,500,000 Bank of America, N.A. 37,500,000 The Bank of Nova Scotia 37,500,000 Deutsche Bank AG, New York Branch 37,500,000 National Australia Bank Limited 35,000,000 Fleet National Bank 35,000,000 Royal Bank of Canada 30,000,000 Barclays Bank PLC 30,000,000 Comercia Bank 30,000,000 State Street Bank and Trust Company 30,000,000 Mellon Bank, N.A. 20,000,000 ABN AMRO Bank, N.V. 20,000,000 HSBC Bank USA 20,000,000 Bank One, N.A. 20,000,000 The Bank of Bermuda Limited 20,000,000 The Bank of N.T. Butterfield & Son Limited 20,000,000 Total $500,000,000.00 =============== SCHEDULE I - Part 2 DOMESTIC LENDING OFFICES ------------------------- - -------------------------------------------------------------------------------- Wachovia Bank, National Association Financial Institutions Group 1339 Chestnut Street, PA 4819 Philadelphia, Pennsylvania 19107 Attn: Joseph DiFrancesco Telephone: (267) 321-7025 Telecopy: (215) 786-4114 - -------------------------------------------------------------------------------- JPMorgan Chase Bank Financial Institutions Group 270 Park Avenue, 15th Floor New York, New York 10017 Attn: Helen Newcomb Telephone: (212) 270-6260 Telecopy: (212) 270-1511 - -------------------------------------------------------------------------------- Bank of America, N.A. 231 S. LaSalle Street Chicago, Illinois 60697 Attn: Debra Basler Telephone: (312) 828-3734 Telecopy: (312) 987-0889 - -------------------------------------------------------------------------------- The Bank of Nova Scotia One Liberty Plaza, 26th Floor New York, New York 10006 Attn: Dan Foote Telephone: (212) 225-5077 Telecopy: (212) 225-5090 - -------------------------------------------------------------------------------- Deutsche Bank AG, New York Branch 31 West 52nd Street Mail Stop NYC01-2402 New York, New York 10019 Attn: Clinton M. Johnson Telephone: (212) 469-8101 Telecopy: (212) 469-8366 - -------------------------------------------------------------------------------- National Australia Bank Limited 200 Park Avenue, 34th Floor New York, New York 10166 ` Attn: Dennis Cogan Telephone: (212) 916-9574 Telecopy: (212) 983-1969 - -------------------------------------------------------------------------------- Mellon Bank, N.A. One Mellon Center, Room 4401 Pittsburgh, Pennsylvania 15258 Attn: Karla Maloof Telephone: (412) 236-4147 Telecopy: (412) 234-8087 - -------------------------------------------------------------------------------- Fleet National Bank 777 Main Street Mail Stop CTEH40225C Hartford, Connecticut 06115 Attn: George Urban Telephone: (860) 952-7565 Telecopy: (860) 952-7604 - -------------------------------------------------------------------------------- Royal Bank of Canada One Liberty Plaza, 3rd Floor New York, New York 10006-1404 Attn: Manager, Trade Products Telephone: (212) 428-6235 Telecopy: (212) 428-3015 - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- with a copy of notices to: Royal Bank of Canada One Liberty Plaza, 4th Floor New York, New York 10006-1404 Attn: Alex Birr Telephone: (212) 428-6404 Telecopy: (212) 428-6201 - -------------------------------------------------------------------------------- Barclays Bank PLC P.O. Box 544 1st Floor 54 Lombard Street London EC3V 9EX England Attn: Neil Holmes Telephone: 44 (0) 20 7699 3125 Telecopy: 44 (0) 20 7699 2407 Copies to: Barclays Capital GSU, 5 North Colonade Canary Wharf London E14 4BB England Attn: Graham Smart Telephone: 44 (0) 20 7773 6450 Telecopy: 44 (0) 20 7773 6807 - -------------------------------------------------------------------------------- Comerica Bank 500 Woodward Avenue Detroit, Michigan 48226-3331 Attn: Martin G. Ellis Telephone: (313) 222-9443 Telecopy: (313) 222-5466 - -------------------------------------------------------------------------------- State Street Bank and Trust Company Domestic Lending Office: 225 Franklin Street Boston, Massachusetts 02110 Address for notices: Lafayette Corporate Center 2 Avenue de Lafayette Boston, Massachusetts 02111 Attn: Edward M. Anderson, VP Telephone: (617) 662-3782 - -------------------------------------------------------------------------------- Telecopy: (617) 662-3778 - -------------------------------------------------------------------------------- ABN AMRO Bank, N.V. 208 South LaSalle Street, Suite 1500 Chicago, Illinois 60604-1003 Attn: Credit Administration Telecopy: (313) 992-5111 - -------------------------------------------------------------------------------- HSBC Bank USA 452 Fifth Avenue, 5th Floor New York, New York 10018 Attn: Anthony C. Valencourt Telephone: (212) 525-2579 Telecopy: (212) 525-2573 - -------------------------------------------------------------------------------- Bank One, N.A. 1 Bank One Plaza, Suite IL1-0085 Chicago, Illinois 60670 Attn: Gretchen Roetzer Telephone: (312) 732-8068 Telecopy: (312) 732-4033 - -------------------------------------------------------------------------------- The Bank of Bermuda Limited 6 Front Street Hamilton HM 11 Hamilton HM DX, Bermuda Attn: A. Kerry Davison, VP-Credit Manager (North America) Telephone: (441) 299-6219 Telecopy: (441) 299-6519 - -------------------------------------------------------------------------------- The Bank of N.T. Butterfield 65 Front Street & Son Limited Hamilton HM DX, Bermuda Attn: Jonathan Raynor, VP-Corporate Banking Telephone: (441) 298-4774 Telecopy: (441) 296-0380 - -------------------------------------------------------------------------------- 3 SCHEDULE II EXISTING WACHOVIA LETTERS OF CREDIT [attached hereto] SCHEDULE III EXISTING MELLON LETTER OF CREDIT -------------------------------- [attached hereto] SCHEDULE IV REPLACEMENT LETTER OF CREDIT ---------------------------- [attached hereto] SCHEDULE 4.01(B) Subsidiaries [attached hereto] SCHEDULE 5.02(A) Liens [attached hereto] EXHIBIT A Assignment and Acceptance ASSIGNMENT AND ACCEPTANCE dated as of ____________, 20___ between ________________________ (the "Assignor") and ________________________ (the "Assignee"), and [consented to and] accepted by Wachovia Bank, National Association, as administrative agent (the "Administrative Agent")[, and ACE Limited (the "Parent")]. W I T N E S S E T H WHEREAS, this Assignment and Acceptance (the "Agreement") relates to the Reimbursement Agreement dated as of September 30, 2002 among the Parent and other Account Parties party thereto, the Assignor and the other Banks party thereto, the Syndication Agents party thereto, the Documentation Agents party thereto and the Administrative Agent (as amended or otherwise modified from time to time, the "Reimbursement Agreement"); WHEREAS, as provided under the Reimbursement Agreement, the Assignor has a commitment to participate in Letters of Credit and make Letter of Credit Advances to the Account Parties in an aggregate principal amount at any time outstanding not to exceed $---------------; WHEREAS, Letters of Credit with a total amount available for drawing thereunder of $_______________ are outstanding at the date hereof; WHEREAS, Letter of Credit Advances made to the Account Parties by the Assignor under the Reimbursement Agreement in the aggregate principal amount of $___________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Reimbursement Agreement and the other Loan Documents in respect of a portion of its LC Commitment Amount thereunder in an amount equal to $____________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Letter of Credit Participating Interest, Letter of Credit Participating Interest Commitment, LC Participation Obligations, Letter of Credit Exposure, and Letter of Credit Advances, if any, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Reimbursement Agreement. 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Reimbursement Agreement and the other Loan Documents to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Reimbursement Agreement to the extent of the Assigned Amount, including the outstanding Letter of Credit Participating Interest Commitment and Letter of Credit Exposure, and the amount of the Letter of Credit Advances, if any, outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee[, the Administrative Agent and the Parent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Reimbursement Agreement with an LC Commitment Amount (in addition to any LC Commitment Amount theretofore held by it) equal to the Assigned Amount, and (ii) the LC Commitment Amount of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor shall be released from its obligations under the Reimbursement Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof the amount heretofore agreed between them.1 It is understood that commitment and Letter of Credit fees accrued to the date hereof in respect of the Assigned Amount are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Reimbursement Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. 4. [Consent of the Administrative Agent and the Parent. Pursuant to the Reimbursement Agreement, this Agreement is conditioned upon the consent of the Administrative Agent and, so long as no Default has occurred and is continuing, the Parent. The execution of this Agreement by the Administrative Agent and, if applicable, the Parent is evidence of this consent.] 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition or statements of the Account Parties or any of their respective Subsidiaries, or the validity and enforceability of the obligations of the Account Parties or any of their respective Subsidiaries in respect of any Loan Document. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Account Parties and their respective Subsidiaries. - ------------------- 1/ Amount should combine the principal amount of any Letter of Credit Advances made by the Assignor together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 2 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. [Remainder of page intentionally left blank.] 3 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By: ________________________________ Title: ________________________________ [ASSIGNEE] By: ________________________________ Title: ________________________________ [ACE LIMITED By: ________________________________ Title: ________________________________ WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent By: ________________________________ Title: ________________________________] 4 EXHIBIT B Replacement Letter of Credit Language This Letter of Credit is issued in replacement of and substitution for Letter of Credit No. ____________ issued by Mellon Bank, N.A. in your favor (the "Mellon Letter of Credit"). Upon your receipt of this Letter of Credit, you are requested to send the Mellon Letter of Credit, with authorization for cancellation, to the following address: Mellon Bank, N.A. One Mellon Bank Center Pittsburgh, PA 15258 Attn: Mary K. Jones /2 This Letter of Credit is not presently operative for drawing and shall become operative for drawing only and immediately upon your receipt of a writing from us (which we agree to send to you upon our receipt of a writing from Mellon Bank, N.A. in form and substance satisfactory to us confirming that the Mellon Letter of Credit has been validly cancelled), sent to you at your address set forth above, reading as follows: "Letter of Credit No. __________ issued by the undersigned in the amount of US $_____________ is now operative for drawing." - ------------------ /2 Address subject to change. EX-10.2 4 reim350.txt Exhibit 10.2 Execution Copy ================================================================================ REIMBURSEMENT AGREEMENT among ACE LIMITED ACE BERMUDA INSURANCE LTD. ACE TEMPEST LIFE REINSURANCE LTD. ACE TEMPEST REINSURANCE LTD., as Account Parties, THE BANKS NAMED HEREIN, WACHOVIA BANK, NATIONAL ASSOCIATION, as Issuing Bank and as Administrative Agent JPMORGAN CHASE BANK and BANK OF AMERICA, N.A. as Co-Syndication Agents, and THE BANK OF NOVA SCOTIA and DEUTSCHE BANK AG, NEW YORK BRANCH as Co-Documentation Agents $350,000,000 Secured Letter of Credit Facility WACHOVIA SECURITIES, INC. Sole Book Runner and Lead Arranger Dated as of September 30, 2002 ================================================================================ Table of Contents Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01 Certain Defined Terms.......................................1 SECTION 1.02 Computation of Time Periods; Other Definitional Provisions.................................................16 SECTION 1.03 Accounting Terms and Determinations........................16 ARTICLE II AMOUNTS AND TERMS OF THE LETTERS OF CREDIT SECTION 2.01 The Letters of Credit......................................17 SECTION 2.02 Issuance and Renewals and Drawings, Participations and Reimbursement with Respect to Letters of Credit............18 SECTION 2.03 Repayment of Advances......................................21 SECTION 2.04 Termination or Reduction of the LC Commitment Amounts......23 SECTION 2.05 Fees.......................................................23 SECTION 2.06 Increased Costs, Etc.......................................24 SECTION 2.07 Payments and Computations..................................25 SECTION 2.08 Taxes......................................................26 SECTION 2.09 Sharing of Payments, Etc...................................28 SECTION 2.10 Use of Letters of Credit...................................29 SECTION 2.11 Defaulting Banks...........................................29 SECTION 2.12 Replacement of Affected Bank...............................30 SECTION 2.13 Certain Provisions Relating to the Issuing Bank and Letters of Credit..........................................31 SECTION 2.14 Downgrade Event with Respect to a Bank.....................32 SECTION 2.15 Downgrade Event or Other Event with Respect to the Issuing Bank...............................................34 SECTION 2.16 Non-Dollar Letters of Credit...............................35 SECTION 2.17 Collateral.................................................36 ARTICLE III CONDITIONS OF LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01 Conditions Precedent to Effective Date.....................37 SECTION 3.02 Conditions Precedent to Each Issuance, Extension or Increase of a Letter of Credit.............................39 SECTION 3.03 Determinations Under Section 3.01..........................39 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01 Representations and Warranties of the Account Parties......40 ARTICLE V COVENANTS OF THE ACCOUNT PARTIES SECTION 5.01 Affirmative Covenants......................................44 SECTION 5.02 Negative Covenants.........................................46 SECTION 5.03 Reporting Requirements.....................................50 SECTION 5.04 Financial Covenants........................................53 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01 Events of Default..........................................54 SECTION 6.02 Actions in Respect of the Letters of Credit upon Default...57 ARTICLE VII THE GUARANTY SECTION 7.01 The Guaranty...............................................57 SECTION 7.02 Guaranty Unconditional.....................................58 SECTION 7.03 Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances...................................59 SECTION 7.04 Waiver by the Account Parties..............................59 SECTION 7.05 Subrogation................................................59 SECTION 7.06 Stay of Acceleration.......................................60 SECTION 7.07 Continuing Guaranty; Assignments...........................60 ARTICLE VIII THE AGENTS SECTION 8.01 Authorization and Action...................................61 SECTION 8.02 Agents' Reliance, Etc......................................61 SECTION 8.03 Wachovia and Affiliates....................................61 SECTION 8.04 Bank Credit Decision.......................................62 SECTION 8.05 Indemnification............................................62 SECTION 8.06 Successor Administrative Agent.............................62 SECTION 8.07 Collateral Matters.........................................63 ii ARTICLE IX MISCELLANEOUS SECTION 9.01 Amendments, Etc............................................64 SECTION 9.02 Notices, Etc...............................................64 SECTION 9.03 No Waiver; Remedies........................................65 SECTION 9.04 Costs and Expenses.........................................65 SECTION 9.05 Right of Set-off...........................................66 SECTION 9.06 Binding Effect.............................................66 SECTION 9.07 Assignments and Participations.............................66 SECTION 9.08 Execution in Counterparts..................................69 SECTION 9.09 No Liability of the Issuing Bank...........................69 SECTION 9.10 Confidentiality............................................70 SECTION 9.11 Jurisdiction, Etc..........................................70 SECTION 9.12 Governing Law..............................................71 SECTION 9.13 Waiver of Jury Trial.......................................71 SECTION 9.14 Disclosure of Information..................................71 Schedule I LC Commitment Amounts Schedule I - Part 2 Domestic Lending Offices Schedule II Existing Letters of Credit Schedule III Methodology for Calculation of Collateral Values Schedule 4.01(b) Subsidiaries Schedule 5.02(a) Liens Exhibit A Form of Assignment and Acceptance Exhibit B Form of Collateral Value Report Exhibit C-1 Form of Opinion of Maples and Calder Exhibit C-2 Form of Opinion of Mayer, Brown, Rowe & Maw Exhibit C-3 Form of Opinion of Conyers, Dill & Pearman Exhibit D Form of Pledge and Security Agreement Exhibit E Form of Letter of Instruction iii REIMBURSEMENT AGREEMENT REIMBURSEMENT AGREEMENT dated as of September 30, 2002, among ACE Limited, a Cayman Islands company (the "Parent"), ACE Bermuda Insurance Ltd., a Bermuda company ("ACE Bermuda"), ACE Tempest Life Reinsurance Ltd., a Bermuda company ("Tempest Life"), and ACE Tempest Reinsurance Ltd., a Bermuda company ("Tempest") (ACE Bermuda, Tempest Life and Tempest, together with the Parent, the "Account Parties" and individually an "Account Party"), the banks, financial institutions and other institutional lenders listed on the signature pages hereof as the Initial Banks (the "Initial Banks"), Wachovia Bank, National Association ("Wachovia"), as Issuing Bank (as hereinafter defined), JPMorgan Chase Bank ("JPMorgan Chase"), as syndication agent, Bank of America, N.A. ("Bank of America"), as syndication agent (JPMorgan Chase and Bank of America, together with any successor syndication agent appointed pursuant to Article VIII, the "Syndication Agents"), The Bank of Nova Scotia ("Nova Scotia"), as documentation agent, Deutsche Bank AG, New York Branch ("Deutsche Bank"), as documentation agent (Nova Scotia and Deutsche Bank, together with any successor documentation agent appointed pursuant to Article VIII, the "Documentation Agents"), and Wachovia, as administrative agent (together with any successor administrative agent appointed pursuant to Article VIII, the "Administrative Agent" and, together with the Syndication Agents and the Documentation Agents, the "Agents") for the Banks. PRELIMINARY STATEMENTS: The Account Parties have requested that the Issuing Bank and the Banks make available to the Account Parties a secured credit facility in an amount up to $350,000,000 to provide for the issuance of letters of credit for the account of one or more of the Account Parties. The Issuing Bank and the Banks have indicated their willingness to agree to make such letters of credit available on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Account Parties" has the meaning specified in the recital of parties to this Agreement. "ACE Bermuda" has the meaning specified in the recital of parties to this Agreement. "ACE INA" means ACE INA Holdings Inc., a Delaware corporation. "Adjusted Consolidated Debt" means, at any time, an amount equal to (i) the then outstanding Consolidated Debt of the Parent and its Subsidiaries plus (ii) to the extent exceeding an amount equal to 15% of Total Capitalization, the then issued and outstanding amount of Preferred Securities (other than any Mandatorily Convertible Securities). "Administrative Agent" has the meaning specified in the recital of parties to this Agreement. "Administrative Agent's Account" means the account of the Administrative Agent maintained by the Administrative Agent at Wachovia Bank, National Association, Charlotte Plaza Building CP-23, 201 South College Street, Charlotte, North Carolina 28288-0680, Account No. 5000000027444, Re: ACE Ltd., Attn: Syndication Agency Services, or such other account as the Administrative Agent shall specify in writing to the Banks. "Advance" means a Letter of Credit Advance. "Affected Bank" means any Bank that (i) has made, or notified any Account Party that an event or circumstance has occurred which may give rise to, a demand for compensation under Section 2.06(a) or (b) or Section 2.08 (but only so long as the event or circumstance giving rise to such demand or notice is continuing) or (ii) is a Downgraded Bank. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term "control" (including the terms "controlling", "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to vote 5% or more of the Voting Interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise. "Agents" has the meaning specified in the recital of parties to this Agreement. "Agreement Currency" has the meaning specified in Section 2.16(g). "Applicable Account Party" with respect to any outstanding or proposed Letter of Credit means the Account Party for the account of which such Letter of Credit was or is proposed to be issued. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office. "Approved Investment" means any Investment that was made by the Parent or any of its Subsidiaries pursuant to investment guidelines set forth by the board of directors of the Parent which are consistent with past practices. "Arranger" means Wachovia Securities, Inc. 2 "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and accepted by the Administrative Agent, in accordance with Section 9.07 and in substantially the form of Exhibit A hereto. "Available Amount" of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time or at any future time (assuming compliance at such time or such future time with all conditions to drawing) (including without limitation amounts which have been the subject of drawings by the applicable beneficiary but which have not yet been paid by the Issuing Bank). "Bank of America" has the meaning specified in the recital of parties to this Agreement. "Bankruptcy Law" means any proceeding of the type referred to in Section 6.01(f) or Title 11, U.S. Code, or any similar foreign, federal or state law for the relief of debtors. "Banks" means the Initial Banks and each Person that shall become a Bank hereunder pursuant to Section 9.07(a), (b) and (c) for so long as such Initial Bank or Person, as the case may be, shall be a party to this Agreement. "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the rate of interest announced publicly by Wachovia in Charlotte, North Carolina from time to time, as Wachovia's prime rate (which may not be its best lending rate) or, if higher on the day in question, 1/2 of 1% above the Federal Funds Rate. "Business Day" means a day of the year on which banks are not required or authorized by law to close in Charlotte, North Carolina, New York, New York, London, England or Bermuda. "Capitalized Leases" means all leases that have been or should be, in accordance with GAAP, recorded as capitalized leases. "Change of Control" means the occurrence of any of the following: (a) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Interests of the Parent (or other securities convertible into such Voting Interests) representing 30% or more of the combined voting power of all Voting Interests of the Parent; or (b) a majority of the board of directors of the Parent shall not be Continuing Members; or (c) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that results in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Parent. "Collateral" means all the assets, property and interests in property that shall from time to time be pledged or be purported to be pledged as direct or indirect security for the Obligations pursuant to any one or more of the Security Documents. "Collateral Value" means, for any Business Day as of which it is being calculated, (a) for each category of Collateral set forth on Schedule 3 III, an amount equal to the "Eligible Percentage" of the market value (or, as to cash, the dollar amount) thereof set forth opposite such category of Collateral on Schedule III, and (b) for the Collateral, in the aggregate, the sum of such amounts, in each case as of the close of business on the immediately preceding Business Day or, if such amount is not determinable as of the close of business on such immediately preceding Business Day, as of the close of business on the most recent Business Day on which such amount is determinable, which Business Day shall be not more than two (2) Business Days prior to the Business Day as of which the Collateral Value is being calculated; provided that the calculation of the Collateral Value shall be further subject to the terms and conditions set forth on Schedule III; and provided further that (i) no Collateral (including, without limitation, cash) shall be included in the calculation of the Collateral Value unless the Administrative Agent has a first priority perfected Lien on and security interest in such Collateral pursuant to the Security Documents and (ii) until the Tempest Life Effective Date, any Collateral pledged by Tempest Life shall, for purposes of all calculations of the Collateral Value hereunder, be taken into account solely against Letter of Credit Obligations arising with respect to Letters of Credit issued for the account of Tempest Life. "Collateral Value Report" has the meaning specified in Section 2.17(b). "Commitment Amount" means an LC Commitment Amount or the Letter of Credit Issuance Commitment Amount. "Committed Facility" means, at any time, the aggregate amount of the Banks' LC Commitment Amounts at such time. "Confidential Information" means information that any Loan Party furnishes to any Agent or any Bank, but does not include any such information that is or becomes generally available to the public other than as a result of a breach by any Agent or any Bank of its obligations hereunder or that is or becomes available to such Agent or such Bank from a source other than the Loan Parties that is not, to the best of such Agent's or such Bank's knowledge, acting in violation of a confidentiality agreement with a Loan Party. "Consolidated" refers to the consolidation of accounts in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income of the Parent and its Consolidated Subsidiaries, determined on a Consolidated basis for such period. "Consolidated Net Worth" means at any date the Consolidated stockholders' equity of the Parent and its Consolidated Subsidiaries determined as of such date, provided that such determination for purposes of Section 5.04 shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial Accounting Standards Board of the United States of America. "Contingent Obligation" means, with respect to any Person, any obligation or arrangement of such Person to guarantee or intended to guarantee any Debt, leases, dividends or other payment obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, (a) 4 the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of a primary obligor, (b) the obligation to make take-or-pay or similar payments, if required, regardless of nonperformance by any other party or parties to an agreement or (c) any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that Contingent Obligations shall not include any obligations of any such Person arising under insurance contracts entered into in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the instrument evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder), as determined by such Person in good faith. "Continuing Member" means a member of the Board of Directors of the Parent who either (i) was a member of the Parent's Board of Directors on the date of execution and delivery of this Agreement by the Parent and has been such continuously thereafter or (ii) became a member of such Board of Directors after such date and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Parent's Board of Directors. "Custodial Account" means each custodial, brokerage or similar account of any Account Party maintained by a custodian, broker or other securities intermediary as a "securities account" within the meaning of Section 8-501(a) of the Uniform Commercial Code for such Account Party as the "entitlement holder" within the meaning of Section 8-102(7) of the Uniform Commercial Code pursuant to a Custodial Agreement, on which (and on the contents of which) a Lien has been granted as security for the Obligations. "Custodial Agreement" means each custodial or similar agreement between the Account Parties (or any of them) and a Custodian, pursuant to which one or more Custodial Accounts are maintained, in each case as amended. "Custodian" means (i) State Street (in its capacity as custodian of the State Street Custodial Accounts) and (ii) each other bank or financial institution that maintains a Custodial Account (in its capacity as custodian thereof), in each case including any sub-custodian. "Debenture" means debt securities issued by ACE INA or the Parent to a Special Purpose Trust in exchange for proceeds of Preferred Securities and common securities of such Special Purpose Trust. "Debt" of any Person means, without duplication for purposes of calculating financial ratios, (a) all indebtedness of such Person for 5 borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person's business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under Capitalized Leases (excluding imputed interest), (f) all obligations of such Person under acceptance, letter of credit or similar facilities, (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests (except for obligations to pay for Equity Interests within customary settlement periods) in such Person or any other Person or any warrants, rights or options to acquire such capital stock (excluding payments under a contract for the forward sale of ordinary shares of such Person issued in a public offering), valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Contingent Obligations of such Person in respect of Debt (of the types described above) of any other Person and (i) all indebtedness and other payment obligations referred to in clauses (a) through (h) above of another Person secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness or other payment obligations; provided, however, that the amount of Debt of such Person under clause (i) above shall, if such Person has not assumed or otherwise become liable for any such Debt, be limited to the lesser of the principal amount of such Debt or the fair market value of all property of such Person securing such Debt; provided further that "Debt" shall not include obligations in respect of insurance or reinsurance contracts entered into in the ordinary course of business; provided further that, solely for purposes of Section 5.04 and the definitions of "Adjusted Consolidated Debt" and "Total Capitalization", "Debt" shall not include (x) any contingent obligations of any Person under or in connection with acceptance, letter of credit or similar facilities or (y) obligations of the Parent or ACE INA under any Debentures or under any subordinated guaranty of any Preferred Securities or obligations of a Special Purpose Trust under any Preferred Securities. "Default" means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. "Defaulted Amount" means, with respect to any Bank at any time, any amount required to be paid by such Bank to any Agent or any other Bank hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Bank to (a) the Issuing Bank pursuant to Section 2.02(e) to purchase a portion of a Letter of Credit Advance made by the Issuing Bank and (b) any Agent or the Issuing Bank pursuant to Section 8.05 to reimburse such Agent or the Issuing Bank for such Bank's ratable share of any amount required to be paid by the Banks to such Agent or the Issuing Bank as provided therein. "Defaulting Bank" means, at any time, any Bank that, at such time, (a) owes a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 6.01(f). 6 "Deutsche Bank" has the meaning specified in the recital of parties to this Agreement. "Documentation Agents" has the meaning specified in the recital of parties to this Agreement. "Dollar Equivalent" has the meaning specified in Section 2.16(h). "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" opposite its name on Part 2 of Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Bank, as the case may be, or such other office of such Bank as such Bank may from time to time specify to any Account Party and the Administrative Agent. "Downgrade Account" has the meaning specified in Section 2.14(a). "Downgrade Event" means, with respect to any Bank, a reduction of the credit rating for the senior unsecured unsupported long-term debt of such Bank (or, if no such rating exists, then a reduction of the long-term issuer credit rating of such Bank) by S&P or Moody's. "Downgrade Notice" has the meaning specified in Section 2.14(a). "Downgraded Bank" means any Bank which has a credit rating of less than A- (in the case of S&P) or A3 (in the case of Moody's) for its senior unsecured unsupported long-term debt or which does not have any credit rating on such debt from one of S&P or Moody's; provided, that if at any time such Bank has no such senior unsecured unsupported long-term debt rating from either rating service but does have a long-term issuer credit rating from either or both services, then such Bank shall not be considered a Downgraded Bank so long as such long-term issuer credit rating remains at or above A- (in the case of S&P) or A3 (in the case of Moody's). "Effective Date" means the first date on which the conditions set forth in Article III shall have been satisfied. "Eligible Assignee" means (i) a Bank, (ii) an Affiliate of a Bank, or (iii) a commercial bank, a savings bank or other financial institution that is approved by the Administrative Agent and the Issuing Bank and, unless an Event of Default has occurred and is continuing at the time any assignment is effected pursuant to Section 9.07, the Parent (such approvals not to be unreasonably withheld or delayed); provided, however, that neither any Loan Party nor any Affiliate of a Loan Party shall qualify as an Eligible Assignee under this definition. "Environmental Action" means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, any Environmental Permit or Hazardous Material or arising from alleged injury or threat to health, safety or the environment, including, without limitation, (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. 7 "Environmental Law" means any Federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, writ, judgment, injunction, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law. "Equity Interests" means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means any Person that for purposes of Title IV of ERISA is a member of the controlled group of any Loan Party, or under common control with any Loan Party, within the meaning of Section 414 of the Internal Revenue Code or Section 4001 of ERISA. "Events of Default" has the meaning specified in Section 6.01. "Existing Letters of Credit" means, collectively, the letters of credit issued by Wachovia pursuant to the Existing Reimbursement Agreement and outstanding on the Effective Date, which letters of credit are listed on Schedule II hereto. "Existing Reimbursement Agreement" means the Reimbursement Agreement, dated as of December 20, 2001, among the Account Parties, the banks and other lenders named therein, Fleet National Bank, as Documentation Agent, and Wachovia, as Issuing Bank and as Administrative Agent, as amended. "Expiration Date" shall mean September 29, 2003. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the 8 average of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" means the fee letter dated August 23, 2002 among the Parent, Wachovia and the Arranger, as amended. "Fiscal Year" means the fiscal year of the Parent and its Consolidated Subsidiaries ending on December 31 in any calendar year. "Foreign Government Scheme or Arrangement" has the meaning specified in Section 4.01 (n) (iv). "Foreign Plan" has the meaning specified in Section 4.01 (n) (iv). "GAAP" has the meaning specified in Section 1.03. "Guaranty" means the undertaking by each of the Account Parties under Article VII. "Hazardous Materials" means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. "Hedge Agreements" means interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other hedging agreements. "Indemnified Party" has the meaning specified in Section 9.04(b). "Initial Banks" has the meaning specified in the recital of parties to this Agreement. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Investment" in any Person means any loan or advance to such Person, any purchase or other acquisition of any Equity Interests or Debt or the assets comprising a division or business unit or a substantial part or all of the business of such Person, any capital contribution to such Person or any other direct or indirect investment in such Person, including, without limitation, any acquisition by way of a merger or consolidation and any arrangement pursuant to which the investor incurs Debt of the types referred to in clause (h) or (i) of the definition of "Debt" in respect of such Person; provided, however, that any purchase by any Loan Party or any Subsidiary of any catastrophe-linked instruments which are (x) issued for the purpose of transferring traditional reinsurance risk to the capital markets and (y) purchased by such Loan Party or Subsidiary in accordance with its customary reinsurance underwriting procedures, or the entry by any Loan Party or any Subsidiary into swap instruments relating to such instruments in accordance with such procedures, shall be deemed to be the entry by such Person into a reinsurance contract and shall not be deemed to be an Investment by such Person. "Issuing Bank" means Wachovia and any "New Issuing Bank" appointed in accordance with Section 2.15. 9 "JPMorgan Chase" has the meaning specified in the recital of parties to this Agreement. "Judgment Currency" has the meaning specified in Section 2.16(g). "LC Commitment Amount" means, with respect to any Bank at any time, the amount set forth opposite such Bank's name on Schedule I hereto under the caption "LC Commitment Amount" or, if such Bank has entered into one or more Assignment and Acceptances, set forth for such Bank in the Register maintained by the Administrative Agent pursuant to Section 9.07(d) as such Bank's "LC Commitment Amount", as such amount may be reduced at or prior to such time pursuant to Section 2.04. "LC Participation Obligations" has the meaning specified in Section 2.14(a). "L/C Related Documents" has the meaning specified in Section 2.03(a)(ii). "Letter of Credit Advance" has the meaning specified in Section 2.02(f). "Letter of Credit Agreement" has the meaning specified in Section 2.02(a). "Letter of Credit Business Day" means a Business Day. "Letter of Credit Exposure" at any time means the sum at such time of (a) the aggregate outstanding amount of Letter of Credit Advances, (b) the aggregate Available Amounts of all outstanding Letters of Credit (including, without limitation, all outstanding Existing Letters of Credit) and (c) the aggregate Available Amounts of all Letters of Credit which have been requested by an Account Party to be issued hereunder but have not yet been so issued. "Letter of Credit Issuance Commitment Amount" means at any time the lesser of (a) $350,000,000 (or such lesser amount as may be agreed in writing among the Account Parties, the Administrative Agent and the Issuing Bank) and (b) the aggregate amount of the LC Commitment Amounts then in effect. "Letter of Credit Outstandings" at any time means the sum at such time of (a) the aggregate outstanding amount of Letter of Credit Advances and (b) the aggregate Available Amounts of all outstanding Letters of Credit, in each case after giving effect to any issuance or renewal of a Letter of Credit occurring on the date of determination and any other changes in the aggregate amounts under clauses (a) and (b) above as of such date, including as a result of any reimbursements of outstanding unpaid drawings under any Letter of Credit or any reductions in the maximum amount available for drawings under any Letter of Credit taking effect on such date. "Letter of Credit Participating Interest" has the meaning specified in Section 2.02(d). 10 "Letter of Credit Participating Interest Commitment" has the meaning specified in Section 2.02(d). "Letter of Credit Participating Interest Percentage" means, for any Bank, a fraction, expressed as a percentage, the numerator of which is such Bank's LC Commitment Amount and the denominator of which is the aggregate LC Commitment Amounts of all the Banks. "Letter of Instruction" means a letter in substantially the form of Exhibit E. "Letters of Credit" has the meaning specified in Section 2.01. "Lien" means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property. "Loan Documents" means (i) this Agreement, (ii) the Fee Letter, (iii) each Letter of Credit Agreement, (iv) each Security Document and (v) each Letter of Instruction, in each case as amended. "Loan Parties" means the Account Parties. "Mandatorily Convertible Preferred Securities" means units comprised of (i) Preferred Securities or preferred shares of Parent and (ii) a contract for the sale of ordinary shares of the Parent (including "Feline Prides(TM)", "Rhinos(TM)" or any substantially similar securities). "Margin Stock" has the meaning specified in Regulation U. "Material Adverse Change" means any material adverse change in the business, financial condition, operations or properties of the Parent and its Subsidiaries, taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, condition, operations or properties of the Parent and its Subsidiaries, taken as a whole, (b) the rights and remedies of the Administrative Agent, the Issuing Bank or any Bank under any Loan Document or (c) the ability of the Loan Parties, taken as a whole, to perform their obligations under the Loan Documents. "Material Financial Obligation" means a principal amount of Debt and/or payment obligations in respect of any Hedge Agreement of the Parent and/or one or more of its Subsidiaries arising in one or more related or unrelated transactions exceeding in the aggregate $25,000,000. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which any Loan Party or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. 11 "Non-Dollar Letters of Credit" has the meaning specified in Section 2.16(a). "Nova Scotia" has the meaning specified in the recital of parties to this Agreement. "OECD" means the Organization for Economic Cooperation and Development. "Obligations" means all obligations of every nature of the Account Parties from time to time owing, due or payable to either Agent or to any Bank under this Agreement or any of the other Loan Documents, whether for principal, reimbursement for payments made under Letters of Credit (including, without limitation, Existing Letters of Credit), interest (including, to the greatest extent permitted by law, post-petition interest), fees, expenses, indemnities or any other obligations, and whether now existing or hereafter incurred, created or arising and whether direct or indirect, absolute or contingent, or due or to become due (including obligations of performance). "Other Taxes" has the meaning specified in Section 2.08(b). "Overnight Rate" has the meaning specified in Section 2.16(h). "Parent" has the meaning specified in the recital of parties to this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation (or any successor). "Pension Plan" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title IV of ERISA (other than any "multiemployer plan" as such term is defined in section 4001(a)(3) of ERISA), and to which any Loan Party or any ERISA Affiliate may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Permitted Collateral Liens" has the meaning specified in Section 5.02(a). "Permitted Liens" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced or which are being contested in good faith by appropriate proceedings: (a) Liens for taxes, assessments and governmental charges or levies not yet due and payable; (b) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 90 days; (c) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; and (d) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. 12 "Pledge and Security Agreement" means the Pledge and Security Agreement made by the Account Parties party thereto in favor of the Administrative Agent, in substantially the form of Exhibit D, as amended. "Preferred Interests" means, with respect to any Person, Equity Interests issued by such Person that are entitled to a preference or priority over any other Equity Interests issued by such Person upon any distribution of such Person's property and assets, whether by dividend or upon liquidation. "Preferred Securities" means (i) preferred securities issued by a Special Purpose Trust which shall provide, among other things, that dividends shall be payable only out of proceeds of interest payments on the Debentures, or (ii) other instruments that may be treated in whole or in part as equity for rating agency purposes while being treated as debt for tax purposes. "Pro Rata" means from and to the Banks in accordance with their respective Letter of Credit Participating Interest Percentages. "Pro Rata Share" means, for any Bank, its share determined Pro Rata, in accordance with the definition of the term "Pro Rata." "Redeemable" means, with respect to any Equity Interest, any Debt or any other right or obligation, any such Equity Interest, Debt, right or obligation that (a) the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer or (b) is redeemable at the option of the holder. "Register" has the meaning specified in Section 9.07(d). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means, at any time, Banks owed or holding at least a majority in interest of the sum of (a) aggregate principal amount of the Letter of Credit Advances outstanding at such time and (b) the aggregate Available Amount of all Letters of Credit outstanding at such time, or, if no such principal amount and no Letters of Credit are outstanding at such time, Banks having LC Commitment Amounts constituting at least a majority in interest of the aggregate of the LC Commitment Amounts; provided, however, that if any Bank shall be a Defaulting Bank at such time, there shall be excluded from the determination of Required Banks at such time (A) the aggregate principal amount of the interest of such Bank in Letter of Credit Advances and outstanding at such time, (B) such Bank's Pro Rata Share of the aggregate Available Amount of all Letters of Credit outstanding at such time and (C) the Unused LC Commitment Amount of such Bank at such time. "Responsible Officer" means the Chairman, Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Treasurer or General Counsel of the Parent. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. 13 "Securitization Transaction" means any sale, assignment or other transfer by Parent or any Subsidiary of any accounts receivable, premium finance loan receivables, lease receivables or other payment obligations owing to Parent or such Subsidiary or any interest in any of the foregoing, together in each case with any collections and other proceeds thereof, any collection or deposit accounts related thereto, and any collateral, guaranties or other property or claims in favor of Parent or such Subsidiary supporting or securing payment by the obligor thereon of, or otherwise related to, any such receivables. "Security Documents" means, collectively, (i) the Pledge and Security Agreement and all other security agreements, pledge agreements, charges and mortgages at any time delivered to the Administrative Agent to create or evidence the Liens securing the Obligations, and (ii) the State Street Control Agreements and all other control agreements and similar agreements pursuant to which a Lien on a Custodial Account (and on the contents thereof) securing the Obligations is perfected in favor of the Administrative Agent, in each case under (i) and (ii), as amended. "Significant Subsidiary" means a Subsidiary of Parent that is a "significant subsidiary" of the Parent under Regulation S-X promulgated by the Securities and Exchange Commission. "Solvent" and "Solvency" mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Special Purpose Trust" means a special purpose business trust established by the Parent or ACE INA of which the Parent or ACE INA will hold all the common securities, which will be the issuer of the Preferred Securities, and which will loan to the Parent or ACE INA (such loan being evidenced by the Debentures) the net proceeds of the issuance and sale of the Preferred Securities and common securities of such Special Purpose Trust. "State Street" means State Street Bank and Trust Company. "State Street Control Agreements" means, collectively, the control agreements among State Street, the Administrative Agent and (respectively) each of the Account Parties, each in form and substance reasonably satisfactory to the Administrative Agent, pursuant to which a Lien on the State Street Custodial Accounts and the contents thereof and all security entitlements related thereto securing the Obligations is perfected in favor of the Administrative Agent, as amended. 14 "State Street Custodial Accounts" means, collectively, the Custodial Accounts of each of the Account Parties pledged pursuant to the Pledge and Security Agreement and in which the Administrative Agent's Lien is perfected pursuant to the State Street Control Agreements. "State Street Custodial Agreements" means, collectively, the Custodial Agreements, each dated as of December 14, 2001, between State Street and (respectively) each of the Account Parties, in each case as amended. "Subsidiary" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture or limited liability company or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. "Subsidiary Guarantors" means the Account Parties (other than the Parent). "Syndication Agents" has the meaning specified in the recital of parties to this Agreement. "Taxes" has the meaning specified in Section 2.08(a). "Tempest" has the meaning specified in the recital of parties to this Agreement. "Tempest Life" has the meaning specified in the recital of parties to this Agreement. "Tempest Life Effective Date" has the meaning specified in Section 7.01(c). "Total Capitalization" means, at any time, an amount (without duplication) equal to (i) the then outstanding Consolidated Debt of the Parent and its Subsidiaries plus (ii) Consolidated stockholders equity of the Parent and its Subsidiaries plus (without duplication) (iii) the then issued and outstanding amount of Preferred Securities (including Mandatorily Convertible Preferred Securities) and (without duplication) Debentures. "Uniform Commercial Code" has the meaning specified in the Pledge and Security Agreement. "Unused LC Commitment Amount" means, with respect to any Bank at any time, (a) such Bank's LC Commitment Amount at such time minus (b) such Bank's Pro Rata Share of (i) the aggregate Available Amount of all Letters of Credit hereunder (including, without limitation, all Existing Letters of Credit) and (ii) the aggregate principal amount of all Letter of Credit Advances made by the Issuing Bank pursuant to Section 2.02(f) and outstanding at such time (whether held by the Issuing Bank or the Banks). 15 "U.S. Government Securities" means securities issued or unconditionally guaranteed by the United States of America or any agency or instrumentality thereof and backed by the full faith and credit of the United States of America. "Voting Interests" means shares of capital stock issued by a corporation, or equivalent Equity Interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. "Wachovia" has the meaning specified in the recital of parties to this Agreement. "Welfare Plan" means a welfare plan, as defined in Section 3(1) of ERISA, that is maintained for employees of any Loan Party or in respect of which any Loan Party could have liability. "Withdrawal Liability" has the meaning specified in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02 Computation of Time Periods; Other Definitional Provisions. In this Agreement and the other Loan Documents in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". References in the Loan Documents to any agreement or contract "as amended" shall mean and be a reference to such agreement or contract as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with its terms. SECTION 1.03 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time in the United States of America ("GAAP"), applied on a basis consistent (except for changes concurred in by the Parent's independent public accountants) with the most recent audited consolidated financial statements of the Parent and its Subsidiaries delivered to the Banks; provided that, if the Parent notifies the Administrative Agent that the Parent wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Parent that the Required Banks wish to amend Article V for such purpose), then the Parent's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective (and, concurrently with the delivery of any financial statements required to be delivered hereunder, the Parent shall provide a statement of reconciliation conforming such financial information to such generally accepted accounting principles as previously in effect), until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Parent and the Required Banks. 16 ARTICLE II AMOUNTS AND TERMS OF THE LETTERS OF CREDIT SECTION 2.01 The Letters of Credit. The Issuing Bank agrees, on the terms and subject to the conditions herein set forth, to issue standby letters of credit (the "Letters of Credit") for the account of any Account Party on any Letter of Credit Business Day from time to time during the period from the Effective Date to the Expiration Date. From and after the Effective Date, the Existing Letters of Credit shall be Letters of Credit hereunder. The Issuing Bank shall have no obligation to issue, and no Account Party will request the issuance of, any Letter of Credit hereunder if either (a) at the time of issuance of such Letter of Credit and after giving effect thereto, the Letter of Credit Exposure would exceed the lesser of (x) the Letter of Credit Issuance Commitment Amount and (y) the aggregate Collateral Value, or (b) any Bank's Pro Rata Share of the Available Amount of such Letter of Credit exceeds, immediately before the time of such issuance, an amount equal to such Bank's Pro Rata Share of the total Unused LC Commitment Amounts of the Banks at such time (as such amount shall be advised by the Administrative Agent to the Issuing Bank as contemplated by Section 2.02). Unless all the Banks consent otherwise in writing, the Issuing Bank shall have no obligation to issue, and no Account Party shall request the issuance of, any Letter of Credit hereunder if the Available Amount of such Letter of Credit exceeds, immediately before the time of such issuance, an amount equal to the total Unused LC Commitment Amounts of the Banks at such time (as such amount shall be advised by the Administrative Agent to the Issuing Bank as contemplated by Section 2.02). The Issuing Bank shall have no obligation to issue, and no Account Party shall request the issuance of, any Letter of Credit except within the following limitations: (i) subject to the provisions of Section 2.16, each Letter of Credit shall be denominated in U.S. dollars, (ii) each Letter of Credit shall be payable only against sight drafts (and not time drafts) and (iii) no Letter of Credit shall have an expiration date (including all rights of the Applicable Account Party or the beneficiary to require renewal) later than one year after the date of issuance thereof, but a Letter of Credit may by its terms be automatically renewable annually unless the Issuing Bank notifies the beneficiary thereof of its election not to renew such Letter of Credit (which the Issuing Bank agrees to do on and subject to the terms of Section 2.02(c)). 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. Letters of Credit may be issued for the account of any Subsidiary of the Parent that is not an Account Party hereunder, provided that the Parent shall be a joint applicant and account party with respect to any such Letter of Credit. By their execution of this Agreement, the Banks party hereto as of the Effective Date that are also party to the Existing Reimbursement Agreement as "Banks" thereunder hereby waive, in their capacity as the "Required Banks" under the Existing Reimbursement Agreement, the requirement of three Business Days' prior written notice for the termination of the LC Commitment Amounts (as defined in the Existing Reimbursement Agreement) pursuant to Section 2.04 thereof, and agree that such notice may be given on the Effective Date of this Agreement. 17 SECTION 2.02 Issuance and Renewals and Drawings, Participations and Reimbursement with Respect to Letters of Credit. (a) Request for Issuance. An Account Party may from time to time request, upon at least three Letter of Credit Business Days' notice (given not later than 11:00 A.M. Charlotte, North Carolina time on the last day permitted therefor), the Issuing Bank to issue or renew (other than any automatic renewal thereof) a Letter of Credit by: (i) delivering to the Issuing Bank either (x) a written request to such effect or (y) a request made in electronic form through the Issuing Bank's remote access system and in accordance with the terms and conditions (including any written agreements between the Issuing Bank and any Account Party) applicable thereto, in each case specifying the date on which such Letter of Credit is to be issued (which shall be a Letter of Credit Business Day), the expiration date thereof, the Available Amount thereof, the name and address of the beneficiary thereof and the form thereof, and in each case with a copy of such request (or, in the case of clause (y) above, a written or electronic summary thereof) to the Administrative Agent; and (ii) in the case of the issuance of a Letter of Credit, delivering to the Issuing Bank a completed agreement and application with respect to such Letter of Credit as the Issuing Bank may specify for use in connection with such requested Letter of Credit (a "Letter of Credit Agreement"), together with such other certificates, documents and other papers or information as are specified in such Letter of Credit Agreement or as may be required pursuant to the Issuing Bank's customary practices for the issuance of letters of credit (including requirements relating to requests made through the Issuing Bank's remote access system). In addition, the applicable Account Party shall deliver to the Administrative Agent a Collateral Value Report not later than 11:00 A.M. Charlotte, North Carolina time on the Letter of Credit Business Day immediately preceding the date on which such Letter of Credit is to be issued. The Administrative Agent shall, promptly upon receiving a copy of the notice referred to in clause (i) above, notify the Banks of such proposed Letter of Credit (which notice shall specify the Available Amount and term of such proposed Letter of Credit) or such proposed renewal of a Letter of Credit (which notice shall specify the term of such renewal), and shall determine, as of 11:00 A.M. (Charlotte, North Carolina time) on the Business Day immediately preceding 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 Administrative Agent to cease issuing or renewing Letters of Credit as contemplated by this Agreement, the Administrative Agent shall immediately notify the Issuing Bank (in writing or by telephone immediately confirmed in writing) that the Issuing Bank is not authorized to issue or renew, as the case may be, such Letter of Credit. If the Issuing Bank issues or renews a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Applicable Account Party shall otherwise direct, and shall promptly notify the Administrative Agent thereof and furnish a copy thereof to the Administrative Agent. The Issuing Bank may 18 issue Letters of Credit through any of its branches or Affiliates (whether domestic or foreign) that issue letters of credit, and each Account Party authorizes and directs the Issuing Bank to select the branch or Affiliate that will issue or process any Letter of Credit. (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 issued for its account or increase (or, with the consent of the beneficiary, decrease) the Available Amount of or the amount available to be drawn on such Letter of Credit. Such extension or increase shall for all purposes hereunder (including for purposes of Section 2.02(a)) 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, Renewal and Amendment. As between the Issuing Bank, on the one hand, and the Agents and the Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing or renewing a proposed Letter of Credit unless it shall have received notice from the Administrative Agent as provided in Section 2.02(a) hereof that it is not authorized to do so (and, in the case of automatic renewals, ten days shall have passed following the date of the Issuing Bank's receipt of such notice), notwithstanding any subsequent notices to the Issuing Bank, any knowledge of a Default, any knowledge of failure of any condition specified in Article III 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 Agreements, or waive compliance with any condition of issuance, renewal or payment, without the consent of, and without liability to, any Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases the Available Amount of or the amount available to be drawn on an outstanding Letter of Credit shall be subject to Section 2.01. With respect to each Letter of Credit that remains outstanding at any time after the Expiration Date and that provides by its terms for automatic renewal, the Issuing Bank shall notify the beneficiary thereof, in accordance with the terms specified for such notice in such Letter of Credit, of the Issuing Bank's election not to renew such Letter of Credit. (d) Letter of Credit Participating Interests. Concurrently with the issuance of each Letter of Credit (and upon the Effective Date, with respect to each Existing Letter of Credit, and without any further action by any party to this Agreement), 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 Agreement, all reimbursement obligations with respect to such Letter of Credit, and all Collateral, guarantees and other rights from time to time directly or indirectly 19 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 Advances made by a Bank other than the Issuing Bank and other than Letter of Credit commissions under Section 2.05(c)(i), payable from time to time under or in connection with a Letter of Credit or Letter of Credit Agreement shall be for the sole account of the Issuing Bank. On the date that any assignee becomes a party to this Agreement in accordance with Section 9.07 hereof, Letter of Credit Participating Interests in all outstanding Letters of Credit held by the Bank from which such assignee acquired its interest hereunder shall be proportionately reallocated between such assignee and such assignor Bank (and, to the extent such assignor Bank is the Issuing Bank, the assignee Bank shall be deemed to have acquired a Letter of Credit Participating Interest from the Issuing Bank to such extent). Notwithstanding any other provision hereof, each Bank hereby agrees that its obligation to participate in each Letter of Credit, its obligation to make the payments specified in Section 2.02(e), 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. (e) 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 2.03(a), the Issuing Bank may notify the Administrative Agent thereof (which notice may be by telephone), and the Administrative Agent shall forthwith notify each Bank (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Administrative Agent's close of business on the date such notice is given (if notice is given by 2:00 P.M. Charlotte, North Carolina time) or 10:00 A.M. Charlotte, North Carolina time the following day (if notice is given after 2:00 P.M. Charlotte, North Carolina time or in the case of any Bank whose Applicable Lending Office is located in Europe), each Bank will pay to the Administrative 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. Amounts received by the Administrative Agent for the account of the Issuing Bank shall be forthwith transferred, in immediately available funds, to the Issuing Bank. If and to the extent that any Bank fails to make such payment to the Administrative Agent for the account of 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 such payment is due from such Bank to the Issuing Bank to but not including the date of repayment to the Issuing Bank (before and after judgment) at a rate per annum for each day (i) from and including the date such payment is due from such Bank to the Issuing Bank to and including the second Business Day thereafter equal to the Federal Funds Rate and (ii) thereafter equal to the Base Rate. For avoidance of doubt, it is understood and agreed by the Banks that Letters of Credit issued prior to the Expiration Date may, by their terms, remain outstanding after the Expiration Date and that the obligations of the Banks to make payments under this Section 2.02(e) shall continue from and after the Expiration Date until the expiration or termination of all Letters of Credit, subject to and in accordance with the terms hereof. (f) Letter of Credit Advances. The term "Letter of Credit Advance" is used in this Agreement in accordance with the meanings set forth in this 20 paragraph 2.02(f). The making of any payment by the Issuing Bank under a Letter of Credit is sometimes referred to herein as the making of a Letter of Credit Advance by the Issuing Bank in the amount of such payment. The making of any payment by a Bank for the account of the Issuing Bank under Section 2.02(e) on account of an unreimbursed drawing on a Letter of Credit is sometimes referred to herein as the making of a Letter of Credit Advance to the Applicable Account Party by such Bank. The making of such a Letter of Credit Advance by a Bank with respect to an unreimbursed drawing on a Letter of Credit shall reduce, by a like amount, the outstanding Letter of Credit Advance of the Issuing Bank with respect to such unreimbursed drawing. (g) Letter of Credit Reports. The Issuing Bank will furnish to the Administrative Agent prompt written notice of each issuance or renewal of a Letter of Credit (including the Available Amount and expiration date thereof), amendment to a Letter of Credit, cancellation of a Letter of Credit and payment on a Letter of Credit. The Administrative Agent will furnish (A) to each Bank prior to the tenth Business Day of each calendar quarter a written report summarizing issuance, renewal and expiration dates of Letters of Credit issued or renewed during the preceding calendar quarter and payments and reductions in Available Amount during such calendar quarter on all Letters of Credit and (B) to each Bank prior to the tenth Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit. SECTION 2.03 Repayment of Advances. (a) Account Parties' Reimbursement Obligation. (i) Each Account Party hereby agrees to reimburse the Issuing Bank (by making payment to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.07) in the amount of each payment made by the Issuing Bank under any Letter of Credit issued for such Account Party's account, such reimbursement to be made on the date such payment under such Letter of Credit is made by the Issuing Bank (but not earlier than the date which is one Business Day after notice of such payment under such Letter of Credit or of the drawing giving rise to such payment under such Letter of Credit is given to such Account Party). Such reimbursement obligation shall be payable without further notice, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. To the extent such payment by such Account Party is not timely made as provided in the first sentence of this clause (i), (x) such Account Party hereby agrees to pay to the Administrative Agent, for the respective accounts of the Issuing Bank and the Banks which have funded their respective shares of such amount remaining unpaid by such Account Party, on demand, interest thereon at a rate per annum for each day equal to 2% plus the Base Rate in effect on such day, and (y) each Account Party shall be deemed to have delivered an irrevocable and continuing Letter of Instruction to the Administrative Agent (which each Account Party hereby irrevocably authorizes the Administrative Agent to date the date that such payment to the Administrative Agent is due and payable and to deliver to the Persons identified therein) instructing the Administrative Agent to obtain, receive and apply at or after such time such part of the Collateral or the proceeds thereof as is equivalent to such reimbursement obligation and any interest thereon that may accrue prior to such application. 21 (ii) The obligation of each Account Party to reimburse the Issuing Bank for any payment made by the Issuing Bank under any Letter of Credit, and the obligation of each Bank under Section 2.02(e) with respect thereto, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, the applicable Letter of Credit Agreement and any other applicable agreement or instrument under all circumstances, including, without limitation, the following circumstances: (A) any lack of validity or enforceability of any Loan Document, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (all of the foregoing being, collectively, the "L/C Related Documents"); (B) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of any Account Party or any other Person in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; (C) the existence of any claim, set-off, defense or other right that any Account Party or any other Person may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for which any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction; (D) any statement or any other document presented under a 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; (E) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; (F) any exchange, release or non-perfection of any Collateral, or any release or amendment or waiver of or consent to departure from the Guaranty or any other guarantee, for all or any of the obligations of any Account Party or any other Person in respect of the L/C Related Documents; or (G) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Account Party or a guarantor. (b) Rescission. If any amount received by the Issuing Bank on account of any Letter of Credit Advance 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 22 or payment is required, whether or not such matter has been adjudicated), each Bank will (except to the extent a corresponding amount received by such Bank on account of its Letter of Credit Advance relating to the same payment on a Letter of Credit has been avoided, rescinded or otherwise returned or paid over by such Bank), promptly upon notice from the Administrative Agent or the Issuing Bank, pay over to the Administrative 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. SECTION 2.04 Termination or Reduction of the LC Commitment Amounts. The Parent may, upon at least three Business Days' notice to the Administrative Agent, terminate in whole or reduce in part the unused portion of the LC Commitment Amounts; provided, however, that each partial reduction (i) shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) shall be made ratably among the Banks in accordance with their LC Commitment Amounts and (iii) shall automatically reduce the Issuing Bank's Letter of Credit Issuance Commitment Amount, as contemplated by the definition of that term. SECTION 2.05 Fees. (a) Commitment Fee. The Account Parties jointly and severally agree to pay to the Administrative Agent for the account of the Banks a commitment fee, from the Effective Date in the case of each Initial Bank and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Bank in the case of each other Bank until the Expiration Date, payable in arrears quarterly on the last Business Day of each March, June, September and December commencing December 31, 2002 and on the Expiration Date, at a rate equal to 0.08% per annum on the average daily Unused LC Commitment Amount of each Bank during such quarter (or shorter period); provided, however, that no commitment fee shall accrue on the LC Commitment Amount of a Defaulting Bank so long as such Bank shall be a Defaulting Bank. (b) Administrative Agent's Fees. The Account Parties jointly and severally agree to pay to the Administrative Agent for its own account such fees as may from time to time be agreed between the Parent and the Administrative Agent. (c) Letter of Credit Fees, Etc. (i) The Account Parties jointly and severally agree to pay to the Administrative Agent for the account of each Bank a commission, payable in arrears quarterly on the last Business Day of each March, June, September and December commencing December 31, 2002 and on the Expiration Date, on such Bank's Pro Rata Share of the average daily aggregate Available Amount during such quarter (or shorter period) of all Letters of Credit outstanding from time to time at a rate equal to 0.30% per annum. (ii) The Account Parties jointly and severally agree to pay to the Issuing Bank, for its own account, (x) the facing fee referred to the Fee Letter, on the terms set forth therein, and (y) the Issuing Bank's customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, 23 relating to letters of credit as are from time to time in effect. With respect to the Existing Letters of Credit, Wachovia shall be entitled to receive the fees and other amounts provided for under this Section 2.05(c)(ii) (to the extent not previously paid to Wachovia pursuant to the Existing Reimbursement Agreement) as if the Existing Letters of Credit were issued hereunder on the Effective Date. (iii) Notwithstanding the foregoing provisions of this Section 2.05(c), until the Tempest Life Effective Date, Tempest Life shall be obligated under this Section 2.05(c) only for the portion of such fees, commissions and charges allocable or attributable to Letters of Credit issued for its own account. SECTION 2.06 Increased Costs, Etc. (a) If, due to either (i) the introduction of or any change in or in the interpretation of, in each case after the date hereof, any law or regulation or (ii) the compliance with any guideline or request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to issue or of issuing or maintaining or participating in Letters of Credit or the making of Letter of Credit Advances (excluding, for purposes of this Section 2.06, any such increased costs resulting from (x) Taxes or Other Taxes (as to which Section 2.08 shall govern) and (y) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Bank is organized or has its Applicable Lending Office or any political subdivision thereof), then the Account Parties jointly and severally agree to pay, from time to time, within five days after demand by such Bank (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, to the Administrative Agent for the account of such Bank additional amounts sufficient to compensate such Bank for such increased cost. A certificate as to the amount of such increased cost, submitted to the Account Parties by such Bank, shall be conclusive and binding for all purposes, absent manifest error. (b) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation, in each case after the date hereof, or (ii) the compliance with any guideline or request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the amount of capital required or expected to be maintained by any Bank or any corporation controlling such Bank as a result of or based upon the existence of such Bank's commitment to lend hereunder and other commitments of such type, then, within five days after demand by such Bank or such corporation (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, the Account Parties jointly and severally agree to pay to the Administrative Agent for the account of such Bank, from time to time as specified by such Bank, additional amounts sufficient to compensate such Bank in the light of such circumstances, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank's commitment to issue or participate in Letters of Credit hereunder or to the 24 issuance or maintenance of or participation in any Letters of Credit. A certificate as to such amounts submitted to the Account Parties by such Bank shall be conclusive and binding for all purposes, absent manifest error. (c) Each Bank shall promptly notify the Account Parties and the Administrative Agent of any event of which it has actual knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in such Bank's good faith judgment, otherwise disadvantageous to such Bank) to mitigate or avoid any obligation by the Account Parties to pay any amount pursuant to subsection (a) or (b) above or pursuant to Section 2.08 (and, if any Bank has given notice of any such event and thereafter such event ceases to exist, such Bank shall promptly so notify the Account Parties and the Administrative Agent). Without limiting the foregoing, each Bank will designate a different Applicable Lending Office if such designation will avoid (or reduce the cost to the Account Parties of) any event described in the preceding sentence and such designation will not, in such Bank's good faith judgment, be otherwise disadvantageous to such Bank. (d) Notwithstanding the provisions of subsections (a) and (b) above or Section 2.08 (and without limiting subsection (c) above), if any Bank fails to notify the Account Parties of any event or circumstance that will entitle such Bank to compensation pursuant subsection (a) or (b) above or Section 2.08 within 120 days after such Bank obtains actual knowledge of such event or circumstance, then such Bank shall not be entitled to compensation from the Account Parties for any amount arising prior to the date which is 120 days before the date on which such Bank notifies the Account Parties of such event or circumstance. For avoidance of doubt, it is noted that the term "Bank" as used in this Section 2.06 and in other Sections of this Agreement includes the Issuing Bank in its capacity as such. SECTION 2.07 Payments and Computations. (a) The Account Parties shall make each payment hereunder irrespective of any right of counterclaim or set-off (except as otherwise provided in Section 2.11), not later than 11:00 A.M. (Charlotte, North Carolina time) on the day when due, in U.S. dollars, to the Administrative Agent at the Administrative Agent's Account in same day funds, with payments being received by the Administrative Agent after such time being deemed to have been received on the next succeeding Business Day. The Administrative Agent will promptly thereafter cause like funds to be distributed (i) if such payment by such Account Party is in respect of principal, interest, commitment fees or any other amount then payable hereunder to more than one Bank, to such Banks for the account of their respective Applicable Lending Offices ratably in accordance with the amounts of such respective amount then payable to such Banks and (ii) if such payment by such Account Party is in respect of any amount then payable hereunder to one Bank, to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(d), from and after the effective date of such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder in respect of the interest assigned thereby to the Bank assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. 25 (b) Each Account Party hereby authorizes each Bank, if an Event of Default under Section 6.01(a) has occurred and is continuing, to charge from time to time against any or all of such Account Party's accounts with such Bank any amount that resulted in such Event of Default. (c) All computations of interest on Letter of Credit Advances (and any other amount payable by reference to the Base Rate) when the Base Rate is determined by reference to Wachovia's prime rate shall be made by the Administrative Agent on the basis of a year of 365 or, if applicable, 366 days; all other computations of interest, fees and Letter of Credit commissions shall be made by the Administrative Agent on the basis of a year of 360 days. All such computations shall be made for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Administrative Agent of an interest rate, fee or commission hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be. SECTION 2.08 Taxes. (a) Any and all payments by any Loan Party hereunder shall be made, in accordance with Section 2.07, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and each Agent, taxes that are imposed on its overall net income by the United States and taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction under the laws of which such Bank or such Agent, as the case may be, is organized or any political subdivision thereof and, in the case of each Bank, taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder being herein referred to as "Taxes"). If any Loan Party shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or to any Bank or any Agent, (i) the sum payable by such Loan Party shall be increased as may be necessary so that after such Loan Party and the Administrative Agent have made all required deductions (including deductions applicable to additional sums payable under this Section 2.08) such Bank or such Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Loan Party shall make all such deductions and (iii) such Loan Party shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, each Loan Party shall pay any present or future stamp, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or from the execution, delivery or registration of, performance under, or otherwise with respect to, this Agreement or any other Loan Document (herein referred to as "Other Taxes"). 26 (c) Each Loan Party shall indemnify each Bank and each Agent for and hold them harmless against the full amount of Taxes and Other Taxes, and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.08, imposed on or paid by such Bank or such Agent (as the case may be) and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. This indemnification payment shall be made within 30 days from the date such Bank or such Agent (as the case may be) makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, each Loan Party shall furnish to the Administrative Agent, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing such payment. In the case of any payment hereunder by or on behalf of a Loan Party through an account or branch outside the United States or by or on behalf of a Loan Party by a payor that is not a United States person, if such Loan Party determines that no Taxes are payable in respect thereof, such Loan Party shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at such address, an opinion of counsel acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of subsections (d) and (e) of this Section 2.08, the terms "United States" and "United States person" shall have the meanings specified in Section 7701(a)(9) and 7701(a)(10) of the Internal Revenue Code, respectively. (e) Each Bank organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Bank or the Issuing Bank, as the case may be, and on the date of the Assignment and Acceptance pursuant to which it becomes a Bank in the case of each other Bank, and from time to time thereafter as requested in writing by the Parent (but only so long thereafter as such Bank remains lawfully able to do so), provide each of the Administrative Agent and the Parent with two original Internal Revenue Service forms W-8BEN or W-8ECI or (in the case of a Bank that has certified in writing to the Administrative Agent that it is not a "bank" as defined in Section 881(c)(3)(A) of the Internal Revenue Code) form W-8 (and, if such Bank delivers a form W-8, a certificate representing that such Bank is not a "bank" for purposes of Section 881(c)(3)(A) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the Parent and is not a controlled foreign corporation related to the Parent (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Bank is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or, in the case of a Bank providing a form W-8, certifying that such Bank is a foreign corporation, partnership, estate or trust. If the forms provided by a Bank at the time such Bank first becomes a party to this Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Bank provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that if, at the effective date of the Assignment and Acceptance pursuant to which a Bank becomes a party to this Agreement, the Bank assignor was entitled to payments under subsection (a) of this Section 2.08 in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Bank assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required 27 on the date hereof by Internal Revenue Service form W-8BEN, W-8ECI or W-8 (and the related certificate described above), that the Bank reasonably considers to be confidential, the Bank shall give notice thereof to the Parent and shall not be obligated to include in such form or document such confidential information. (f) For any period with respect to which a Bank which may lawfully do so has failed to provide the Parent with the appropriate form described in subsection (e) above (other than if such failure is due to a change in law occurring after the date on which a form originally was required to be provided or if such form otherwise is not required under subsection (e) above), such Bank shall not be entitled to indemnification under subsection (a) or (c) of this Section 2.08 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Bank become subject to Taxes because of its failure to deliver a form required hereunder, the Parent shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (g) Each Bank represents and warrants to the Account Parties that, as of the date such Bank becomes a party to this Agreement, such Bank is entitled to receive payments hereunder from the Account Parties without deduction or withholding for or on account of any Taxes. SECTION 2.09 Sharing of Payments, Etc. If any Bank shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise, other than as a result of an assignment pursuant to Section 9.07) (a) on account of Obligations due and payable to such Bank hereunder at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Bank at such time to (ii) the aggregate amount of the Obligations due and payable to all Banks hereunder at such time) of payments on account of the Obligations due and payable to all Banks hereunder at such time obtained by all the Banks at such time or (b) on account of Obligations owing (but not due and payable) to such Bank hereunder at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations owing to such Bank at such time to (ii) the aggregate amount of the Obligations owing (but not due and payable) to all Banks hereunder at such time) of payments on account of the Obligations owing (but not due and payable) to all Banks hereunder at such time obtained by all of the Banks at such time, such Bank shall forthwith purchase from the other Banks such interests or participating interests in the Obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each other Bank shall be rescinded and such other Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank's ratable share (according to the proportion of (i) the purchase price paid to such Bank to (ii) the aggregate purchase price paid to all Banks) of such recovery together with an amount equal to such Bank's ratable share (according to the proportion of (i) the amount of such other Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. Each Account Party agrees that any Bank so purchasing an interest or participating interest from another Bank pursuant to this Section 2.09 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such interest or 28 participating interest, as the case may be, as fully as if such Bank were the direct creditor of such Account Party in the amount of such interest or participating interest, as the case may be. SECTION 2.10 Use of Letters of Credit. The Letters of Credit shall be used for the general corporate purposes of the Account Parties and their respective Subsidiaries. SECTION 2.11 Defaulting Banks. (a) In the event that, at any one time, (i) any Bank shall be a Defaulting Bank, (ii) such Defaulting Bank shall owe a Defaulted Amount to any Agent or any of the other Banks and (iii) any Account Party shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Bank, then the Administrative Agent may, on its behalf or on behalf of such other Banks and to the fullest extent permitted by applicable law, apply at such time the amount so paid by such Account Party to or for the account of such Defaulting Bank to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Banks, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent and such other Banks and, if the amount of such payment made by such Account Party shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent, such other Agents and such other Banks, in the following order of priority: (i) first, to the Agents for any Defaulted Amounts then owing to the Agents; (ii) second, to the Issuing Bank for any amount then due and payable to it, in its capacity as such, by such Defaulting Bank, ratably in accordance with such amounts then due and payable to the Issuing Bank; and (iii) third, to any other Banks for any Defaulted Amounts then owing to such other Banks, ratably in accordance with such respective Defaulted Amounts then owing to such other Banks. Any portion of such amount paid by such Account Party for the account of such Defaulting Bank remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) of this Section 2.11. (b) In the event that, at any one time, (i) any Bank shall be a Defaulting Bank, (ii) such Defaulting Bank shall not owe a Defaulted Amount and (iii) any Account Party, any Agent or other Bank shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Bank, then such Account Party or such 29 Agent or such other Bank shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow and the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow under this subsection (b) shall be deposited by the Administrative Agent in an account with Wachovia in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (b). The terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be Wachovia's standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (b). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Advances required to be made by such Defaulting Bank and to pay any amount payable by such Defaulting Bank hereunder and under the other Loan Documents to the Administrative Agent or any other Bank, as and when such Advances or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Advances and amounts required to be made or paid at such time, in the following order of priority: (i) first, to the Agents for any amounts then due and payable by such Defaulting Bank to the Agents hereunder; (ii) second, to the Issuing Bank for any amount then due and payable to it, in its capacity as such, by such Defaulting Bank, ratably in accordance with such amounts then due and payable to such Issuing Bank; and (iii) third, to any other Banks for any amount then due and payable by such Defaulting Bank to such other Banks hereunder, ratably in accordance with such respective amounts then due and payable to such other Banks. In the event that any Bank that is a Defaulting Bank shall, at any time, cease to be a Defaulting Bank, any funds held by the Administrative Agent in escrow at such time with respect to such Bank shall be distributed by the Administrative Agent to such Bank and applied by such Bank to the Obligations owing to such Bank at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such Obligations outstanding at such time. (c) The rights and remedies against a Defaulting Bank under this Section 2.11 are in addition to other rights and remedies that any Agent or any Bank may have against such Defaulting Bank with respect to any Defaulted Amount. SECTION 2.12 Replacement of Affected Bank. At any time any Bank is an Affected Bank, the Account Parties may replace such Affected Bank as a party to this Agreement with one or more other Banks and/or Eligible Assignees, and upon notice from the Account Parties such Affected Bank shall assign pursuant to an Assignment and Acceptance, and without recourse or warranty, its LC Commitment Amount, its Letter of Credit Advances, its obligations to fund Letter of Credit payments, its participation in, and its rights and 30 obligations with respect to, Letters of Credit, and all of its other rights and obligations hereunder to such other Banks and/or Eligible Assignees for a purchase price equal to the sum of the principal amount of the Letter of Credit Advances so assigned, all accrued and unpaid interest thereon, such Affected Bank's ratable share of all accrued and unpaid fees payable pursuant to Section 2.05 and all other Obligations owed to such Affected Bank hereunder. SECTION 2.13 Certain Provisions Relating to the Issuing Bank and Letters of Credit. (a) Letter of Credit Agreements. The representations, warranties and covenants by the Account Parties under, and the rights and remedies of the Issuing Bank under, any Letter of Credit Agreement 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 and applicable law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Agreement shall inure to the benefit of each Bank to the extent of its Letter of Credit Participating Interest Commitment and Letter of Credit Advances as fully as if such Bank was a party to such Letter of Credit Agreement. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Agreement, this Agreement shall prevail. (b) Certain Provisions. The Issuing Bank shall have no duties or responsibilities to any Agent or any Bank except those expressly set forth in this Agreement, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the Banks and the Agents under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Agent, any Bank 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 Loan Document or Letter of Credit, except to the extent resulting from the gross negligence or willful misconduct of the Issuing Bank, as finally determined by a court of competent jurisdiction. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice to any Agent or any Bank relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan 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 Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide any 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 Loan Document. (c) Administration. The Issuing Bank may rely upon any notice or other communication of any nature (written, electronic or oral, including but not limited to telephone conversations and transmissions through the Issuing Bank's remote access system, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan 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 31 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, any Agent or any Bank, such matter may be established by a certificate of such Account Party, such Agent or such Bank, 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 Default unless the Issuing Bank has received notice from a Bank, an Agent or an Account Party referring to this Agreement, describing such Default, and stating that such notice is a "notice of default". (d) 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), in accordance with its Pro Rata Share, 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 Loan Document or any Letter of Credit, 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 to the extent 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. (e) 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 Loan Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the term "Banks" and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account to any Person, 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 Account Party and any stockholder, subsidiary or affiliate of any Account Party, as though the Issuing Bank were not the Issuing Bank hereunder. SECTION 2.14 Downgrade Event with Respect to a Bank. (a) If a Downgrade Event shall occur with respect to (i) any Downgraded Bank or (ii) any other Bank and, as a result thereof, such other Bank becomes a Downgraded Bank, then the Issuing Bank may, by notice to such Downgraded Bank, the Administrative Agent and the Parent within 45 days after such Downgrade Event (any such notice, a "Downgrade Notice"), 32 request that the Account Parties use reasonable efforts to replace such Bank as a party to this Agreement pursuant to Section 2.12. If such Bank is not so replaced within 45 days after receipt by the Account Parties of such Downgrade Notice, then (x) if no Default exists and such Downgraded Bank has not exercised its right to remain a Bank hereunder pursuant to clause (y) below, the following shall occur concurrently: (A) the Committed Facility shall be reduced by the amount of the LC Commitment Amount of such Downgraded Bank, (B) the Account Parties shall prepay all amounts owed to such Downgraded Bank hereunder or in connection herewith (C) if, upon the reduction of the Committed Facility under clause (A) above and the payment under clause (B) above, the sum of the principal amount of all Advances plus the Available Amount of all Letters of Credit (valuing the Available Amount of, and Letter of Credit Advances of the Issuing Bank in respect of, any Non-Dollar Letter of Credit at the Dollar Equivalent thereof as of the time of such calculation) would exceed the amount of the Committed Facility, then the Account Parties will immediately eliminate such excess by paying Advances and/or causing the Available Amount of one or more Letters of Credit to be reduced, and (D) upon completion of the events described in clauses (A), (B) and (C) above, such Downgraded Bank shall cease to be a party to this Agreement; or (y) if a Default exists or, not later than 30 days after receipt of such Downgrade Notice, such Downgraded Bank notifies the Account Parties, the Issuing Bank and the Administrative Agent that such Downgraded Bank elects to provide (in a manner reasonably satisfactory to the Issuing Bank) cash collateral to the Issuing Bank for (or if such Downgraded Bank is unable, without regulatory approval, to provide cash collateral, a letter of credit reasonably satisfactory to the Issuing Bank covering) its contingent obligations to reimburse the Issuing Bank for any payment under any Letter of Credit as provided in Section 2.02(e) (its "LC Participation Obligations"), such Downgraded Bank shall be obligated to (and each Bank agrees that in such circumstances it will) deliver to the Issuing Bank (I) immediately, cash collateral (or, as aforesaid, a letter of credit) in an amount equal to its LC Participation Obligations and (II) from time to time thereafter (so long as it is a Downgraded Bank), cash collateral (or, as aforesaid, a letter of credit) sufficient to cover any increase in its LC Participation Obligations as a result of any proposed issuance of or increase in a Letter of Credit. Any funds provided by a Downgraded Bank for such purpose shall be maintained in a segregated deposit account in the name of the Issuing Bank at the Issuing Bank's principal office in the United States (a "Downgrade Account"). The funds so deposited in any Downgrade Account (or any drawing under such a letter of credit) shall be used only in accordance with the following provisions of this Section 2.14. (b) If any Downgraded Bank shall be required to fund its participation in a payment under a Letter of Credit pursuant to Section 2.02(e), then the Issuing Bank shall apply the funds deposited in the applicable Downgrade Account by such Downgraded Bank (or any drawing under 33 such a letter of credit) to fund such participation. The deposit of funds in a Downgrade Account by any Downgraded Bank (or any drawing under such a letter of credit) shall not constitute a Letter of Credit Advance (and the Downgraded Bank shall not be entitled to interest on such funds except as provided in clause (c) below) unless and until (and then only to the extent that) such funds (or any drawing under such a letter of credit) are used by the Issuing Bank to fund the participation of such Downgraded Bank pursuant to the first sentence of this clause (b). (c) Funds in a Downgrade Account shall be invested in such investments as may be agreed between the Issuing Bank and the applicable Downgraded Bank, and the income from such investments shall be distributed to such Downgraded Bank from time to time (but not less often than monthly) as agreed between the Issuing Bank and such Downgraded Bank. The Issuing Bank will (i) from time to time, upon request by a Downgraded Bank, release to such Downgraded Bank any amount on deposit in the applicable Downgrade Account in excess of the LC Participation Obligations of such Downgraded Bank (or, if applicable, not draw under any such letter of credit in excess of the L/C Participation Obligations of such Downgraded Bank) and (ii) upon the earliest to occur of (A) the effective date of any replacement of such Downgraded Bank as a party hereto pursuant to an Assignment and Acceptance, (B) the termination of such Downgraded Bank's LC Commitment Amount pursuant to clause (a) or (C) the first Letter of Credit Business Day after receipt by the Issuing Bank of evidence (reasonably satisfactory to the Issuing Bank) that such Bank is no longer a Downgraded Bank, release to such Bank all amounts on deposit in the applicable Downgrade Account (or, if applicable, return such letter of credit to such Bank for cancellation). (d) At any time any Downgraded Bank is required to maintain cash collateral with the Issuing Bank pursuant to this Section 2.14, the Issuing Bank shall have no obligation to issue or increase any Letter of Credit unless such Downgraded Bank has provided sufficient funds as cash collateral to the Issuing Bank to cover all LC Participation Obligations of such Downgraded Bank (including in respect of the Letter of Credit to be issued or increased). SECTION 2.15 Downgrade Event or Other Event with Respect to the Issuing Bank. At any time that the Issuing Bank is a Downgraded Bank or at such other times as the Issuing Bank and the Account Parties may agree, the Account Parties may, upon not less than three Letter of Credit Business Days' notice to the Issuing Bank (in this Section sometimes referred to as the "Old Issuing Bank") and the Administrative Agent, designate any Bank (so long as such Bank has agreed to such designation) as an additional "Issuing Bank" hereunder (in this Section sometimes referred to as the "New Issuing Bank"). Such notice shall specify the date (which shall be a Letter of Credit Business Day) on which the New Issuing Bank is to become an additional "Issuing Bank" hereunder. From and after such date, all new Letters of Credit requested to be issued hereunder shall be issued by the New Issuing Bank. From and after such date (and until the first date on which no Letters of Credit issued by the Old Issuing Bank are outstanding and no reimbursement obligations are owed to the Old Issuing Bank, on which date the Old Issuing Bank shall cease to be an Issuing Bank hereunder), references in this Agreement to the "Issuing Bank" shall be deemed to refer (a) to the Old Issuing Bank, with respect to Letters of Credit issued by it, (b) to the New Issuing Bank, with respect to Letters of Credit issued or to be issued by it, and (c) to each of the Old Issuing Bank and the New Issuing Bank, with respect to other matters. Notwithstanding the fact that an Old Issuing Bank shall cease to be an "Issuing Bank" hereunder, all of the exculpatory, indemnification and similar provisions hereof in favor of the "Issuing Bank" shall inure to such Old Issuing Bank's benefit as to any 34 actions taken or omitted by it while it was an "Issuing Bank" under this Agreement. The Account Parties agree that after any appointment of a New Issuing Bank hereunder, the Account Parties shall use reasonable commercial efforts to promptly replace (or otherwise cause the applicable beneficiary to return to the Old Issuing Bank for cancellation) each letter of credit issued by the Old Issuing Bank with a Letter of Credit issued by the New Issuing Bank. SECTION 2.16 Non-Dollar Letters of Credit. (a) The Account Parties, the Administrative Agent, the Issuing Bank and the Banks (i) agree that the Issuing Bank may (in its sole discretion) issue Letters of Credit ("Non-Dollar Letters of Credit") in currencies other than U.S. dollars and (ii) further agree as set forth in the following paragraphs of this Section with respect to such Non-Dollar Letters of Credit. (b) The Account Parties agree that their reimbursement obligations under Section 2.03(a) and any resulting Letter of Credit Advance, in each case in respect of a drawing under any Non-Dollar Letter of Credit, (i) shall be payable in Dollars at the Dollar Equivalent of such obligation in the currency in which such Non-Dollar Letter of Credit was issued (determined on the date of payment by the Account Parties or, in the event of payment by the Banks pursuant to Section 2.02(e), on the date of such payment by the Banks), and (ii) shall bear interest at a rate per annum equal to the Base Rate plus 2%, for each day from and including the date on which the Applicable Account Party is to reimburse the Issuing Bank pursuant to Section 2.03(a) to but excluding the date such obligation is paid in full. (c) Each Bank agrees that its obligation to pay the Issuing Bank such Bank's Pro Rata Share of the unreimbursed portion of any payment by the Issuing Bank under Section 2.02(e) in respect of a drawing under any Non-Dollar Letter of Credit shall be payable in Dollars at the Dollar Equivalent of such obligation in the currency in which such Non-Dollar Letter of Credit was issued (calculated on the date of payment), and any such amount which is not paid when due shall bear interest at a rate per annum equal to the Overnight Rate plus, beginning on the third Business Day after such amount was due, 2%. (d) For purposes of determining whether there is availability for the Account Parties to request any Advance or to request the issuance or extension of, or any increase in, any Letter of Credit, the Dollar Equivalent amount of the Available Amount of each Non-Dollar Letter of 35 Credit shall be calculated as of the date such Advance is to be made or such Letter of Credit is to be issued, extended or increased. (e) For purposes of determining the letter of credit fee under Section 2.05(c), the Dollar Equivalent amount of the Available Amount of any Non-Dollar Letter of Credit shall be determined on each of (1) the date of an issuance, extension or change in the Available Amount of such Non-Dollar Letter of Credit, (2) the date of any payment by the Issuing Bank in respect of a drawing under such Non-Dollar Letter of Credit, (3) the last Business Day of each March, June, September and December and (4) each day on which the LC Commitment Amounts are to be reduced pursuant to Section 2.04 (it being understood that no requested reduction shall be permitted to the extent that, after making a calculation pursuant to this clause (e), such reduction would be greater than the unused portion of the LC Commitment Amounts). (f) If, on the last Business Day of each March, June, September and December, the sum of the principal amount of all Advances plus the Available Amount of all Letters of Credit (valuing the Available Amount of, and Letter of Credit Advances in respect of, any Non-Dollar Letter of Credit at the Dollar Equivalent thereof as of such day) would exceed the amount of the Committed Facility, then the Account Parties will immediately eliminate such excess by paying Advances and/or causing the Available Amount of one or more Letters of Credit to be reduced. (g) If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due in respect of any Non-Dollar Letter of Credit in one currency into another currency, the rate of exchange used shall be that at which in accordance with its normal banking procedures the Issuing Bank could purchase the first currency with such other currency on the Letter of Credit Business Day preceding that on which final judgment is given. The obligation of any Account Party in respect of any such sum due from it to the Issuing Bank or any Bank hereunder shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement and the applicable Non-Dollar Letter of Credit (the "Agreement Currency"), be discharged only to the extent that on the Letter of Credit Business Day following receipt by the Issuing Bank or such Bank of any sum adjudged to be so due in the Judgment Currency, the Issuing Bank or such Bank may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Issuing Bank or such Bank in the Agreement Currency, the Applicable Account Party agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Issuing Bank or such Bank, as applicable, against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Issuing Bank or such Bank in such currency, the Issuing Bank and each Bank agrees to return the amount of any excess to the Applicable Account Party (or to any other Person who may be entitled thereto under applicable law). (h) For purposes of this Section, "Dollar Equivalent" means, in relation to an amount denominated in a currency other than U.S. dollars, the amount of U.S. dollars which could be purchased with such amount by the Issuing Bank in accordance with its customary procedures (and giving effect to any transaction costs) at the quoted foreign exchange spot rate of the Issuing Bank at the time of determination; and "Overnight Rate" means, for any day, the rate of interest per annum at which overnight deposits in the applicable currency, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by the Issuing Bank to major banks in the London or other applicable offshore interbank market. The Overnight Rate for any day which is not a Letter of Credit Business Day (or on which dealings are not carried on in the applicable offshore interbank market) shall be the Overnight Rate for the immediately preceding Letter of Credit Business Day. SECTION 2.17 Collateral. (a) Pursuant to the Security Documents and as collateral security for the payment and performance of the Obligations, the Account Parties 36 shall grant and convey, or cause to be granted and conveyed, to the Administrative Agent for its benefit and the benefit of the Banks, a Lien and security interest in, to and upon the Collateral, prior and superior to all other Liens. Each Account Party shall cause the Collateral to be charged or pledged and be made subject to the Security Documents (in form and substance acceptable to the Administrative Agent) necessary for the perfection of the Lien and security interest in, to and upon the Collateral and for the exercise by the Administrative Agent and the Banks of their rights and remedies hereunder and thereunder. Notwithstanding the foregoing, and for the sake of clarity, until the Tempest Life Effective Date, the Obligations secured by any Collateral pledged by Tempest Life shall not include any Obligations of Tempest Life under Article VII of this Agreement. (b) (i) On the Letter of Credit Business Day immediately preceding the proposed date of issuance or renewal of a Letter of Credit under Section 2.02(a), (ii) within ten (10) Business Days after the end of each calendar month, and (iii) at and as of such other times as the Administrative Agent or the Required Banks may reasonably request in its (or their) sole discretion, the Account Parties shall deliver or cause to be delivered to the Administrative Agent a certificate executed by the Parent, in the form of Exhibit B or otherwise in a form reasonably satisfactory to the Administrative Agent (which form may vary depending on the frequency of the delivery of such certificate), setting forth the Letter of Credit Outstandings, the Collateral Value of the Collateral by category and in the aggregate, and such other information as the Administrative Agent may reasonably request (such certificate, a "Collateral Value Report"). Such certificate shall be subject to review and verification by the Administrative Agent, it being understood and agreed that the Administrative Agent shall have the right to redetermine the Collateral Value of the Collateral in accordance with the terms and provisions of this Agreement and the Security Documents. ARTICLE III CONDITIONS OF LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01 Conditions Precedent to Effective Date. The occurrence of the Effective Date, and the obligation of the Issuing Bank to issue any Letter of Credit on the Effective Date, is subject to the satisfaction of the following conditions precedent: (i) The Administrative Agent shall have received the following, each dated the Effective Date (unless otherwise specified), in form and substance reasonably satisfactory to the Administrative Agent (unless otherwise specified) and in sufficient copies for each Bank: (A) Copies of the Pledge and Security Agreement, duly completed and executed by each Account Party that is a party thereto, the State Street Control Agreements, each duly completed and executed by State Street and by the Account Party that is a party thereto, and the State Street Custodial Agreements. (B) Certified copies of the resolutions of the Board of Directors of each Loan Party approving the transactions contemplated by the Loan Documents and each Loan Document to which it is or is to be a party, and of all documents evidencing other necessary corporate action 37 and governmental and other third party approvals and consents, if any, with transactions contemplated by the Loan Documents and each Loan Document to which it is or is to be a party. (C) A copy of a certificate of the Secretary of State or other appropriate official of the jurisdiction of incorporation of each Loan Party, dated reasonably near the Effective Date, certifying as to the good standing (or existence) of such Loan Party. (D) A certificate of each Loan Party, signed on behalf of such Loan Party by its President or a Vice President (or equivalent officer if such Loan Party has no Vice President) and its Secretary or any Assistant Secretary (the statements made in which certificate shall be true on and as of the Effective Date), certifying as to (1) a true and correct copy of the constitutional documents of such Loan Party as in effect on the date on which the resolutions referred to in Section 3.01(a)(i)(B) were adopted and on the Effective Date, (2) the due incorporation and good standing or valid existence of such Loan Party as a corporation organized under the laws of the jurisdiction of its incorporation, and the absence of any proceeding for the dissolution or liquidation of such Loan Party, (3) the truth of the representations and warranties contained in the Loan Documents as though made on and as of the Effective Date and (4) the absence of any event occurring and continuing, or resulting from the Effective Date, that constitutes a Default. (E) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying the names and true signatures of the officers of such Loan Party authorized to sign each Loan Document to which it is or is to be a party and the other documents to be delivered hereunder and thereunder. (F) A favorable opinion of (1) Maples and Calder, Cayman Islands counsel for the Parent, in substantially the form of Exhibit C-1 hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request, (2) Mayer, Brown, Rowe & Maw, New York counsel for the Loan Parties, in substantially the form of Exhibit C-2 hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request, and (3) Conyers Dill & Pearman, Bermuda counsel for ACE Bermuda, Tempest Life and Tempest, in substantially the form of Exhibit C-3 hereto and as to such other matters as any Bank through the Administrative Agent may reasonably request. (ii) There shall exist no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries pending or threatened before any court, governmental agency or arbitrator that (x) could be reasonably expected to have a Material Adverse Effect or (y) would reasonably be expected to materially adversely affect the legality, validity or enforceability of any Loan Document or the other transactions contemplated by the Loan Documents. 38 (iii) No development or change shall have occurred after December 31, 2001, and no information shall have become known after such date, that has had or could reasonably be expected to have a Material Adverse Effect. (iv) The Account Parties shall have paid all accrued fees of the Administrative Agent and the Banks and all accrued expenses of the Administrative Agent (including the accrued fees and expenses of counsel to the Administrative Agent and local counsel on behalf of all of the Banks), in each case to the extent then due and payable. (v) The Administrative Agent shall have received evidence satisfactory to it that all obligations of any Account Party outstanding under the Existing Reimbursement Agreement (other than fees and expenses of Wachovia's counsel) have been repaid and satisfied in full and that, concurrently with the effectiveness of this Agreement, the LC Commitment Amounts (as defined therein) under the Existing Reimbursement Agreement have been reduced to zero, and Wachovia shall have agreed, by its execution and delivery of this Agreement, that the Existing Letters of Credit issued under the Existing Reimbursement Agreement shall become Letters of Credit hereunder as of the Effective Date. SECTION 3.02 Conditions Precedent to Each Issuance, Extension or Increase of a Letter of Credit. The obligation of the Issuing Bank to issue, extend or increase a Letter of Credit (including any issuance on the Effective Date) shall be subject to the further conditions precedent that on the date of such issuance, extension or increase (a) the following statements shall be true (and each request for issuance, extension, or increase, and the acceptance by the Account Party that requested such issuance, extension or increase shall constitute a representation and warranty by such Account Party that both on the date of such notice and on the date of such issuance, extension or increase such statements are true): (i) the representations and warranties contained in each Loan Document are correct in all material respects on and as of such date, before and after giving effect to such issuance, extension or increase, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other the date of such issuance, extension or increase, in which case as of such specific date (provided, however, that the representation and warranty contained in the last sentence of Section 4.01(g) shall be excluded from this clause (i) at all times after (but shall be included on and as of) the Effective Date); and (ii) no Default has occurred and is continuing, or would result from such issuance, extension or increase; and (b) the Administrative Agent shall have received such other approvals, opinions or documents as any Bank or the Issuing Bank through the Administrative Agent may reasonably request. SECTION 3.03 Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Bank shall be deemed to have consented to, approved or accepted or to be satisfied 39 with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Banks unless an officer of the Administrative Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Bank prior to the Effective Date specifying its objection thereto, provided that such Bank has been given at least one Business Day's notice that the final form of such document or matter is available for its review. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01 Representations and Warranties of the Account Parties. Each Account Party represents and warrants as follows: (a) Each Loan Party and each of its Subsidiaries (i) is duly organized or formed, validly existing and, to the extent such concept applies, in good standing under the laws of the jurisdiction of its incorporation or formation, (ii) is duly qualified and in good standing as a foreign corporation or other entity in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed would not be reasonably likely to have a Material Adverse Effect and (iii) has all requisite power and authority (including, without limitation, all governmental licenses, permits and other approvals) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted, except where the failure to have any license, permit or other approval would not be reasonably likely to have a Material Adverse Effect. All of the outstanding Equity Interests in each Account Party (other than the Parent) have been validly issued, are fully paid and non-assessable and (except for any Preferred Securities issued after the date of this Agreement) are owned, directly or indirectly, by the Parent free and clear of all Liens. (b) Set forth on Schedule 4.01(b) hereto is a complete and accurate list of all Subsidiaries of each Loan Party as of the Effective Date. (c) The execution, delivery and performance by each Loan Party of each Loan Document to which it is or is to be a party and the consummation of the transactions contemplated by the Loan Documents, are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene such Loan Party's constitutional documents, (ii) violate any law, rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties or (iv) except for the Liens created under the Loan Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries. No Loan Party or any of its Subsidiaries is in violation of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of 40 trust, lease or other instrument, the violation or breach of which could be reasonably likely to have a Material Adverse Effect. (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for (i) the due execution, delivery, recordation, filing or performance by any Loan Party of any Loan Document to which it is or is to be a party or the other transactions contemplated by the Loan Documents, or (ii) the exercise by the Administrative Agent or any Bank of its rights under the Loan Documents, except for the authorizations, approvals, actions, notices and filings which have been duly obtained, taken, given or made and are in full force and effect. (e) This Agreement has been, and each other Loan Document when delivered hereunder will have been, duly executed and delivered by each Loan Party party thereto. This Agreement is, and each other Loan Document when delivered hereunder will be, the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms. (f) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or threatened before any court, governmental agency or arbitrator that (i) could be reasonably likely to have a Material Adverse Effect or (ii) would reasonably be expected to affect the legality, validity or enforceability of any Loan Document or the transactions contemplated by the Loan Documents. (g) The Consolidated balance sheets of the Parent and its Subsidiaries as at December 31, 2001, and the related Consolidated statements of income and of cash flows of the Parent and its Subsidiaries for the fiscal year then ended, accompanied by an unqualified opinion of PricewaterhouseCoopers LLP, independent public accountants, and the Consolidated balance sheets of the Parent and its Subsidiaries as at June 30, 2002, and the related Consolidated statements of income and cash flows of the Parent and its Subsidiaries for the six months then ended, duly certified by the Chief Financial Officer of the Parent, copies of which have been furnished to each Bank, fairly present, subject, in the case of said balance sheet as at June 30, 2002, and said statements of income and cash flows for the six months then ended, to year-end audit adjustments, the Consolidated financial condition of the Parent and its Subsidiaries as at such dates and the Consolidated results of operations of the Parent and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles applied on a consistent basis (subject, in the case of the June 30, 2002 balance sheet and statements, to the absence of footnotes). Since December 31, 2001, there has been no Material Adverse Change. (h) The Parent has delivered to the Administrative Agent a true and correct copy of each State Street Custodial Agreement as in effect as of the date of this Agreement. Each State Street Custodial Agreement is in full force and effect and no default or event of default by any Account Party exists thereunder. (i) No written information, exhibit or report furnished by or on behalf of any Loan Party to any Agent or any Bank in connection with the negotiation and syndication of the Loan Documents or pursuant to the terms 41 of the Loan Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein not misleading as at the date it was dated (or if not dated, so delivered). (j) Margin Stock will constitute less than 25% of the value of those assets of any Account Party which are subject to any limitation on sale, pledge or other disposition hereunder. None of the Collateral constitutes or will constitute Margin Stock. (k) Neither any Loan Party nor any of its Subsidiaries is an "investment company", or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended. Neither the making of any Advances, nor the issuance of any Letters of Credit, nor the application of the proceeds or repayment thereof by any Account Party, nor the consummation of the other transactions contemplated by the Loan Documents, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder. (l) Neither any Loan Party nor any of its Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction that is reasonably likely to have a Material Adverse Effect. (m) Each Loan Party is, individually and together with its Subsidiaries, Solvent. (n) Except to the extent that any and all events and conditions under clauses (i) through (vi) below of this paragraph (n) in the aggregate are not reasonably expected to have a Material Adverse Effect: (i) Schedule B (Actuarial Information) to the most recent annual report (Form 5500 Series) for each Pension Plan, copies of which have been filed with the Internal Revenue Service, is complete and accurate and fairly presents the funding status of such Pension Plan, and since the date of such Schedule B there has been no material adverse change in such funding status. (ii) Neither any Loan Party nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan. (iii) Neither any Loan Party nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (iv) With respect to each scheme or arrangement mandated by a government other than the United States (a "Foreign Government Scheme or Arrangement") and with respect to each employee benefit plan that is not subject to United States law maintained or contributed to by any Loan Party or with respect to which any Subsidiary of any Loan Party may have liability under applicable local law (a "Foreign Plan"): (x) Any employer and employee contributions required by law or by the terms of any Foreign Government 42 Scheme or Arrangement or any Foreign Plan have been made, or, if applicable, accrued, in accordance with normal accounting practices. (y) The fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the date hereof, with respect to all current and former participants in such Foreign Plan according to the actuarial assumptions and valuations most recently used to account for such obligations in accordance with applicable generally accepted accounting principles. (z) Each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities. (v) To the extent the assets of any Loan Party are or are deemed under applicable law to be "plan assets" within the meaning of Department of Labor Regulation ss. 2510.3-101, the execution, delivery and performance of the Loan Documents and the consummation of the transactions contemplated therein will not result in a non-exempt prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code. (vi) During the twelve-consecutive-month period to the date of the execution and delivery of this Agreement and prior to the request for any Letter of Credit to be issued hereunder, no steps have been taken to terminate any Pension Plan, no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a lien under section 302(f) of ERISA and no minimum funding waiver has been applied for or is in effect with respect to any Pension Plan. No condition exists or event or transaction has occurred or is reasonably expected to occur with respect to any Pension Plan which could result in any Loan Party or any ERISA Affiliate incurring any material liability, fine or penalty. (o) In the ordinary course of its business, each Account Party reviews the effect of Environmental Laws on the operations and properties of such Account Party and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, and any actual or potential liabilities to third parties and any related costs and expenses). On the basis of this review, each Account Party has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a Material Adverse Effect. The operations and properties of each Loan Party and each of its Subsidiaries comply in all material respects with all applicable Environmental Laws and Environmental Permits, except for non-compliances which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; Hazardous Materials have not been released, discharged or disposed of on any property currently or formerly owned or operated by any Loan Party or any of its Subsidiaries that would reasonably be expected to have a 43 Material Adverse Effect; and there are no Environmental Actions pending or threatened against any Loan Party or its Subsidiaries, and no circumstances exist that could be reasonably likely to form the basis of any such Environmental Action, which (in either case), individually or in the aggregate with all other such pending or threatened actions and circumstances, would reasonably be expected to have a Material Adverse Effect. (p) Each Loan Party and each of its Subsidiaries has filed, has caused to be filed or has been included in all material federal tax returns and all other material tax returns required to be filed and has paid all taxes shown thereon to be due, together with applicable interest and penalties, except to the extent contested in good faith and by appropriate proceedings (in which case adequate reserves have been established therefor in accordance with GAAP). (q) Set forth on Schedule II hereto is a list of all letters of credit that were issued under the Existing Reimbursement Agreement and that are outstanding as of the Effective Date. ARTICLE V COVENANTS OF THE ACCOUNT PARTIES SECTION 5.01 Affirmative Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, each Account Party will: (a) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, compliance with Environmental Laws, Environmental Permits, ERISA and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970. (b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all lawful material claims that, if unpaid, might by law become a Lien upon its property; provided, however, that neither any Account Party nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained. (c) Maintenance of Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Parent or such Subsidiary operates (it being understood that the foregoing shall not apply 44 to maintenance of reinsurance or similar matters which shall be solely within the reasonable business judgment of the Parent and its Subsidiaries). (d) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its existence, legal structure, legal name, rights (charter and statutory), permits, licenses, approvals, privileges and franchises; provided, however, that the Parent and its Subsidiaries may consummate any merger or consolidation permitted under Section 5.02(c) and provided further that neither the Parent nor any of its Subsidiaries shall be required to preserve any right, permit, license, approval, privilege or franchise if the Board of Directors of the Parent or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Parent or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Parent, such Subsidiary or the Banks. (e) Visitation Rights. At any reasonable time and from time to time upon prior notice, permit the Administrative Agent (upon request made by any Agent or any Bank), or any agents or representatives thereof, at the expense (so long as no Default has occurred and is continuing) of such Agent or such Bank, as the case may be, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Parent and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Parent and any of its Subsidiaries with any of their officers or directors and with, so long as a representative of the Parent is present, their independent certified public accountants. (f) Keeping of Books. Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Parent and each such Subsidiary sufficient to permit the preparation of financial statements in accordance with GAAP. (g) Maintenance of Properties, Etc. Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (h) Transactions with Affiliates. Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under the Loan Documents with any of their Affiliates (other than any such transactions between Loan Parties or wholly owned Subsidiaries of Loan Parties) on terms that are fair and reasonable and no less favorable than it would obtain in a comparable arm's-length transaction with a Person not an Affiliate. (i) Pari Passu Ranking. Ensure that at all times the claims of the Banks, the Issuing Bank and the Agents against it under the Loan Documents will rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors, except for claims which are preferred by any bankruptcy, insolvency, liquidation or other similar laws of general application or are mandatorily preferred by law applying to insurance companies generally. (j) Additional Collateral. Comply with the provisions of this Section regarding any new or additional Collateral. The Account Parties may from time to time add Collateral to the State Street Custodial Accounts without the necessity of executing or delivering any documents pursuant to 45 this Agreement (but subject to the provisions of Section 5.02(g)). The Account Parties may from time to time pledge new or additional Collateral contained in Custodial Accounts other than the State Street Custodial Accounts by executing and delivering to the Administrative Agent either a supplement to the Pledge and Security Agreement in the form attached thereto (in the case of any new Custodial Account maintained with State Street), or a new pledge and security agreement (in substantially the form of the Pledge and Security Agreement) or other pledge agreement, security agreement or charge (in the case of any new Custodial Account maintained with another Custodian), in form and substance reasonably satisfactory to the Administrative Agent, and by causing to be executed and delivered to the Administrative Agent a control agreement or such other Security Documents as the Administrative Agent shall reasonably require together with such other documents, certificates and opinions (including opinions as to the validity and perfection of the Administrative Agent's Lien on such Collateral), in form and substance reasonably satisfactory to the Administrative Agent, as the Administrative Agent may reasonably request in connection therewith; and the applicable Account Parties will take such other action as the Administrative Agent may reasonably request to create in favor of the Administrative Agent a perfected security interest in and Lien on the Collateral being pledged pursuant to the documents described above. (k) Custodial Account Statements. Cause to be delivered to the Administrative Agent, promptly upon receipt after the end of each calendar month, a monthly statement of each Custodial Account prepared by the Custodian thereof, showing the assets credited to such account as of the date of such statement. SECTION 5.02 Negative Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, each of the Account Parties will not, at any time: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on or with respect to any of its properties of any character (including, without limitation, accounts) whether now owned or hereafter acquired, or assign or permit any of its Subsidiaries to assign, any accounts or other right to receive income, except: (i) Permitted Liens; (ii) Liens described on Schedule 5.02(a) hereto; (iii) purchase money Liens upon or in real property or equipment acquired or held by the Parent or any of its Subsidiaries in the ordinary course of business to secure the purchase price of such property or equipment or to secure Debt incurred solely for the purpose of financing the acquisition, construction or improvement of any such property or equipment to be subject to such Liens, or Liens existing on any such property or equipment at the time of acquisition or within 180 days following such acquisition (other than any such Liens created in 46 contemplation of such acquisition that do not secure the purchase price), or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount; provided, however, that no such Lien shall extend to or cover any property other than the property or equipment being acquired, constructed or improved, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced; (iv) Liens arising in connection with Capitalized Leases; provided that no such Lien shall extend to or cover any assets other than the assets subject to such Capitalized Leases; (v) (A) any Lien existing on any asset of any Person at the time such Person becomes a Subsidiary and not created in contemplation of such event, (B) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Parent or any of it Subsidiaries in accordance with Section 5.02(c) and not created in contemplation of such event and (C) any Lien existing on any asset prior to the acquisition thereof by the Parent or any of its Subsidiaries and not created in contemplation of such acquisition; (vi) Liens securing obligations under credit default swap transactions determined by reference to, or Contingent Obligations in respect of, Debt issued by the Parent or one of its Subsidiaries; such Debt not to exceed an aggregate principal amount of $550,000,000; (vii) Liens arising in the ordinary course of its business which (A) do not secure Debt and (B) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (viii) Liens on cash and Approved Investments securing Hedge Agreements arising in the ordinary course of business; (ix) other Liens securing Debt or other obligations outstanding in an aggregate principal or face amount not to exceed at any time 5% of Consolidated Net Worth; (x) Liens consisting of deposits made by the Parent or any insurance Subsidiary with any insurance regulatory authority or other statutory Liens or Liens or claims imposed or required by applicable insurance law or regulation against the assets of the Parent or any insurance Subsidiary, in each case in favor of policyholders of the Parent or such insurance Subsidiary or an insurance regulatory authority and in the ordinary course of the Parent's or such insurance Subsidiary's business; (xi) Liens on Investments and cash balances of the Parent or any insurance Subsidiary (other than capital stock of any Subsidiary) securing obligations of the Parent or any insurance Subsidiary in respect of (i) letters of credit obtained in the ordinary course of business (including, without limitation, Liens created by the Security Documents) and/or (ii) trust arrangements formed in the ordinary course of business for the benefit of cedents to secure reinsurance recoverables owed to them by the Parent or any insurance Subsidiary; 47 (xii) the replacement, extension or renewal of any Lien permitted by clause (iii) or (vi) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount (other than in respect of fees, expenses and premiums, if any) or change in any direct or contingent obligor) of the Debt secured thereby; (xiii) Liens securing obligations owed by any Loan Party to any other Loan Party or owed by any Subsidiary of the Parent (other than a Loan Party) to the Parent or any other Subsidiary; (xiv) Liens incurred in the ordinary course of business in favor of financial intermediaries and clearing agents pending clearance of payments for investment or in the nature of set-off, banker's lien or similar rights as to deposit accounts or other funds; (xv) judgment or judicial attachment Liens, provided that the enforcement of such Liens is effectively stayed; (xvi) Liens arising in connection with Securitization Transactions; provided that the aggregate principal amount of the investment or claim held at any time by all purchasers, assignees or other transferees of (or of interests in) receivables and other rights to payment in all Securitization Transactions (together with the aggregate principal amount of any other obligations secured by such Liens) shall not exceed U.S. $250,000,000; (xvii) Liens arising in connection with certain equity proceeds received on or about September 12, 2000 (plus interest accrued thereon) placed in a segregated account in support of (or pledged as collateral for) Parent's guaranty of the $412,372,000 principal amount of Auction Rate Reset Subordinated Notes Series A issued by ACE INA to ACE RHINOS Trust on June 30, 1999; (xviii) Liens on securities arising out of repurchase agreements with a term of not more than three months entered into with "Lenders" (as such term is defined in the Five Year Credit Agreement) or their Affiliates or with securities dealers of recognized standing; provided that the aggregate amount of all assets of the Parent and its Subsidiaries subject to such agreements shall not at any time exceed $800,000,000. For purposes of this clause (xviii), "Five Year Credit Agreement" shall mean the Second Amended and Restated Five Year Credit Agreement dated as of April 5, 2002 among the Parent, ACE Bermuda, Tempest, ACE INA Holdings Inc. and ACE Guaranty Re Inc., as borrowers, various financial institutions, and JPMorgan Chase Bank, as administrative agent, as amended, modified, supplemented or restated from time to time; and (xix) Liens securing up to an aggregate amount of $200,000,000 of obligations of Tempest, the Parent or any wholly owned Subsidiary, arising out of catastrophe bond financing. Notwithstanding the foregoing provisions of this subsection (a) or any other provision of this Agreement or any other Loan Document, in no event shall any Account Party create, incur, assume or suffer to exist any Lien on or with respect to the Collateral or any portion thereof other than 48 (w) the Liens created in favor of the Administrative Agent under the Security Documents, (x) Liens described in clause (a) of the definition of Permitted Liens, (y) Liens described in clause (xv) above, and (z) Liens in favor of any Custodian pursuant to such Custodian's standard Custodial Agreements securing payment of such Custodian's customary fees, commissions and charges (the Liens described in clauses (w), (x), (y) and (z), collectively, "Permitted Collateral Liens"). (b) Change in Nature of Business. Make any material change in the nature of the business of the Parent and its Subsidiaries, taken as a whole, as carried on at the date hereof. (c) Mergers, Etc. Merge into or amalgamate or consolidate with any Person or permit any Person to merge into it, or permit any of its Subsidiaries to do so, except that: (i) any Subsidiary of the Parent may merge into or amalgamate or consolidate with any other Subsidiary of the Parent, provided that, in the case of any such merger, amalgamation or consolidation, the Person formed by such merger, amalgamation or consolidation shall be a wholly owned Subsidiary of the Parent, provided further that, in the case of any such merger, amalgamation or consolidation to which an Account Party is a party, the Person formed by such merger, amalgamation or consolidation shall be such Account Party; (ii) any Subsidiary of any Account Party may merge into or amalgamate or consolidate with any other Person or permit any other Person to merge into or amalgamate or consolidate with it; provided that the Person surviving such merger shall be a wholly owned Subsidiary of the Account Party; (iii) in connection with any sale or other disposition permitted under Section 5.02(d), any Subsidiary of the Parent may merge into or amalgamate or consolidate with any other Person or permit any other Person to merge into or amalgamate or consolidate with it; and (iv) the Parent or any Account Party may merge into or amalgamate or consolidate with any other Person; provided that, in the case of any such merger, amalgamation or consolidation, the Person formed by such merger, amalgamation or consolidation shall be the Parent or such Account Party, as the case may be; provided, however, that in each case, immediately after giving effect thereto, no event shall occur and be continuing that constitutes a Default. (d) Sales, Etc., of Assets. Sell, lease, transfer or otherwise dispose of, or permit any other Account Party to sell, lease, transfer or otherwise dispose of, all or substantially all of its assets (excluding sales of investment securities in the ordinary course of business); provided, however, that the provisions of Section 5.02(g) shall apply independent of this Section 5.02(d). (e) Restricted Payments. In the case of the Parent, declare or pay any dividends, purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Interests now or hereafter outstanding, return any capital to its stockholders, partners or members (or the equivalent Persons thereof) as such, make any distribution of assets, Equity Interests, 49 obligations or securities to its stockholders, partners or members (or the equivalent Persons thereof) as such or issue or sell any Equity Interests or accept any capital contributions, or permit any of its Subsidiaries to do any of the foregoing, or permit any of its Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for value any Equity Interests in the Parent or to issue or sell any Equity Interests therein, except that, so long as no Default shall have occurred and be continuing at the time of any action described in clause (i) or (ii) below or would result therefrom: (i) the Parent may (A) declare and pay dividends and distributions payable only in common stock of the Parent, (B) issue and sell shares of its capital stock, (C) purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Interests in an aggregate amount during the term of this Agreement not exceeding $300,000,000 and (D) declare and pay cash dividends to its stockholders, (ii) (A) any Loan Party (other than the Parent) may declare and pay cash dividends to another Loan Party and (B) any Subsidiary of the Parent (other than any Loan Party) may (x) declare and pay cash dividends to the Parent or any other wholly owned Subsidiary of the Parent of which it is a Subsidiary and (y) accept capital contributions from its parent, and (iii) a Special Purpose Trust may issue Preferred Securities and pay dividends thereon with the proceeds of payments of interest on the Debentures. (f) Accounting Changes. Make or permit, or permit any of its Subsidiaries to make or permit, any change in accounting policies or reporting practices, except as permitted by GAAP. (g) Collateral. Permit (i) the Letter of Credit Outstandings to exceed the aggregate Collateral Value at any time or (ii) the average rating (calculated on a weighted average basis) of the securities included within the calculation of the aggregate Collateral Value to be less than "A-" (with rating methodologies to be taken into account in the manner set forth in Schedule III). The Account Parties may from time to time add Collateral to or sell, deliver, transfer or otherwise withdraw Collateral from any Custodial Account (including, without limitation, by trading of securities), but only so long as (i) immediately after giving effect thereto no Default or Event of Default would exist and (ii) with respect to the addition or termination (or removal as Collateral) of Custodial Accounts, the Account Parties comply with any applicable restrictions and conditions set forth in the Security Documents. (h) Custodial Agreements. Make or permit any amendment or modification to any Custodial Agreement that is adverse in any material respect to the interests of the Account Parties or the Banks. SECTION 5.03 Reporting Requirements. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, the Parent will furnish to the Agents and the Banks: 50 (a) Default Notice. As soon as possible and in any event within two days after the occurrence of each Default or any event, development or occurrence reasonably likely to have a Material Adverse Effect continuing on the date of such statement, a statement of the chief financial officer of the Parent setting forth details of such Default, event, development or occurrence and the action that the Parent or the applicable Subsidiary has taken and proposes to take with respect thereto. (b) Annual Financials. (i) As soon as available and in any event within 90 days after the end of each Fiscal Year (or, if earlier, within five Business Days after such date as the Parent is required to file its annual report on Form 10-K for such Fiscal Year with the Securities and Exchange Commission), a copy of the annual Consolidated audit report for such year for the Parent and its Subsidiaries, including therein a Consolidated balance sheet of the Parent and its Subsidiaries as of the end of such Fiscal Year and Consolidated statements of income and cash flows of the Parent and its Subsidiaries for such Fiscal Year, all reported on in a manner reasonably acceptable to the Securities and Exchange Commission in each case and accompanied by an opinion of PricewaterhouseCoopers LLP or other independent public accountants of recognized standing reasonably acceptable to the Required Banks, together with (i) a certificate of the Chief Financial Officer of the Parent stating that no Default has occurred and is continuing, or if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Parent has taken a proposes to take with respect thereto, and (ii) a schedule in form reasonably satisfactory to the Administrative Agent of the computations used by the Parent in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Section 5.04 (which schedule shall include a statement as to the ratio of the aggregate Collateral Value to the Letter of Credit Outstandings as of the end of each calendar month during the period covered by such financial statements, to the extent not previously furnished to the Agents and the Banks). (ii) As soon as available and in any event within 120 days after the end of each Fiscal Year, a copy of the annual Consolidated audit report for such year for each Subsidiary Guarantor and its Subsidiaries, including therein a Consolidated balance sheet of such Subsidiary Guarantor and its Subsidiaries as of the end of such Fiscal Year and a Consolidated statement of income and a Consolidated statement of cash flows of such Subsidiary Guarantor and its Subsidiaries for such Fiscal Year, in each case accompanied by an opinion acceptable to the Required Banks of PricewaterhouseCoopers LLP or other independent public accountants of recognized standing acceptable to the Required Banks. (c) Quarterly Financials. As soon as available and in any event within 45 days after the end of each of the first three quarters of each Fiscal Year (or, if earlier, within five Business Days after such date as the Parent is required to file its quarterly report on Form 10-Q for such fiscal quarter with the Securities and Exchange Commission), Consolidated balance sheets of the Parent and its Subsidiaries as of the end of such quarter and Consolidated statements of income and a Consolidated statement of cash flows of the Parent and its Subsidiaries for the period commencing 51 at the end of the previous fiscal quarter and ending with the end of such fiscal quarter and Consolidated statements of income and a Consolidated statement of cash flows of the Parent and its Subsidiaries for the period commencing at the end of the previous Fiscal Year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding Fiscal Year, all in reasonable detail and duly certified (subject to the absence of footnotes and normal year-end audit adjustments) by the Chief Financial Officer of the Parent as having been prepared in accordance with GAAP, together with (i) a certificate of said officer stating that no Default has occurred and is continuing or, if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Parent has taken and proposes to take with respect thereto and (ii) a schedule in form reasonably satisfactory to the Administrative Agent of the computations used by the Parent in determining compliance with the covenants contained in Section 5.04 (which schedule shall include a statement as to the ratio of the aggregate Collateral Value to the Letter of Credit Outstandings as of the end of each calendar month during the period covered by such financial statements). (d) Litigation. Promptly after the commencement thereof, notice of all actions, suits, investigations, litigation and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting any Loan Party or any of its Subsidiaries of the type described in Section 4.01(f). (e) Securities Reports. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that the Parent sends to its stockholders generally, copies of all regular, periodic and special reports, and all registration statements, that any Loan Party or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or with any national securities exchange, and (to the extent not otherwise provided) copies of all certifications of the Parent's principal executive officer and principal financial officer made pursuant to Section 302 or 906 of the Sarbanes-Oxley Act of 2002, as amended. (f) ERISA. (i) ERISA Events. Promptly and in any event within 10 days after any Loan Party or any ERISA Affiliate institutes any steps to terminate any Pension Plan or becomes aware of the institution of any steps or any threat by the PBGC to terminate any Pension Plan, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could result in the requirement that any Loan Party or any ERISA Affiliate furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could result in any Loan Party or any ERISA Affiliate incurring any material liability, fine or penalty, or any material increase in the contingent liability of any Loan Party or any ERISA Affiliate with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto. (ii) Plan Annual Reports. Promptly upon request of any Agent or any Bank, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Pension Plan. 52 (iii) Multiemployer Plan Notices. Promptly and in any event within 15 Business Days after receipt thereof by any Loan Party or any ERISA Affiliate from the sponsor of a Multiemployer Plan, copies of each notice concerning (A) the imposition of Withdrawal Liability by any such Multiemployer Plan, (B) the reorganization or termination, within the meaning of Title IV of ERISA, of any such Multiemployer Plan or (C) the amount of liability incurred, or that may be incurred, by such Loan Party or any ERISA Affiliate in connection with any event described in clause (A) or (B); provided, however, that such notice and documentation shall not be required to be provided (except at the specific request of any Agent or any Bank, in which case such notice and documentation shall be promptly provided following such request) if such condition or event is not reasonably expected to result in any Loan Party or any ERISA Affiliate incurring any material liability, fine, or penalty. (g) Statutory Statements. As soon as available and in any event within 20 days after submission, each statutory statement of the Loan Parties (or any of them) in the form submitted to The Insurance Division of the Office of Registrar of Companies of Bermuda. (h) Regulatory Notices, Etc. Promptly after any Responsible Officer of the Parent obtains knowledge thereof, (i) a copy of any notice from the Bermuda Minister of Finance, the Registrar of Companies or the Supervisor of Insurance or any other person of the revocation, the suspension or the placing of any restriction or condition on the registration as an insurer of any Account Party under the Bermuda Insurance Act 1978 (and related regulations) or of the institution of any proceeding or investigation which could result in any such revocation, suspension or placing of such a restriction or condition, (ii) copies of any correspondence by, to or concerning any Loan Party relating to an investigation conducted by the Bermuda Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Act 1981 (and related regulations) or otherwise and (iii) a copy of any notice of or requesting or otherwise relating to the winding-up or any similar proceeding of or with respect to any Loan Party. (i) Other Information. Such other information respecting the business, condition (financial or otherwise), operations, performance, properties or prospects of any Loan Party or any of its Subsidiaries as the Administrative Agent, or any Bank through the Administrative Agent, may from time to time reasonably request. SECTION 5.04 Financial Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Bank shall have any Letter of Credit Participating Interest Commitment or commitment to issue a Letter of Credit hereunder, the Parent will: (a) Adjusted Consolidated Debt to Total Capitalization Ratio. Maintain at all times a ratio of Adjusted Consolidated Debt to Total Capitalization of not more than 0.35 to 1.0. (b) Consolidated Net Worth. Maintain at all times Consolidated Net Worth in an amount not less than the sum of (i) $3,600,000,000 plus (ii) 25% of Consolidated Net Income for each fiscal quarter of the Parent ending on or after March 31, 2000 for which such Consolidated Net Income is positive. 53 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01 Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) (i) any Account Party shall fail to pay any principal of any Advance when the same shall become due and payable or (ii) any Account Party shall fail to pay any interest on any Advance, or any Loan Party shall fail to make any other payment under any Loan Document, in each case under this clause (ii) within five Business Days after the same becomes due and payable; or (b) any representation or warranty made by any Loan Party (or any of its officers) under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made; or (c) any Account Party shall fail to perform or observe any term, covenant or agreement contained in Section 2.10, 5.01(d) (with respect to the Parent) or (e), 5.02 (other than 5.02(g)) or 5.04; or (d) any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in any Loan Document on its part to be performed or observed if such failure shall remain unremedied for (1) in the case of any covenant contained in Section 5.02(g), three Business Days after the earlier of the date on which (i) a Responsible Officer becomes aware of such failure or (ii) written notice thereof shall have been given to such Loan Party by any Agent or any Bank, and (2) in all other cases, 30 days after the earlier of the date on which (i) a Responsible Officer becomes aware of such failure or (ii) written notice thereof shall have been given to such Loan Party by any Agent or any Bank; or (e) the Parent or any of its Significant Subsidiaries shall fail to pay any Material Financial Obligation (but excluding Debt outstanding hereunder) of the Parent or such Significant Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Material Financial Obligation; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Material Financial Obligation and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Material Financial Obligation or otherwise to cause, or to permit the holder thereof to cause, such Material Financial Obligation to mature; or any such Material Financial Obligation shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Material Financial Obligation shall be required to be made, in each case prior to the stated maturity thereof; or (f) any Loan Party or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment 54 for the benefit of creditors; or any proceeding shall be instituted by or against any Loan Party or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur; or any Loan Party or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or (g) any judgment or order for the payment of money in excess of $100,000,000 shall be rendered against any Loan Party or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (h) any non-monetary judgment or order shall be rendered against any Loan Party or any of its Subsidiaries that could be reasonably likely to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (i) any provision of any Loan Document after delivery thereof pursuant to Section 3.01 shall for any reason cease to be valid and binding on or enforceable against any Loan Party party to it (other than as a result of a transaction permitted hereunder), or any such Loan Party shall so state in writing; or any Security Document shall for any reason (other than pursuant to the terms thereof) cease to create in favor of the Administrative Agent a valid and perfected first priority Lien on and security interest in the Collateral purported to be covered thereby; or the Administrative Agent shall cease for any reason to hold a perfected first priority Lien on and security interest in the Collateral; or (j) a Change of Control shall occur; or (k) Any Loan Party or any ERISA Affiliate shall incur or shall be reasonably expected to incur liability in excess of $25,000,000 in the aggregate with respect to any Pension Plan or any Multiemployer Plan in connection with the occurrence of any of the following events or existence of any of the following conditions: (i) Institution of any steps by any Loan Party, any ERISA Affiliate or any other Person, including, without limitation, the PBGC to terminate a Pension Plan if as a result of such termination a Loan Party or any ERISA Affiliate could be required to make a contribution to such Pension Plan, or could incur a liability or obligation; or 55 (ii) A contribution failure occurs with respect to any Pension Plan sufficient to give rise to a lien under section 302(f) of ERISA; or (iii) Any condition shall exist or event shall occur with respect to a Pension Plan that is reasonably expected to result in any Loan Party or any ERISA Affiliate being required to furnish a bond or security to the PBGC or such Pension Plan, or incurring a liability or obligation; or (l) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan; or (m) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, and as a result of such reorganization or termination the aggregate annual contributions of the Loan Parties and the ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years of such Multiemployer Plans immediately preceding the plan year in which such reorganization or termination occurs; or (n) any Custodial Agreement is amended or modified in any manner that is inconsistent with the terms of the Loan Documents or that otherwise could reasonably be expected to have a Material Adverse Effect, or is terminated, or ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any material respect, or any party thereto denies that it has any further liability or obligation thereunder; or (o) any Account Party shall (i) change its name, identity or corporate structure, (ii) change its chief executive office from the location thereof listed on Annex A to the Pledge and Security Agreement, or (iii) change the jurisdiction of its incorporation or organization from the jurisdiction listed on Annex A to the Pledge and Security Agreement (whether by merger or otherwise), unless in each case such Account Party has (1) given twenty (20) days' prior written notice to the Administrative Agent of its intention to do so, together with information regarding any such new location and such other information in connection with such proposed action as the Administrative Agent may reasonably request, and (2) delivered to the Administrative Agent ten (10) days prior to any such change or removal such documents, instruments and financing statements as may be required by the Administrative Agent, all in form and substance satisfactory to the Administrative Agent, paid all necessary filing and recording fees and taxes, and taken all other actions reasonably requested by the Administrative Agent (including, at the request of the Administrative Agent, delivery of opinions of counsel reasonably satisfactory to the Administrative Agent to the effect that all such actions have been taken), in order to perfect and maintain the Lien upon and security interest in the Collateral provided for in the Pledge and Security Agreement in accordance with the provisions of Section 3(c) thereof; provided that an Event of Default under this subsection shall not occur unless any failure of any Account Party to perform or observe any provision of this subsection shall remain unremedied for 30 days after the earlier of the date on which (y) a Responsible Officer becomes aware of such failure or (z) written notice thereof shall have been given to such Loan Party by any Agent or any Bank; 56 then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Required Banks, by notice to the Account Parties, declare the obligation of the Issuing Bank to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and/or (ii) shall at the request, or may with the consent, of the Required Banks, by notice to the Account Parties, declare all amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Account Parties, and/or (iii) shall at the request, or may with the consent, of the Required Banks, proceed to exercise the rights and remedies of the Administrative Agent and the Banks under the Loan Documents and applicable law, including, without limitation, by dating, delivering and acting upon Letters of Instruction; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to any Account Party under the Federal Bankruptcy Code, (x) the obligation of the Issuing Bank to issue Letters of Credit shall automatically be terminated, (y) all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Account Parties and (z) the obligation of the Account Parties to provide cash collateral under Section 6.02 shall automatically become effective.. SECTION 6.02 Actions in Respect of the Letters of Credit upon Default. If any Event of Default shall have occurred and be continuing, the Administrative Agent may, or shall at the request of the Required Banks, after having taken any of the actions described in Section 6.01(ii) or otherwise, make demand upon the Account Parties to, and forthwith upon such demand the Account Parties will, pay to the Administrative Agent on behalf of the Banks in same day funds at the Administrative Agent's office designated in such demand, an amount equal to the aggregate Available Amount of all Letters of Credit then outstanding as cash collateral. If at any time during the continuance of an Event of Default the Administrative Agent determines that such funds are subject to any right or claim of any Person other than the Administrative Agent and the Banks or that the total amount of such funds is less than the aggregate Available Amount of all Letters of Credit, the Account Parties will, forthwith upon demand by the Administrative Agent, pay to the Administrative Agent, as additional cash collateral, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, that the Administrative Agent determines to be free and clear of any such right and claim. Upon the drawing of any Letter of Credit, such funds shall be applied to reimburse the Issuing Bank or Banks, as applicable, to the extent permitted by applicable law. ARTICLE VII THE GUARANTY SECTION 7.01 The Guaranty. (a) Subject to subsection (c) below, each Account Party hereby jointly and severally, unconditionally, absolutely and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all Obligations of each of the other Account Parties under the Loan Documents including, without limitation, the 57 principal of and interest on reimbursement obligations owing by such other Account Parties pursuant to this Agreement with respect to Letters of Credit. Upon failure by an Account Party to pay punctually any such amount, each other Account Party agrees to pay forthwith on demand the amount not so paid at the place and in the manner specified in this Agreement. For the avoidance of doubt, notwithstanding the limitations of subsection (c) below as to the guarantee obligations of Tempest Life, all other Account Parties at all times, including prior to the Tempest Life Effective Date, jointly and severally, unconditionally, absolutely and irrevocably guarantee the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all Obligations of Tempest Life. (b) Each Account Party (other than the Parent), and by its acceptance of this Guaranty, the Administrative Agent and each other Bank, hereby confirms that it is the intention of all such Persons that this Guaranty and the obligations of each Account Party hereunder not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar foreign, federal or state law to the extent applicable to this Guaranty and the obligations of each Account Party (other than the Parent) hereunder. To effectuate the foregoing intention, the Administrative Agent, the other Banks and the Account Parties hereby irrevocably agree that the obligations of each Account Party (other than the Parent) under this Article VII at any time shall be limited to the maximum amount as will result in the obligations of such Account Party under this Guaranty not constituting a fraudulent transfer or conveyance. (c) Notwithstanding anything to the contrary in this Agreement, the guarantee made by Tempest Life under this Article VII shall not be effective until the date (the "Tempest Life Effective Date") on which Tempest Life receives the necessary direction or exemption from the Bermuda Supervisor of Insurance to the effect that any liability with respect to its guaranty provided under this Article VII, until a claim or demand is made or funds are drawn against, directly or indirectly, under this Article VII, need not be recorded as a liability and thereby decrease its statutory capital and surplus as determinable under the Insurance Act 1978 of Bermuda and the related regulations. Upon the Tempest Life Effective Date, automatically and without necessity of any acknowledgment or affirmation by Tempest Life or any further action by any party, the guarantee made by Tempest Life under this Article VII shall become effective and the obligations of Tempest Life under this Article VII shall become Obligations for all purposes of this Agreement and the other Loan Documents. The Administrative Agent shall promptly notify the Banks of the date and occurrence of the Tempest Life Effective Date. SECTION 7.02 Guaranty Unconditional. The obligations of each Account Party under this Article VII shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release (including with respect to any Collateral) in respect of any obligation of any other obligor under any of the Loan Documents, by operation of law or otherwise; (ii) any modification or amendment of or supplement to any of the Loan Documents; 58 (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any other obligor under any of the Loan Documents; (iv) any change in the corporate existence, structure or ownership of any obligor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other obligor or its assets or any resulting release or discharge of any obligation of any other obligor contained in any of the Loan Documents; (v) the existence of any claim, set-off or other rights which any obligor may have at any time against any other obligor, the Administrative Agent, any Bank or any other corporation or person, whether in connection with any of the Loan Documents or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against any other obligor for any reason of any of the Loan Documents, or any provision of applicable law or regulation purporting to prohibit the payment by any other obligor of principal interest or any other amount payable under any of the Loan Documents; or (vii) any other act or omission to act or delay of any kind by any obligor, the Administrative Agent, any Bank or any other corporation or person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of or defense to an Account Party's obligations under this Article VII. SECTION 7.03 Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances. Each Account Party's obligations under this Article VII shall remain in full force and effect until the commitments of the Banks hereunder shall have terminated, no Letters of Credit shall be outstanding and all amounts payable by the other Account Parties under the Loan Documents shall have been paid in full. If at any time any payment of the principal of or interest on any reimbursement obligation or any other amount payable by an Account Party under the Loan Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of such Account Party or otherwise, each other Account Party's obligations under this Article VII with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 7.04 Waiver by the Account Parties. Each Account Party irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any corporation or person against any other obligor or any other corporation or person. SECTION 7.05 Subrogation. Each Account Party hereby unconditionally and irrevocably agrees not to exercise any rights that it may now have or hereafter acquire against any other Account Party, any other Loan Party or any other insider guarantor that arise from the existence, payment, performance or enforcement of such Account Party's obligations under or in respect of this Guaranty or any other Loan Document, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of any 59 Bank against any other Account Party, any other Loan Party or any other insider guarantor or any collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any other Account Party, any other Loan Party or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all amounts payable under this Guaranty shall have been paid in full in cash, no Letters of Credit shall be outstanding and the commitments of the Banks hereunder shall have expired or been terminated. If any amount shall be paid to any Account Party in violation of the immediately preceding sentence at any time prior to the latest of (a) the payment in full in cash of all amounts payable under this Guaranty, and (b) the Expiration Date, such amount shall be received and held in trust for the benefit of the Banks, shall be segregated from other property and funds of such Account Party and shall forthwith be paid or delivered to the Administrative Agent in the same form as so received (with any necessary endorsement or assignment) to be credited and applied to all amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Loan Documents, or to be held as collateral for any amounts payable under this Guaranty thereafter arising. If (i) any Account Party shall make payment to any Bank of all or any amounts payable under this Guaranty, (ii) all amounts payable under this Guaranty shall have been paid in full in cash, and (iii) the Expiration Date shall have occurred, the Banks will, at such Account Party's request and expense, execute and deliver to such Account Party appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Account Party of an interest in the obligations resulting from such payment made by such Account Party pursuant to this Guaranty. SECTION 7.06 Stay of Acceleration. If acceleration of the time for payment of any amount payable by any Account Party under any of the Loan Documents is stayed upon the insolvency, bankruptcy or reorganization of such Account Party, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by the other Account Parties under this Article VII forthwith on demand by the Administrative Agent made at the request of the requisite proportion of the Banks. SECTION 7.07 Continuing Guaranty; Assignments. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of all amounts payable under this Guaranty and (ii) the Expiration Date, (b) be binding upon each Account Party, its successors and assigns and (c) inure to the benefit of and be enforceable by the Banks and their successors, transferees and assigns. Without limiting the generality of clause (c) of the immediately preceding sentence, any Bank may assign or otherwise transfer all or any portion of its rights and obligations under this Agreement (including, without limitation, all or any portion of its Letter of Credit Participating Interest Commitment and the Advances owing to it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Bank herein or otherwise, in each case as and to the extent provided in Section 9.07. 60 ARTICLE VIII THE AGENTS SECTION 8.01 Authorization and Action. Each Bank (in its capacity as a Bank) hereby appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to such Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by the Loan Documents, no Agent shall be required to exercise any discretion or take any action, but shall be required to act (in the case of the Administrative Agent) or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Banks or all the Banks where unanimity is required, and such instructions shall be binding upon all Banks; provided, however, that no Agent shall be required to take any action that exposes such Agent to personal liability or that is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Bank prompt notice of each notice given to it by any Account Party pursuant to the terms of this Agreement. SECTION 8.02 Agents' Reliance, Etc. Neither any Agent nor any of its respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, each Agent: (a) may consult with legal counsel (including counsel for any Loan Party), independent public accountants and other experts selected by it and 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; (b) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations (whether written or oral) made in or in connection with the Loan Documents; (c) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of any Loan Party or to inspect the property (including the books and records) of any Loan Party; (d) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; and (e) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram or telecopy) reasonably believed by it to be genuine and signed or sent by the proper party or parties. SECTION 8.03 Wachovia and Affiliates. With respect to its LC Commitment Amounts, and the Advances, Wachovia shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not an Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include Wachovia in its individual capacity. Wachovia and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, any Loan Party, any of its Subsidiaries and any Person that may do business with or own securities of any Loan Party or any such Subsidiary, all as if Wachovia were not an Agent and without any duty to account therefor to the Banks. 61 SECTION 8.04 Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any 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 this Agreement. SECTION 8.05 Indemnification. (a) Each Bank severally agrees to indemnify each Agent and its officers, directors, employees, agents, advisors and Affiliates (to the extent not promptly reimbursed by the Account Parties) from and against such Bank's ratable share (determined as provided below) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against such Agent or any such other Person in any way relating to or arising out of the Loan Documents or any action taken or omitted by such Agent under the Loan Documents; provided, however, that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's or other Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank agrees to reimburse each Agent promptly upon demand for its ratable share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Account Parties under Section 9.04, to the extent that such Agent is not promptly reimbursed for such costs and expenses by the Account Parties. (b) For purposes of this Section 8.05, the Banks' respective ratable shares of any amount shall be determined, at any time, according to the sum of (i) the aggregate principal amount of the Advances outstanding at such time and owing to the respective Banks, (ii) their respective Pro Rata Shares of the aggregate Available Amounts of all Letters of Credit outstanding at such time and (iii) their respective Unused LC Commitment Amounts at such time. The failure of any Bank to reimburse any Agent promptly upon demand for its ratable share of any amount required to be paid by the Banks to such Agent as provided herein shall not relieve any other Bank of its obligation hereunder to reimburse such Agent for its ratable share of such amount, but no Bank shall be responsible for the failure of any other Bank to reimburse such Agent for such other Bank's ratable share of such amount. Without prejudice to the survival of any other agreement of any Bank hereunder, the agreement and obligations of each Bank contained in this Section 8.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents. SECTION 8.06 Successor Administrative Agent. Any Agent may resign at any time by giving written notice thereof to the Banks and the Parent and may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal of the Administrative Agent, the Required Banks shall have the right to appoint a successor Administrative Agent, subject (so long as no Event of Default exists) to the consent of the Parent (which consent shall not be unreasonably withheld). If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have 62 accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Required Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent such successor Administrative Agent shall succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under the Loan Documents. If within 45 days after written notice is given of the retiring Administrative Agent's resignation or removal under this Section 8.06 no successor Administrative Agent shall have been appointed and shall have accepted such appointment, then on such 45th day (i) the retiring Administrative Agent's resignation or removal shall become effective, (ii) the retiring Administrative Agent shall thereupon be discharged from its duties and obligations under the Loan Documents and (iii) the Required Banks shall thereafter perform all duties of the retiring Administrative Agent under the Loan Documents until such time, if any, as the Required Banks appoint a successor Administrative Agent as provided above. After any retiring Agent's resignation or removal hereunder as Agent shall have become effective, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If Nova Scotia or Deutsche Bank ceases to be a Bank hereunder, it shall be deemed to have resigned as Documentation Agent and no replacement shall be appointed. If JPMorgan Chase or Bank of America ceases to be a Bank hereunder, it shall be deemed to have resigned as Syndication Agent and no replacement shall be appointed. SECTION 8.07 Collateral Matters. (a) The Administrative Agent is authorized on behalf of the Banks, without the necessity of any further notice to or consent from any of the Banks, from time to time to take any action with respect to any Collateral or Security Document that may be necessary or as it may deem to be appropriate to perfect, maintain and protect the security interests in and Liens on the Collateral granted pursuant to the Security Documents. (b) The Banks irrevocably authorize the Administrative Agent to release any security interest in or Lien on the Collateral held by it pursuant to the Security Documents (i) upon the termination of the Issuing Bank's obligation to issue Letters of Credit hereunder, the payment in full of the Obligations and the satisfaction and termination in full of all other Letter of Credit Outstandings, (ii) that is sold or disposed of as permitted hereunder or any other Loan Document or to which the requisite number or percentage of Banks have consented or (iii) otherwise pursuant to and in accordance with the provisions of any applicable Loan Document. Upon request by the Administrative Agent at any time, the Banks will confirm in writing the Administrative Agent's authority to release Collateral pursuant to this subsection (b). 63 ARTICLE IX MISCELLANEOUS SECTION 9.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Issuing Bank and the Required Banks (and, in the case of an amendment, the Parent), and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Banks (other than (A) any Bank that is, at such time, a Defaulting Bank, and (B) in the case of clauses (vi) and (vii) below, any Bank which is not and will not be (and is not and will not be owed any obligation which is or will be) affected thereby), do any of the following at any time: (i) waive any of the conditions specified in Section 3.01 or, in the case of the Effective Date, Section 3.02, (ii) change the number of Banks or the percentage of (x) the LC Commitment Amounts, (y) the aggregate unpaid principal amount of the Advances or (z) the aggregate Available Amount of outstanding Letters of Credit that, in each case, shall be required for the Banks or any of them to take any action hereunder, (iii) reduce or limit the obligations of any Account Party under Section 7.01 or release such Account Party or otherwise limit such Account Party's liability with respect to the Obligations owing to the Agents and the Banks, (iv) amend this Section 9.01, (v) increase the LC Commitment Amounts of the Banks, extend the Expiration Date or subject the Banks to any additional obligations, (vi) reduce the principal of, or interest on, any reimbursement obligation or any fees or other amounts payable hereunder, or increase any Bank's LC Commitment Amount, (vii) postpone any date fixed for any payment of principal of, or interest on, any reimbursement obligation or any fees or other amounts payable hereunder, (viii) limit the liability of any Loan Party under any of the Loan Documents, or (ix) release any of the Collateral if such release would cause the aggregate Collateral Value to be less than the Letter of Credit Outstandings; provided further that no amendment, waiver or consent shall, unless in writing and signed by an Agent in addition to the Banks required above to take such action, affect the rights or duties of such Agent under this Agreement or the other Loan Documents. SECTION 9.02 Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic or telecopy communication) and mailed, telegraphed, telecopied or delivered, if to any Account Party, at its address set forth below on the signature pages hereof; if to any Initial Bank, at its Domestic Lending Office specified opposite its name on Part 2 of Schedule I hereto; if to any other Bank, at its Domestic Lending Office specified in the Assignment and Acceptance pursuant to which it became a Bank; if to Wachovia (in its capacity as Issuing Bank) at its address at 401 Linden Street, Mail Code NC-6034, Winston-Salem, North Carolina 27101, Attn: International Operations -- Standby Letter of Credit Department, Telecopy No. (336) 735-0952; and if to the Administrative Agent, at its address at Charlotte Plaza Building CP-23, 201 South College Street, Charlotte, North Carolina 28288-0680, Attn: Syndication Agency Services, Telecopy No. (704) 383-0288; or, as to any party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telegraphed or telecopied, be effective when deposited in the mails, delivered to the telegraph company or transmitted by telecopier, respectively, except that notices and communications to the Administrative Agent pursuant to Article II, III or VIII shall not be effective until received by the Administrative Agent. Manual delivery by telecopier of an 64 executed counterpart of any amendment or waiver of any provision of this Agreement or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of an original executed counterpart thereof. SECTION 9.03 No Waiver; Remedies. No failure on the part of any Bank or any Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04 Costs and Expenses. (a) Each of the Account Parties agrees to pay on demand (i) all reasonable costs and expenses of the Administrative Agent and of the Issuing Bank in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents (including, without limitation, (A) all due diligence, collateral review, syndication, transportation, computer, duplication, appraisal, audit, insurance, consultant, search, filing and recording fees and expenses and (B) the reasonable fees and expenses of a single counsel for the Administrative Agent and a single counsel for the Issuing Bank with respect thereto, with respect to advising the Administrative Agent as to its rights and responsibilities, or the perfection, protection or preservation of rights or interests, under the Loan Documents, with respect to negotiations with any Loan Party or with other creditors of any Loan Party or any of its Subsidiaries arising out of any Default or any events or circumstances that may give rise to a Default and with respect to presenting claims in or otherwise participating in or monitoring any bankruptcy, insolvency or other similar proceeding involving creditors' rights generally and any proceeding ancillary thereto) and (ii) all reasonable costs and expenses of each Agent, the Issuing Bank and each Bank in connection with the enforcement of the Loan Documents (including, without limitation, in connection with the sale of, collection from, or other realization upon, the Collateral), whether in any action, suit or litigation, or any bankruptcy, insolvency or other similar proceeding affecting creditors' rights generally (including, without limitation, the reasonable fees and expenses of counsel for the Administrative Agent, the Issuing Bank and each Bank with respect thereto). (b) Each of the Account Parties jointly and severally agrees to indemnify and hold harmless each Agent, the Arranger, the Issuing Bank, each Bank and each of their Affiliates and their respective officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) this Agreement, the actual or proposed use of the proceeds of the Advances, the Loan Documents or any of the transactions 65 contemplated thereby, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by any Loan Party, its directors, shareholders or creditors or an Indemnified Party or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated by the Loan Documents are consummated. Each of the Account Parties also agrees not to assert any claim against any Agent, the Arranger, any Bank or any of their Affiliates, or any of their respective officers, directors, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the credit facilities provided hereunder, the actual or proposed use of the proceeds of the Advances or the Letters of Credit, the Loan Documents or any of the transactions contemplated by the Loan Documents. (c) Without prejudice to the survival of any other agreement of any Loan Party hereunder or under any other Loan Document, the agreements and obligations of the Account Parties contained in Section 2.07 and this Section 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under any of the other Loan Documents. SECTION 9.05 Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare amounts owing hereunder to be due and payable pursuant to the provisions of Section 6.01, each Agent and each Bank and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and otherwise apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Agent, such Bank or such Affiliate to or for the credit or the account of any Account Party against any and all of the Obligations of such Account Party now or hereafter existing under the Loan Documents, irrespective of whether such Agent or such Bank shall have made any demand under this Agreement and although such Obligations may be unmatured. Each Agent and each Bank agrees promptly to notify each Account Party after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Agent and each Bank and their respective Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Agent, such Bank and their respective Affiliates may have. SECTION 9.06 Binding Effect. This Agreement shall become effective when it shall have been executed by each Account Party, the Issuing Bank and each Agent and the Administrative Agent shall have been notified by each Initial Bank that such Initial Bank has executed it and thereafter shall be binding upon and inure to the benefit of each Account Party, each Agent, the Issuing Bank and each Bank and their respective successors and assigns, except that no Account Party shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Banks. SECTION 9.07 Assignments and Participations. (a) Each Bank may, and so long as no Default shall have occurred and be continuing, if demanded by any Account Party (following a demand by such Bank pursuant to Section 2.12) upon at least five Business Days notice 66 to such Bank and the Administrative Agent, will, assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its LC Commitment Amount, its Letter of Credit Participating Interest Commitment and the Letter of Credit Advances owing to it); provided, however, that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations of such Bank hereunder, except for any non-pro rata assignment made by a Downgraded Bank after a request by the Issuing Bank pursuant to Section 2.14 (and any subsequent non-pro rata assignment of the interest so assigned or by the Downgraded Bank) and any other non-pro rata assignment approved by the Administrative Agent and any Account Party, (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Bank or an Affiliate of any Bank or an assignment of all of a Bank's rights and obligations under this Agreement, the aggregate amount of the LC Commitment Amounts being assigned to such Eligible Assignee pursuant to such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 unless it is an assignment of the entire amount of such assignor's LC Commitment Amount, (iii) each such assignment shall be to an Eligible Assignee, (iv) each assignment made as a result of a demand by any Account Party pursuant to Section 2.12 shall be arranged by such Account Party after consultation with the Administrative Agent and shall be either an assignment of all of the rights and obligations of the assigning Bank under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Bank under this Agreement, (v) no Bank shall be obligated to make any such assignment as a result of a demand by any Account Party pursuant to Section 2.12 unless and until such Bank shall have received one or more payments from either such Account Party or other Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances made by such Bank, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Bank under this Agreement, (vi) as a result of such assignment, no Account Party shall be subject to additional amounts under Section 2.06 or 2.08 and (vii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with a processing and recordation fee of $2,500.00. (b) Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank, hereunder and (ii) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.06, 2.08 and 9.04 to the extent any claim thereunder relates to an event arising prior to such assignment and any other rights that are expressly provided hereunder to survive) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). 67 (c) By executing and delivering an Assignment and Acceptance, each Bank assignor thereunder and each assignee thereunder confirm to and agree with each other and the other parties thereto and hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of any of its obligations under any Loan Document or any other instrument or document furnished pursuant thereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any Agent, such assigning Bank 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 this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Loan Documents as are delegated to such Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank. (d) The Administrative Agent, acting for this purpose (but only for this purpose) as the agent of the Account Parties, shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the LC Commitment Amount of, and principal amount of the Advances owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Account Parties, the Agents and the Banks shall treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by any Account Party or any Agent or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Parent and to the parties to such Assignment and Acceptance. (f) Each Bank may sell participations to one or more Persons (other than any Loan Party or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its LC Commitment Amount, its Letter of Credit Participating Interest Commitment and the Advances owing 68 to it; provided, however, that (i) such Bank's obligations under this Agreement (including, without limitation, its Letter of Credit Participating Interest Commitment) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Account Parties, the Agents 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 and (iv) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, reimbursement obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, postpone any date fixed for any payment of principal of, or interest on, the reimbursement obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. Each Bank shall, as agent of the Account Parties solely for the purposes of this Section, record in book entries maintained by such Bank, the name and amount of the participating interest of each Person entitled to receive payments in respect of any participating interests sold pursuant to this Section. (g) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07, disclose to the assignee or participant or proposed assignee or participant any information relating to any Account Party furnished to such Bank by or on behalf of any Account Party; provided, however, that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Confidential Information received by it from such Bank. (h) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. SECTION 9.08 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement. SECTION 9.09 No Liability of the Issuing Bank. Each Account Party assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Issuing Bank nor any of its officers, directors, employees or agents shall be liable or responsible for: (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing Bank against presentation of documents that do not strictly comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the 69 Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that such Account Party shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to such Account Party, to the extent of any direct, but not consequential, damages suffered by such Account Party that such Account Party proves were caused by (i) the Issuing Bank's willful misconduct or gross negligence as determined in a final, non-appealable judgment by a court of competent jurisdiction in determining whether documents presented under any Letter of Credit comply with the terms of the Letter of Credit or (ii) the Issuing Bank's willful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. SECTION 9.10 Confidentiality. Neither any Agent nor any Bank shall disclose any Confidential Information to any Person without the consent of the Parent, other than (a) to such Agent's or such Bank's Affiliates and their officers, directors, employees, agents and advisors and to actual or prospective Eligible Assignees and participants, and then only on a confidential basis, (b) as required by any law, rule or regulation or judicial process, (c) as requested or required by any state, Federal or foreign authority or examiner regulating such Bank and (d) to any rating agency when required by it, provided that, prior to any such disclosure, such rating agency shall undertake to preserve the confidentiality of any Confidential Information relating to the Loan Parties received by it from such Bank. SECTION 9.11 Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Loan Documents in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. 70 SECTION 9.12 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 9.13 Waiver of Jury Trial. Each of the Account Parties, the Agents and the Banks irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to any of the Loan Documents, the Advances or the actions of any Agent or any Bank in the negotiation, administration, performance or enforcement thereof. SECTION 9.14 Disclosure of Information. Each Account Party agrees and consents to the Administrative Agent's and the Arranger's disclosure of information relating to this transaction to Gold Sheets and other similar bank trade publications. Such information will consist of deal terms and other information customarily found in such publications. The Parent shall have the right to review and approve any such disclosure made by the Administrative Agent or the Arranger before such disclosure is made (such approval not to be unreasonably withheld). [Remainder of page intentionally left blank] 71 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. ACE LIMITED The Common Seal of ACE Limited was hereunto affixed in the presence of: ----------------------------------------- Director ----------------------------------------- Secretary ACE BERMUDA INSURANCE LTD. The Common Seal of ACE Bermuda Insurance Ltd. was hereunto affixed in the presence of: ----------------------------------------- Director ----------------------------------------- Secretary ACE TEMPEST LIFE REINSURANCE LTD. The Common Seal of ACE Tempest Life Reinsurance Ltd. was hereunto affixed in the presence of: ----------------------------------------- Director ----------------------------------------- Secretary ACE TEMPEST REINSURANCE LTD. The Common Seal of ACE Tempest Reinsurance Ltd. was hereunto affixed in the presence of: ----------------------------------------- Director ----------------------------------------- Secretary Address for each Account Party: ACE Global Headquarters 17 Woodbourne Avenue Hamilton HM08 Bermuda Telecopy: (441) 296-0087 (signatures continued) S- WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Issuing Bank and as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- JPMORGAN CHASE BANK, as Syndication Agent and as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- BANK OF AMERICA, N.A. as Syndication Agent and as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- THE BANK OF NOVA SCOTIA, as Documentation Agent and as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- DEUTSCHE BANK AG, NEW YORK BRANCH as Documentation Agent and as an Initial Bank By: --------------------------------------- Title: --------------------------------------- (signatures continued) S- NATIONAL AUSTRALIA BANK LIMITED, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- FLEET NATIONAL BANK, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- ROYAL BANK OF CANADA, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- BARCLAYS BANK PLC, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- COMERICA BANK, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- (signatures continued) S- STATE STREET BANK AND TRUST COMPANY, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- MELLON BANK, N.A., as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- ABN AMRO BANK, N.V., as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- HSBC BANK USA, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- BANK ONE, N.A., as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- THE BANK OF NEW YORK, as an Initial Bank By: ----------------------------------------- Title: ----------------------------------------- SCHEDULE I LC COMMITMENT AMOUNTS Wachovia Bank, National Association $30,000,000 JPMorgan Chase Bank 27,500,000 Bank of America, N.A. 27,500,000 The Bank of Nova Scotia 27,500,000 Deutsche Bank AG, New York Branch 27,500,000 National Australia Bank Limited 22,500,000 Fleet National Bank 22,500,000 Royal Bank of Canada 20,000,000 Barclays Bank PLC 20,000,000 Comercia Bank 20,000,000 State Street Bank and Trust Company 20,000,000 Mellon Bank, N.A. 17,000,000 ABN AMRO Bank, N.V. 17,000,000 HSBC Bank USA 17,000,000 Bank One, N.A. 17,000,000 The Bank of New York 17,000,000 Total $350,000,000.00 =============== SCHEDULE I - Part 2 DOMESTIC LENDING OFFICES - -------------------------------------------------------------------------------- Wachovia Bank, National Association Financial Institutions Group 1339 Chestnut Street, PA 4819 Philadelphia, Pennsylvania 19107 Attn: Joseph DiFrancesco Telephone: (267) 321-7025 Telecopy: (215) 786-4114 - -------------------------------------------------------------------------------- JPMorgan Chase Bank Financial Institutions Group 270 Park Avenue, 15th Floor New York, New York 10017 Attn: Helen Newcomb Telephone: (212) 270-6260 Telecopy: (212) 270-1511 - -------------------------------------------------------------------------------- Bank of America, N.A. 231 S. LaSalle Street Chicago, Illinois 60697 Attn: Debra Basler Telephone: (312) 828-3734 Telecopy: (312) 987-0889 - -------------------------------------------------------------------------------- Bank of Nova Scotia One Liberty Plaza, 26th Floor New York, New York 10006 Attn: Dan Foote Telephone: (212) 225-5077 Telecopy: (212) 225-5090 - -------------------------------------------------------------------------------- Deutsche Bank AG, New York Branch 31 West 52nd Street Mail Stop NYC01-2402 New York, New York 10019 Attn: Clinton M. Johnson Telephone: (212) 469-8101 Telecopy: (212) 469-8366 - -------------------------------------------------------------------------------- National Australia Bank Limited 200 Park Avenue, 34th Floor New York, New York 10166 Attn: Dennis Cogan Telephone: (212) 916-9574 Telecopy: (212) 983-1969 - -------------------------------------------------------------------------------- Fleet National Bank 777 Main Street Mail Stop CTEH40225C Hartford, Connecticut 06115 Attn: George Urban Telephone: (860) 952-7565 Telecopy: (860) 952-7604 - -------------------------------------------------------------------------------- Royal Bank of Canada One Liberty Plaza, 4th Floor New York, New York 10006-1404 Attn: Gabriella King Telephone: (212) 428-6318 Telecopy: (212) 428-6201 with a copy of notices to: Royal Bank of Canada One Liberty Plaza, 4th Floor New York, New York 10006-1404 Attn: Alexander Birr Telephone: (212) 428-6404 Telecopy: (212) 428-6201 - -------------------------------------------------------------------------------- Barclays Bank PLC P.O. Box 544 1st Floor 54 Lombard Street London EC3V 9EX England Attn: Neil Holmes Telephone: 44 (0) 20 7699 3125 Telecopy: 44 (0) 20 7699 2407 Copies to: Barclays Capital GSU, 5 North Colonade Canary Wharf London E14 4BB England Attn: Graham Smart Telephone: 44 (0) 20 7773 6450 Telecopy: 44 (0) 20 7773 6807 - -------------------------------------------------------------------------------- Comerica Bank 500 Woodward Avenue Detroit, Michigan 48226-3331 Attn: Martin G. Ellis Telephone: (313) 222-9443 Telecopy: (313) 222-5466 - -------------------------------------------------------------------------------- State Street Bank and Trust Company Domestic Lending Office: 225 Franklin Street Boston, Massachusetts 02110 Address for notices: Lafayette Corporate Center 2 Avenue de Lafayette Boston, Massachusetts 02111 Attn: Edward M. Anderson, VP Telephone: (617) 662-3782 Telecopy: (617) 662-3778 - -------------------------------------------------------------------------------- Mellon Bank, N.A. One Mellon Center, Room 4401 Pittsburgh, Pennsylvania 15258 Attn: Karla Maloof Telephone: (412) 236-4147 Telecopy: (412) 234-8087 - -------------------------------------------------------------------------------- ABN AMRO Bank, N.V. 208 South LaSalle Street, Suite 1500 Chicago, Illinois 60604-1003 Attn: Credit Administration Telecopy: (313) 992-5111 - -------------------------------------------------------------------------------- HSBC Bank USA 452 Fifth Avenue, 5th Floor New York, New York 10018 Attn: Anthony C. Valencourt Telephone: (212) 525-2579 Telecopy: (212) 525-2573 - -------------------------------------------------------------------------------- Bank One, N.A. 1 Bank One Plaza, Suite IL1-0085 Chicago, Illinois 60670 Attn: Gretchen Roetzer Telephone: (312) 732-8068 Telecopy: (312) 732-4033 - -------------------------------------------------------------------------------- The Bank of New York Insurance Division One Wall Street, 17th Floor New York, New York 10286 Attn: David Trick, VP Telephone: (212) 635-7273 Telecopy: (212) 809-9520 - -------------------------------------------------------------------------------- 2 SCHEDULE II EXISTING LETTERS OF CREDIT [attached hereto] SCHEDULE III Methodology for Calculation of Collateral Values In order to be included in the calculation of aggregate Collateral Value (in addition to other requirements set forth in the Reimbursement Agreement and this Schedule), investments shall satisfy each of the criteria (including as to rating) under one of the categories listed below. In addition, the following conditions shall apply: 1. No portion of the Collateral (other than U.S. Government Securities) consisting of securities of a single issuer shall exceed 10% of the Collateral Value at any time. 2. No security shall be included in the calculation of aggregate Collateral Value unless it is listed on a national securities exchange or freely tradeable at readily established prices in over-the-counter transactions. 3. For purposes of this Schedule and each Collateral Value Report, all maturities are calculated from the relevant date of determination of the Collateral Value. 4. For purposes of calculating the average rating of the Collateral included in the calculation of the aggregate Collateral Value, (a) Moody's ratings shall be converted to their respective S&P equivalents in accordance with established practice, and (b) commercial paper rated "A2" shall be deemed to be rated "A." - -------------------------------------------------------------------------------- Category of Investment/Security Eligible Percentage - -------------------------------------------------------------------------------- Cash (denominated in U.S. Dollars) 100% - -------------------------------------------------------------------------------- Prime bank certificates of deposit issued by U.S. banks 95% rated Aa3/AA- or better - -------------------------------------------------------------------------------- U.S. Government Securities 95% of Market Maturity 2 years or less 90% of Market Maturity over 2 years - -------------------------------------------------------------------------------- Investment-grade municipal bonds (Rating Aaa/AAA - 85% of Market Baa3/BBB-) 80% of Market Maturity 5 years or less Maturity over 5 years - -------------------------------------------------------------------------------- Investment-grade corporate bonds (Rating Aa3/AA- or 90% of Market better, non-convertible, NYSE-traded) 85% of Market Maturity 2 years or less Maturity over 2 years - -------------------------------------------------------------------------------- Investment-grade corporate bonds (Rating A1/A+ to 85% of Market Baa3/BBB-, non-convertible, NYSE-traded) 80% of Market Maturity 2 years or less Maturity over 2 years - -------------------------------------------------------------------------------- Commercial paper (Rating A1-A2, P1-P2) 85% of Market - -------------------------------------------------------------------------------- SCHEDULE 4.01(B) Subsidiaries [attached hereto] SCHEDULE 5.02(A) Liens [attached hereto] EXHIBIT A Form of Assignment and Acceptance ASSIGNMENT AND ACCEPTANCE dated as of ____________, 20___ between ________________________ (the "Assignor") and ________________________ (the "Assignee"), and [consented to and] accepted by Wachovia Bank, National Association, as administrative agent (the "Administrative Agent")[, and ACE Limited (the "Parent")]. W I T N E S S E T H WHEREAS, this Assignment and Acceptance (the "Agreement") relates to the Reimbursement Agreement dated as of September 30, 2002 among the Parent and other Account Parties party thereto, the Assignor and the other Banks party thereto, the Documentation Agents party thereto, the Syndication Agents party thereto and the Administrative Agent (as amended or otherwise modified from time to time, the "Reimbursement Agreement"); WHEREAS, as provided under the Reimbursement Agreement, the Assignor has a commitment to participate in Letters of Credit and make Letter of Credit Advances to the Account Parties in an aggregate principal amount at any time outstanding not to exceed $_______________; WHEREAS, Letters of Credit with a total amount available for drawing thereunder of $_______________ are outstanding at the date hereof; WHEREAS, Letter of Credit Advances made to the Account Parties by the Assignor under the Reimbursement Agreement in the aggregate principal amount of $___________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Reimbursement Agreement and the other Loan Documents in respect of a portion of its LC Commitment Amount thereunder in an amount equal to $____________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Letter of Credit Participating Interest, Letter of Credit Participating Interest Commitment, LC Participation Obligations, Letter of Credit Exposure, and Letter of Credit Advances, if any, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Reimbursement Agreement. 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Reimbursement Agreement and the other Loan Documents to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Reimbursement Agreement to the extent of the Assigned Amount, including the outstanding Letter of Credit Participating Interest Commitment and Letter of Credit Exposure, and the amount of the Letter of Credit Advances, if any, outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee[, the Administrative Agent and the Parent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Reimbursement Agreement with an LC Commitment Amount (in addition to any LC Commitment Amount theretofore held by it) equal to the Assigned Amount, and (ii) the LC Commitment Amount of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor shall be released from its obligations under the Reimbursement Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof the amount heretofore agreed between them./1 It is understood that commitment and Letter of Credit fees accrued to the date hereof in respect of the Assigned Amount are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Reimbursement Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. 4. [Consent of the Administrative Agent and the Parent. Pursuant to the Reimbursement Agreement, this Agreement is conditioned upon the consent of the Administrative Agent and, so long as no Default has occurred and is continuing, the Parent. The execution of this Agreement by the Administrative Agent and, if applicable, the Parent is evidence of this consent.] 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition or statements of the Account Parties or any of their respective Subsidiaries, or the validity and enforceability of the obligations of the Account Parties or any of their respective Subsidiaries in respect of any Loan Document. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Account Parties and their respective Subsidiaries. - --------------------- /1 Amount should combine the principal amount of any Letter of Credit Advances made by the Assignor together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 2 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. [Remainder of page intentionally left blank.] 3 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By: ________________________________ Title: ________________________________ [ASSIGNEE] By: ________________________________ Title: ________________________________ [ACE LIMITED By: ________________________________ Title: ________________________________ WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent By: ________________________________ Title: ________________________________] 4 EXHIBIT B Form of Collateral Value Report ____________, 200_ Wachovia Bank, National Association, as Administrative Agent Charlotte Plaza Building CP-23 201 South College Street Charlotte, North Carolina 28288-0680 Attn: Syndication Agency Services Ladies and Gentlemen: Reference is made to the Reimbursement Agreement dated as of September 30, 2002 among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Life Reinsurance Ltd. and ACE Tempest Reinsurance Ltd., as Account Parties, the Banks party thereto, and Wachovia Bank, National Association, as Administrative Agent (as amended or otherwise modified from time to time, the "Reimbursement Agreement"). Terms defined in the Reimbursement Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. This Collateral Value Report is delivered pursuant to Section 2.17(b) of the Reimbursement Agreement. The date of this Collateral Value Report is _____________, 200__(the "Report Date"). Set forth below is the Collateral Value of the Collateral and certain other information required by Section 2.17(b) of the Reimbursement Agreement as of ______________, 200__ (the "Valuation Date"), calculated in accordance with the definition of Collateral Value contained in the Reimbursement Agreement and the other provisions of the Agreement (including Schedule III to the Reimbursement Agreement):
- ---------------------------------------------------------------------------------------------------------- Amount/ Eligible Type of Security Market Value Percenrtage Collateral Value - ---------------------------------------------------------------------------------------------------------- Cash Denominated in U.S. Dollars 100% - ---------------------------------------------------------------------------------------------------------- Prime bank certificates of deposit issued 95% by U.S. banks rated Aa3/AA- or better - ---------------------------------------------------------------------------------------------------------- U.S. Government and U.S. Government Agency Obligations Maturity 2 years or less 95% of Market Maturity over 2 years 90% of Market - ---------------------------------------------------------------------------------------------------------- Investment Grade Municipal Bonds (Rating Aaa-Baa3) Maturity 5 years or less 85% of Market Maturity over 5 years 80% of Market - ---------------------------------------------------------------------------------------------------------- Investment Grade Corporate Bonds (Rating Aa3 or better, Non-convertible, NYSE) Maturity 2 years or less 90% of Market Maturity over 2 years 85% of Market - ---------------------------------------------------------------------------------------------------------- Investment Grade Corporate Bonds (Rating Baa3 to A1, Non-convertible, NYSE) Maturity 2 years or less 85% of Market Maturity over 2 years 80% of Market - ---------------------------------------------------------------------------------------------------------- Commercial Paper (Rating A1-A2, P1-P2) 85% of Market - ---------------------------------------------------------------------------------------------------------- Total $ - ---------------------------------------------------------------------------------------------------------- Outstanding Letters of Credit - ------------------------------------------------------------------------------------------------------------ Unreimbursed Beneficiary Date Undrawn Amount Drawings - ------------------------------------------------------------------------------------------------------------ $ $ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Total $ $ - ------------------------------------------------------------------------------------------------------------
Ratio of Aggregate Collateral Value to Letter of Credit Outstandings: _________ The Parent certifies that the foregoing information correctly sets forth the Collateral Value (in the aggregate and for each category of Collateral) and the Letter of Credit Outstandings as of the Valuation Date, that the Letter of Credit Outstandings do not exceed the aggregate Collateral Value as of the Valuation Date, and that nothing has come to the attention of the undersigned to cause the undersigned to believe that the Letter of Credit Outstandings exceed the aggregate Collateral Value as of the Report Date. ACE LIMITED By: _______________________________ Name: _______________________________ Title: _______________________________ 2 EXHIBIT D PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT, dated as of the 30th day of September, 2002 (this "Agreement"), is made by ACE Limited, a Cayman Islands company (the "Parent"), ACE Bermuda Insurance Ltd., a Bermuda company ("ACE Bermuda"), ACE Tempest Life Reinsurance Ltd., a Bermuda company ("Tempest Life"), and ACE Tempest Reinsurance Ltd., a Bermuda company ("Tempest") (ACE Bermuda, Tempest Life and Tempest, together with the Parent, the "Pledgors," and individually, a "Pledgor"), in favor of WACHOVIA BANK, NATIONAL ASSOCIATION ("Wachovia"), as administrative agent for the banks, financial institutions and other institutional lenders (collectively, the "Banks") party to the Reimbursement Agreement referred to below (in such capacity, the "Administrative Agent"), for the benefit of the Secured Parties (as hereinafter defined). Capitalized terms used herein without definition shall have the meanings given to them in the Reimbursement Agreement referred to below. RECITALS A. The Pledgors, as Account Parties, the Banks, Wachovia, as Issuing Bank, JPMorgan Chase Bank and Bank of America, N.A., as Syndication Agents, The Bank of Nova Scotia and Deutsche Bank AG, New York Branch, as Documentation Agents, and the Administrative Agent are parties to a Reimbursement Agreement, dated as of September 30, 2002 (as amended, modified or supplemented from time to time, the "Reimbursement Agreement"), providing for the issuance of up to $350,000,000 in letters of credit for the account of one or more of the Pledgors upon the terms and subject to the conditions set forth therein. B. Under Article VII of the Reimbursement Agreement, each of the Pledgors has guaranteed the payment in full of the Obligations of the other Pledgors under the Reimbursement Agreement and the other Loan Documents. C. It is a condition to the extension of credit to the Pledgors under the Reimbursement Agreement that the Pledgors shall have agreed, by executing and delivering this Agreement, to secure the payment in full of the Obligations under the Reimbursement Agreement and the other Loan Documents. The Secured Parties are relying on this Agreement in their decision to extend credit to the Pledgors under the Reimbursement Agreement, and would not enter into the Reimbursement Agreement without the execution and delivery of this Agreement by the Pledgors. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, to induce the Secured Parties to enter into the Reimbursement Agreement and to induce the Banks to extend credit to the Pledgors thereunder, each Pledgor hereby agrees as follows: 1. Pledge and Grant of Security Interest. Each Pledgor hereby pledges, assigns and delivers to the Administrative Agent, for the ratable benefit of the Banks (including the Issuing Bank in its capacity as such) and the Administrative Agent (collectively, the "Secured Parties"), and grants to the Administrative Agent, for the ratable benefit of the Secured Parties, a Lien upon and security interest in, all of such Pledgor's right, title and interest in and to the following (collectively, the "Collateral"): (i) The following accounts, each established by State Street Bank and Trust Company ("State Street"), as Custodian for and in the name of the applicable Pledgor listed below (such accounts, together with any successor or replacement accounts and any new accounts added to the Collateral pursuant to Section 4(d), and all sub-accounts created under any of the foregoing, collectively, the "Accounts," and individually, an "Account"; the Accounts designated as "Fund Accounts" below, collectively, the "Fund Accounts," and individually, a "Fund Account"; and the Accounts designated as "DDA Accounts" below, collectively, the "Deposit Accounts," and individually, a "Deposit Account"): (A) ACE Limited Control Account Wachovia, Fund Account Number ____, DDA Account Number ________, each in the name of the Parent; (B) ACE Bermuda Control Account Wachovia, Fund Account Number ____, DDA Account Number ________, each in the name of ACE Bermuda; (C) ATLR Control Account Wachovia, Fund Account Number ____, DDA Account Number ________, each in the name of Tempest Life; and (D) ATR Bermuda Control Account Wachovia, Fund Account Number ____, DDA Account Number ________, each in the name of Tempest; (ii) all securities, money, instruments and other assets now or at any time hereafter held or contained in or credited to any of the Accounts, including, without limitation, all bonds, debentures, stock and other securities (whether certificated or uncertificated and whether in registered, bearer or book-entry form), security entitlements, securities accounts and other investment property and all promissory notes, negotiable instruments, certificates of deposit, deposit accounts, financial assets, cash and cash equivalents, together with all rights to receive interest, income, dividends, distributions, returns of capital and other amounts (whether in cash, securities, property, or a combination thereof), and all additional stock, warrants, options, securities, interests and other property, from time to time paid or payable or distributed or distributable in respect of any of the foregoing (but subject to the provisions of Section 5); all additions, replacements, substitutions and exchanges to or for any of the foregoing; and all other rights, powers, privileges, interests, claims and other property in any manner arising out of or relating to any of the foregoing, of whatever kind or character; together with all certificates, instruments and entries upon the books of any Custodian or any other securities intermediaries at any time evidencing any of the foregoing, in each case whether now owned or existing or hereafter acquired or arising, and including, without limitation, the securities and other assets listed in the Account statements attached hereto as Exhibit A (the securities 2 and other assets described in this clause (ii), together with the Accounts, collectively, the "Pledged Assets"); and (iii) any and all proceeds (as defined in the Uniform Commercial Code) of or from any and all of the foregoing and, to the extent not otherwise included in the foregoing, (y) all payments under any insurance (whether or not the Administrative Agent is the loss payee thereunder), indemnity, warranty or guaranty with respect to any of the foregoing Collateral and (z) all other amounts from time to time paid or payable under or with respect to any of the foregoing Collateral (collectively, "Proceeds"). For purposes of this Agreement, the term "Proceeds" includes whatever is receivable or received when Collateral or Proceeds are sold, exchanged, collected or otherwise disposed of, whether voluntarily or involuntarily. 2. Security for Obligations. This Agreement and the Collateral secure the full and prompt payment, at any time and from time to time as and when due (whether at the stated maturity, by acceleration or otherwise), of all Obligations of the Pledgors under the Reimbursement Agreement, this Agreement (including all fees, costs and expenses payable by the Pledgors under Section 9) and the other Loan Documents, whether now existing or hereafter incurred, created or arising and whether direct or indirect, absolute or contingent, due or to become due (including obligations of performance), and including all such Obligations that, but for the operation of the automatic stay under Section 362(a) of the federal Bankruptcy Code (Title 11, U.S. Code), would become due. Notwithstanding the foregoing or anything to the contrary contained herein, until the Tempest Life Effective Date, (i) the Obligations secured by any Collateral pledged hereunder by Tempest Life shall not include any Obligations of Tempest Life under Article VII of the Reimbursement Agreement (such Obligations, the "Guaranty Obligations"), and (ii) any Collateral pledged hereunder by Tempest Life shall secure only the Obligations of Tempest Life (excluding the Guaranty Obligations) and shall not secure any Obligations of any other Pledgor. Upon the Tempest Life Effective Date, automatically and without necessity of any acknowledgment or affirmation by Tempest Life or any further action by any party, the Guaranty Obligations shall be deemed to be Obligations of Tempest Life secured by the Collateral hereunder and all Collateral pledged by Tempest Life hereunder (whether before or after the Tempest Life Effective Date) shall be deemed to secure all of the Obligations of the Pledgors (including, without limitation, the Guaranty Obligations). 3. Representations and Warranties. Each Pledgor represents and warrants as follows: (a) Attached hereto as Exhibit A are true and correct copies of Account statements indicating the contents of the Accounts as of the date shown thereon. As of the date hereof, there have not been any withdrawals or deliveries from, additions to, or trades within the Accounts other than as separately communicated in writing to the Administrative Agent (other than the crediting of interest and dividends). (b) Each Pledgor owns the Accounts established in its name as set forth herein, and all other Collateral purported to be pledged by it hereunder, in each case free and clear of any Liens except for Permitted Collateral Liens. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any government or public office, and no Pledgor has filed 3 or consented to the filing of any such statement or notice, except Uniform Commercial Code financing statements naming the Administrative Agent as secured party. (c) With respect to each Account and the Pledged Assets held or contained therein or credited thereto, this Agreement, together with (i) the execution by State Street (or any other applicable Custodian) of a control agreement with respect to each such Account in substantially the form of Exhibit B hereto or otherwise satisfying the applicable requirements of Section 8-106 of the Uniform Commercial Code (each, a "Control Agreement") and (ii) to the extent the laws of Bermuda are applicable, the registration of the charge created by this Agreement with the Bermuda Registrar of Companies on Form 9 pursuant to Section 55 of the Companies Act 1981, creates, and at all times shall constitute, a valid and perfected security interest in and Lien upon the Collateral owned by such Pledgor in favor of the Administrative Agent, for the benefit of the Secured Parties, superior and prior to the rights of all other Persons therein (except for Permitted Collateral Liens), and no other or additional filings, registrations, recordings or actions are or shall be necessary or appropriate in order to maintain the perfection and priority of such Lien and security interest. 4. Certain Covenants. (a) All securities and other property held or contained in or credited to an Account (other than cash) shall be registered in the name of the Custodian of such Account in a manner sufficient to create a security entitlement in favor of the applicable Pledgor against such Custodian with respect to such securities or other property. In no event shall any such securities or other property be registered in the name of, payable to, or endorsed in favor of, any Pledgor, except to extent the same has been specially endorsed in favor of the applicable Custodian. All cash held or contained in or credited to an Account shall be held or contained in or credited to (as the case may be) a Deposit Account and shall not be held or contained in or credited to any Fund Account. In the event that any Pledgor desires to include, as part of the Collateral, any "Bank Loans" (as defined in the form of Control Agreement attached hereto as Exhibit B) or any other property or interest (other than cash) not treated as a "financial asset" within the meaning of Section 8-102(9) of the Uniform Commercial Code or otherwise not constituting a financial asset pursuant to the applicable Control Agreement, the Pledgor will cause such Bank Loans or other property or interest to be held in or credited to a separate Custodial Account from the other Collateral and shall ensure that such account is added as an "Account" under this Agreement pursuant to Section 4(d). (b) [Reserved.] (c) No Pledgor will sell, transfer or otherwise dispose of, grant any option with respect to, or mortgage, pledge, grant any Lien with respect to or otherwise encumber (other than Permitted Collateral Liens), any of the Collateral or any interest therein, or terminate any Account or Custodial Agreement with respect to any Account, except as may be otherwise expressly permitted in accordance with the terms of this Agreement and the Reimbursement Agreement. No Pledgor will purchase any securities on margin using any of the Collateral as collateral. 4 (d) Any Pledgor may add a new Custodial Account as an "Account" under this Agreement, and/or terminate an Account or remove an Account as Collateral hereunder, in each case by executing and delivering to the Administrative Agent a completed supplement to this Agreement in the form of Exhibit C (each, a "Pledge Supplement"); provided that (i) prior to or concurrently with the addition of any new Account, the applicable Pledgor shall deliver or cause to be delivered to the Administrative Agent a true and correct copy of a statement of such Account prepared by the Custodian thereof, indicating the contents of such Account as of a recent date, a new Control Agreement (or supplement to an existing Control Agreement) executed by the Custodian and the Pledgor, evidencing the establishment of such Account and the perfection of the security interest of the Administrative Agent therein, and (if applicable) a copy of any new Custodial Agreement with respect to such Account, and (ii) no Pledgor may terminate an Account or remove an Account as Collateral hereunder unless, immediately after giving effect thereto, (A) the aggregate Collateral Value (with respect to all remaining Accounts and all other Collateral pledged pursuant to any Loan Document) would equal or exceed the Letter of Credit Outstandings and (B) no other Default or Event of Default would exist. Each Pledgor hereby authorizes the Administrative Agent to attach each such Pledge Supplement to this Agreement, and agrees that all Collateral listed or referred to on any Pledge Supplement shall for all purposes be deemed Collateral hereunder and shall be subject to the provisions hereof. (e) In the event any Custodian gives notice of termination of any Control Agreement, the applicable Pledgors shall have the right to appoint a successor Custodian, which shall be a commercial bank or trust company organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $1,000,000,000, and which appointment shall be subject to the consent of the Administrative Agent (which consent shall not be unreasonably withheld); provided that prior to the effective date of such termination (i) each applicable Pledgor shall have entered into a custodial agreement with the successor Custodian in form and substance reasonably satisfactory to the Administrative Agent, (ii) the retiring Custodian shall have transferred the financial assets and other property (including cash) contained in each applicable Account to the successor Custodian, and (iii) the successor Custodian and each applicable Pledgor shall have entered into a Control Agreement with the Administrative Agent in form and substance reasonably satisfactory to the Administrative Agent and the applicable Pledgors shall have executed and delivered or caused to be delivered all such other documents, opinions and instruments, and taken all such other action, reasonably requested by the Administrative Agent in order to perfect the Administrative Agent's security interest in the affected Collateral. If no successor Custodian shall have been so appointed by the Pledgors, and shall have accepted such appointment, prior to the effective date of termination of the applicable Control Agreement, then the Administrative Agent may, on behalf of the Pledgors, appoint a successor Custodian from among the Banks or otherwise or may direct the retiring Custodian to transfer the financial assets and other property (including cash) contained in each applicable Account to the Administrative Agent, to be held by the Administrative Agent as Collateral for the benefit of the Secured Parties. (f) Each Pledgor agrees that it will, at its own cost and expense, take any and all actions necessary to warrant and defend the right, title and interest of the Secured Parties in and to the Collateral against the claims and demands of all other Persons. 5 5. Voting Rights; Dividends and other Distributions. So long as no Event of Default shall have occurred and be continuing (or would occur as a result thereof), (i) each Pledgor shall be entitled (as against the Administrative Agent and subject to the terms of any custodial or other agreements with any Custodian) to exercise all voting and other consensual rights pertaining to its Pledged Assets, and (ii) all interest, income, dividends, distributions and other amounts payable in cash in respect of the Pledged Assets may be paid to the applicable Custodian and retained in the Accounts for the benefit of the Pledgors, as applicable, or distributed to the Pledgors, as applicable; provided, however, that all such interest, income, dividends, distributions and other amounts shall, at all times after the occurrence and during the continuance of an Event of Default and upon notice from the Administrative Agent to the applicable Custodian, be paid to the Administrative Agent and retained by it as part of the Collateral (except to the extent applied upon receipt to the repayment of the Obligations). All interest, income, dividends, distributions or other amounts that are received by any Pledgor in violation of the provisions of this Section shall be received in trust for the benefit of the Administrative Agent, shall be segregated from other property or funds of such Pledgor and shall be forthwith delivered to the Administrative Agent as Collateral in the same form as so received (with any necessary endorsements). For purposes of the foregoing provisions of this Section and to the extent applicable thereto, each Pledgor hereby waives the requirement of Sections 9-207(c)(1) and (c)(2) of the Uniform Commercial Code that the Administrative Agent apply any money or funds received from the Collateral to reduce the Obligations. 6. Remedies. If an Event of Default shall have occurred and be continuing, the Administrative Agent shall be entitled to exercise in respect of the Collateral all of its rights, powers and remedies provided for herein or otherwise available to it under any other Loan Document, by law, in equity or otherwise, including all rights and remedies of a secured party under the Uniform Commercial Code, and shall be entitled in particular, but without limitation of the foregoing, to exercise the following rights, which each Pledgor agrees to be commercially reasonable: (a) To notify each Custodian of the Event of Default and to direct each Custodian immediately to cease complying with entitlement orders or other directions concerning the Account originated by or on behalf of any Pledgor and to cease distributing interest and dividends on property in the Accounts to or for the benefit of the Pledgors, and thereafter to comply with entitlement orders and other directions concerning the Accounts originated by the Administrative Agent; (b) To notify the parties obligated on any of the Collateral of the security interest in favor of the Administrative Agent created hereby and to direct all such Persons to make payments of all amounts due thereon or thereunder directly to the Administrative Agent or to an account designated by the Administrative Agent; and in such instance and from and after such notice, all amounts and Proceeds (including wire transfers, checks and other instruments) received by any Pledgor in respect of any Collateral shall be received in trust for the benefit of the Administrative Agent hereunder, shall be segregated from the other funds of such Pledgor and shall be forthwith deposited into such account or paid over or delivered to the Administrative Agent in the same form as so received (with any necessary endorsements or assignments), to be held as Collateral and applied to the Obligations as provided herein; 6 (c) To direct each Custodian to transfer to or register in the name of the Administrative Agent or the name of any of its agents or nominees all or any part of the Collateral, without notice to any Pledgor and with or without disclosing that such Collateral is subject to the security interest created hereunder; (d) To exercise all voting, consensual and other rights and powers pertaining to the Pledged Assets (whether or not transferred into the name of the Administrative Agent), at any meeting of shareholders, partners, members or otherwise, and any and all rights of conversion, exchange or subscription and any other rights, privileges or options pertaining to the Pledged Assets as if it were the absolute owner thereof, and in connection therewith, the right to deposit and deliver any and all of the Pledged Assets with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine, and give all consents, waivers and ratifications in respect of the Pledged Assets, all without liability except to account for any property actually received by it, but the Administrative Agent shall have no duty to exercise any such right, privilege or option or give any such consent, waiver or ratification and shall not be responsible for any failure to do so or delay in so doing; and for the foregoing purposes each Pledgor will promptly execute and deliver or cause to be executed and delivered to the Administrative Agent, upon request, all such proxies and other instruments as the Administrative Agent may reasonably request to enable the Administrative Agent to exercise such rights and powers; and in furtherance of the foregoing and without limitation thereof, each Pledgor hereby irrevocably constitutes and appoints the Administrative Agent as the true and lawful proxy and attorney-in-fact of such Pledgor, with full power of substitution in the premises, to exercise all such voting, consensual and other rights and powers to which any holder of any Pledged Assets would be entitled by virtue of holding the same, which proxy and power of attorney, being coupled with an interest, is irrevocable and shall be effective for so long as this Agreement shall be in effect; and (e) To sell, resell, assign and deliver, and to direct each Custodian to sell, resell, assign and deliver, in the sole discretion of the Administrative Agent, all or any of the Collateral, in one or more parcels, on any securities exchange on which any Pledged Assets may be listed, at public or private sale, at any of the Administrative Agent's offices or elsewhere, for cash, upon credit or for future delivery, at such time or times and at such price or prices and upon such other terms as the Administrative Agent may deem satisfactory. If any of the Collateral is sold upon credit or for future delivery, the Administrative Agent shall not be liable for the failure of the purchaser to purchase or pay for the same and, in the event of any such failure, the Administrative Agent may resell or direct the resale of such Collateral. In no event shall any Pledgor be credited with any part of the Proceeds of sale of any Collateral until and to the extent cash payment in respect thereof has actually been received by the Administrative Agent. Each purchaser at any such sale shall hold the property sold absolutely, free from any claim or right of whatsoever kind, including any equity or right of redemption of any Pledgor, and each Pledgor hereby expressly waives all rights of redemption, stay or appraisal, and all rights to require the Administrative Agent to marshal any assets in favor of such Pledgor or any other party or against or in payment of any or all of the Obligations, that it has or may have under any rule of law or statute now existing or hereafter adopted. No demand, presentment, protest, advertisement or notice of any kind (except any notice required by law, as referred to below), all of which are hereby expressly waived by each Pledgor, shall be required in connection with any sale or other disposition of any part of the Collateral. If any notice of a 7 proposed sale or other disposition of any part of the Collateral shall be required under applicable law, the Administrative Agent shall give the applicable Pledgor at least ten (10) days' prior notice of the time and place of any public sale and of the time after which any private sale or other disposition is to be made, which notice each Pledgor agrees is commercially reasonable. The Administrative Agent shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale may have been given. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. Upon each public sale and, to the extent permitted by applicable law, upon each private sale, the Administrative Agent may purchase all or any of the Collateral being sold, free from any equity, right of redemption or other claim or demand, and may make payment therefor by endorsement and application (without recourse) of the Obligations in lieu of cash as a credit on account of the purchase price for such Collateral. 7. Application of Proceeds. (a) All Proceeds collected by the Administrative Agent upon any sale or other disposition of or realization upon any of the Collateral, together with all other moneys received by the Administrative Agent hereunder, shall be applied as follows: (i) first, to the payment of all costs and expenses of such sale, disposition or other realization, including the reasonable costs and expenses of the Administrative Agent and the reasonable fees and expenses of its agents and counsel, all amounts advanced by the Administrative Agent for the account of any Pledgor, and all other amounts payable to the Administrative Agent under Section 9; (ii) second, after payment in full of the amounts specified in clause (i) above, to the ratable payment of all other Obligations owing to the Secured Parties; and (iii) third, after payment in full of the amounts specified in clauses (i) and (ii) above, and following the termination of this Agreement, to the Pledgors or any other Person lawfully entitled to receive such surplus. (b) Each Pledgor shall remain liable to the extent of any deficiency between the amount of all Proceeds realized upon sale or other disposition of the Collateral pursuant to this Agreement and the aggregate amount of the sums referred to in clauses (i) and (ii) of subsection (a) above. Upon any sale of any Collateral hereunder by the Administrative Agent (whether by virtue of the power of sale herein granted, pursuant to judicial proceeding, or otherwise), the receipt of the Administrative Agent or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Administrative Agent or such officer or be answerable in any way for the misapplication thereof. (c) Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent shall have the right to cause to be 8 established and maintained, at its principal office or such other location or locations as it may establish from time to time in its discretion, one or more accounts (collectively, "Collateral Accounts") for the collection of cash Proceeds of the Collateral. Such Proceeds, when deposited, shall continue to constitute Collateral for the Obligations and shall not constitute payment thereof until applied as herein provided. The Administrative Agent shall have sole dominion and control over all funds deposited in any Collateral Account, and such funds may be withdrawn therefrom only by the Administrative Agent. Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent shall have the right to (and, if directed by the Required Banks pursuant to the Reimbursement Agreement, shall) apply amounts held in the Collateral Accounts in payment of the Obligations in the manner provided for in subsection (a) above. 8. Private Sales. Each Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws as in effect from time to time, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Pledged Assets conducted without registration or qualification under the Securities Act and such state securities laws, to limit purchasers to any one or more Persons who will represent and agree, among other things, to acquire such Pledged Assets for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sales may be made in such manner and under such circumstances as the Administrative Agent may deem necessary or advisable in its sole and absolute discretion, including at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and agrees that the Administrative Agent shall have no obligation to conduct any public sales and no obligation to delay the sale of any Pledged Assets for the period of time necessary to permit its registration for public sale under the Securities Act and applicable state securities laws, and shall not have any responsibility or liability as a result of its election so not to conduct any such public sales or delay the sale of any Pledged Assets, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after such registration. Each Pledgor hereby waives any claims against the Administrative Agent or any other Secured Party arising by reason of the fact that the price at which any Pledged Assets may have been sold at any private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Administrative Agent accepts the first offer received and does not offer such Pledged Assets to more than one offeree. 9. Indemnity and Expenses. The Pledgors agree jointly and severally: (a) To indemnify and hold harmless the Administrative Agent, each other Secured Party and each of their respective directors, officers, employees, agents and affiliates from and against any and all claims, damages, demands, losses, obligations, judgments and liabilities (including, without limitation, reasonable attorneys' fees and expenses) in any way arising out of or in connection with this Agreement and the transactions contemplated hereby, except to the extent the same shall arise as a result of the gross negligence or willful misconduct of the party seeking to be indemnified; and 9 (b) To pay and reimburse the Administrative Agent upon demand for all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) that the Administrative Agent may incur in connection with (i) the custody, use or preservation of, or the sale of, collection from or other realization upon, any of the Collateral, including the reasonable expenses of re-taking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, (ii) the exercise or enforcement of any rights or remedies granted hereunder (including, without limitation, under Sections 6 and 8), under any of the other Loan Documents or otherwise available to it (whether at law, in equity or otherwise), or (iii) the failure by any Pledgor to perform or observe any of the provisions hereof. The provisions of this Section shall survive the occurrence of the Termination Requirements (as hereinafter defined). 10. The Administrative Agent; Standard of Care. The Administrative Agent will hold all items of the Collateral at any time received under this Agreement in accordance with the provisions hereof. The obligations of the Administrative Agent as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement and the other Loan Documents, are only those expressly set forth in this Agreement and the other Loan Documents. The Administrative Agent shall act hereunder at the direction, or with the consent, of the Required Banks on the terms and conditions set forth in the Reimbursement Agreement. The powers conferred on the Administrative Agent hereunder are solely to protect its interest, on behalf of the Secured Parties, in the Collateral, and shall not impose any duty upon it to exercise any such powers. Except for treatment of the Collateral in its possession in a manner substantially equivalent to that which the Administrative Agent, in its individual capacity, accords its own property of a similar nature, and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to the Collateral. Neither the Administrative Agent nor any other Secured Party shall be liable to any Pledgor (i) for any loss or damage sustained by such Pledgor, or (ii) for any loss, damage, depreciation or other diminution in the value of any of the Collateral that may occur as a result of or in connection with or that is in any way related to any exercise by the Administrative Agent or any other Secured Party of any right or remedy under this Agreement, any failure to demand, collect or realize upon any of the Collateral or any delay in doing so, or any other act or failure to act on the part of the Administrative Agent or any other Secured Party, except to the extent that the same is caused by its own gross negligence or willful misconduct. 11. Further Assurances; Attorney-in-Fact. (a) Each Pledgor agrees that it will join with the Administrative Agent to execute and, at its own expense, file and refile under the Uniform Commercial Code such financing statements, continuation statements and other documents and instruments in such offices as the Administrative Agent may reasonably deem necessary or appropriate, and wherever required or permitted by law, in order to perfect and preserve the Administrative Agent's security interest in the Collateral, and hereby authorizes the Administrative Agent to file financing statements and amendments thereto relating to all or any part of the Collateral without the signature of such Pledgor where permitted by law, and agrees to do such further acts and things and to execute and deliver to the Administrative Agent such additional conveyances, assignments, agreements (including control agreements) and instruments as the Administrative Agent may reasonably require or deem advisable to perfect, 10 establish, confirm and maintain the security interest and Lien provided for herein, to carry out the purposes of this Agreement or to further assure and confirm unto the Administrative Agent its rights, powers and remedies hereunder. (b) Each Pledgor hereby irrevocably appoints the Administrative Agent its lawful attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor, the Administrative Agent or otherwise, and with full power of substitution in the premises (which power of attorney, being coupled with an interest, is irrevocable for so long as this Agreement shall be in effect), from time to time in the Administrative Agent's discretion after the occurrence and during the continuance of an Event of Default (except for the actions described in clause (i) below, which may be taken by the Administrative Agent without regard to whether an Event of Default has occurred) to take any action and to execute any instruments that the Administrative Agent may deem necessary or advisable to accomplish the purpose of this Agreement, including, without limitation: (i) to sign the name of such Pledgor on any financing statement, continuation statement, notice or other similar document that, in the Administrative Agent's opinion, should be made or filed in order to perfect or continue perfected the security interest granted under this Agreement; (ii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iii) to receive, endorse and collect any checks, drafts, instruments, chattel paper and other orders for the payment of money made payable to such Pledgor representing any interest, income, dividend, distribution or other amount payable in respect of any of the Collateral and to give full discharge for the same; (iv) to file any claims or take any action or institute any proceedings that the Administrative Agent may deem necessary or advisable for the collection of any of the Collateral or otherwise to enforce the rights of the Administrative Agent with respect to any of the Collateral; and (v) to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with any and all of the Collateral as fully and completely as though the Administrative Agent were the absolute owner of the Collateral for all purposes, and to do from time to time, at the Administrative Agent's option and the Pledgors' expense, all other acts and things reasonably deemed necessary by the Administrative Agent to protect, preserve or realize upon the Collateral and to more completely carry out the purposes of this Agreement. (c) If any Pledgor fails to perform any covenant or agreement contained in this Agreement after written request to do so by the Administrative Agent (provided that no such request shall be necessary at any time after the occurrence and during the continuance of an Event of Default), the Administrative Agent may itself perform, or cause the performance of, such covenant or agreement and may take any other action that it deems necessary 11 and appropriate for the maintenance and preservation of the Collateral or its security interest therein, and the reasonable expenses so incurred in connection therewith shall be payable by the Pledgors under Section 9. 12. Waivers. Each Pledgor, to the greatest extent not prohibited by applicable law, hereby (i) agrees that it will not invoke, claim or assert the benefit of any rule of law or statute now or hereafter in effect (including, without limitation, any right to prior notice or judicial hearing in connection with the Administrative Agent's possession, custody or disposition of any Collateral or any appraisal, valuation, stay, extension, moratorium or redemption law), or take or omit to take any other action, that would or could reasonably be expected to have the effect of delaying, impeding or preventing the exercise of any rights and remedies in respect of the Collateral, the absolute sale of any of the Collateral or the possession thereof by any purchaser at any sale thereof, and waives the benefit of all such laws and further agrees that it will not hinder, delay or impede the execution of any power granted hereunder to the Administrative Agent, but that it will permit the execution of every such power as though no such laws were in effect, (ii) waives all rights that it has or may have under any rule of law or statute now existing or hereafter adopted to require the Administrative Agent to marshal any Collateral or other assets in favor of such Pledgor or any other party or against or in payment of any or all of the Obligations, and (iii) waives all rights that it has or may have under any rule of law or statute now existing or hereafter adopted to demand, presentment, protest, advertisement or notice of any kind (except notices expressly provided for herein). 13. No Waiver. The rights and remedies of the Secured Parties expressly set forth in this Agreement and the other Loan Documents are cumulative and in addition to, and not exclusive of, all other rights and remedies available at law, in equity or otherwise. No failure or delay on the part of any Secured Party in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege or be construed to be a waiver of any Default or Event of Default. No course of dealing between the Pledgors and the Secured Parties or their agents or employees shall be effective to amend, modify or discharge any provision of this Agreement or any other Loan Document or to constitute a waiver of any Default or Event of Default. No notice to or demand upon any Pledgor in any case shall entitle such Pledgor or any other Pledgor to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of any Secured Party to exercise any right or remedy or take any other or further action in any circumstances without notice or demand. 14. Pledgors' Obligations Absolute. Each Pledgor agrees that its obligations hereunder, and the security interest granted to and all rights, remedies and powers of the Administrative Agent hereunder, are irrevocable, absolute and unconditional and shall not be discharged, limited or otherwise affected by reason of any of the following, whether or not such Pledgor has knowledge thereof: (i) any change in the time, manner or place of payment of, or in any other term of, any Obligations, or any amendment, modification or supplement to, restatement of, or consent to any rescission or waiver of 12 or departure from, any provisions of the Reimbursement Agreement, any other Loan Document or any agreement or instrument delivered pursuant to any of the foregoing; (ii) the invalidity or unenforceability of any Obligations or any provisions of the Reimbursement Agreement, any other Loan Document or any agreement or instrument delivered pursuant to any of the foregoing; (iii) the addition or release of Pledgors hereunder or the taking, acceptance or release of any Obligations or additional Collateral or other security therefor; (iv) any sale, exchange, release, substitution, compromise, nonperfection or other action or inaction in respect of any Collateral or other direct or indirect security for any Obligations, or any discharge, modification, settlement, compromise or other action or inaction in respect of any Obligations; (v) any agreement not to pursue or enforce or any failure to pursue or enforce (whether voluntarily or involuntarily as a result of operation of law, court order or otherwise) any right or remedy in respect of any Obligations or any Collateral or other security therefor, or any failure to create, protect, perfect, secure, insure, continue or maintain any Liens in any such Collateral or other security; (vi) the exercise of any right or remedy available under the Loan Documents, at law, in equity or otherwise in respect of any Collateral or other security for any Obligations, in any order and by any manner thereby permitted, including, without limitation, foreclosure on any such Collateral or other security by any manner of sale thereby permitted, whether or not every aspect of such sale is commercially reasonable; (vii) any bankruptcy, reorganization, arrangement, liquidation, insolvency, dissolution, termination, reorganization or like change in the corporate structure or existence of any other Pledgor or any other Person directly or indirectly liable for any Obligations; (viii) any manner of application of any payments by or amounts received or collected from any Person, by whomsoever paid and howsoever realized, whether in reduction of any Obligations or any other obligations of any other Person directly or indirectly liable for any Obligations, regardless of what Obligations may remain unpaid after any such application; or (ix) any other circumstance that might otherwise constitute a legal or equitable discharge of, or a defense, set-off or counterclaim available to, any Pledgor or a surety or guarantor generally, other than the occurrence of all of the following: (x) the payment in full of the Obligations, (y) the termination of the obligation of the Issuing Bank to issue Letters of Credit under the Reimbursement Agreement, and (z) the termination or expiration of all outstanding Letters of Credit under the Reimbursement Agreement (the events in clauses (x), (y) and (z) above, collectively, the "Termination Requirements"). 15. Enforcement. By its acceptance of the benefits of this Agreement, each Bank agrees that this Agreement may be enforced only by the 13 Administrative Agent, acting upon the instructions or with the consent of the Required Banks as provided for in the Reimbursement Agreement, and that no Bank shall have any right individually to enforce or seek to enforce this Agreement or to realize upon any Collateral or other security given to secure the payment and performance of the Obligations. 16. Amendments, Waivers, etc. No amendment, modification, waiver, discharge or termination of, or consent to any departure by any Pledgor from, any provision of this Agreement shall be effective unless in a writing signed by the Administrative Agent and such of the Banks as may be required under the provisions of the Reimbursement Agreement to concur in the action then being taken, and then the same shall be effective only in the specific instance and for the specific purpose for which given. 17. Continuing Security Interest; Term; Successors and Assigns; Assignment; Termination and Release; Survival. This Agreement shall create a continuing security interest in the Collateral and shall secure the payment and performance of all of the Obligations as the same may arise and be outstanding at any time and from time to time from and after the date hereof, and shall (i) remain in full force and effect until the occurrence of the Termination Requirements, (ii) be binding upon and enforceable against each Pledgor and its successors and assigns (provided, however, that no Pledgor may sell, assign or transfer any of its rights, interests, duties or obligations hereunder without the prior written consent of the Banks) and (iii) inure to the benefit of and be enforceable by each Secured Party and its successors and assigns. Upon any sale or other disposition by any Pledgor of any Collateral in a transaction expressly permitted hereunder or under or pursuant to the Reimbursement Agreement or any other applicable Loan Document, the Lien and security interest created by this Agreement in and upon such Collateral shall be automatically released, and upon the satisfaction of all of the Termination Requirements, this Agreement and the Lien and security interest created hereby shall terminate; and in connection with any such release or termination, the Administrative Agent, at the request and expense of the applicable Pledgor, will execute and deliver to such Pledgor such documents and instruments evidencing such release or termination as such Pledgor may reasonably request and will assign, transfer and deliver to such Pledgor, without recourse and without representation or warranty (except that the Administrative Agent has not assigned or otherwise transferred its rights hereunder with respect to the applicable Collateral), such of the Collateral as may then be in the possession of the Administrative Agent (or, in the case of any partial release of Collateral, such of the Collateral so being released as may be in its possession). All representations, warranties, covenants and agreements herein shall survive the execution and delivery of this Agreement and any Pledge Supplement. 18. Other Terms. All terms in this Agreement that are not capitalized shall have the meanings provided by the Uniform Commercial Code to the extent the same are used or defined therein. As used in this Agreement, "Uniform Commercial Code" shall mean the Uniform Commercial Code as the same may be in effect from time to time in the State of New York; provided that if, by reason of applicable law, the validity or perfection of any security interest in any Collateral granted under this Agreement is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, then as to the validity or perfection, as the case may be, of such security interest, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect from time to time in such other jurisdiction. 14 19. Notices. All notices and other communications provided for hereunder shall be given to the parties in the manner and subject to the other notice provisions set forth in the Reimbursement Agreement. 20. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 21. Severability. To the extent any provision of this Agreement is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Agreement in any jurisdiction. 22. Construction. The headings of the various sections and subsections of this Agreement have been inserted for convenience only and shall not in any way affect the meaning or construction of any of the provisions hereof. Unless the context otherwise requires, words in the singular include the plural and words in the plural include the singular. 23. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 15 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed under seal by their duly authorized officers as of the date first above written. ACE LIMITED The Common Seal of ACE Limited was hereunto affixed in the presence of: --------------------------------------------- Director --------------------------------------------- Secretary ACE BERMUDA INSURANCE LTD. The Common Seal of ACE Bermuda Insurance Ltd. was hereunto affixed in the presence of: --------------------------------------------- Director --------------------------------------------- Secretary ACE TEMPEST LIFE REINSURANCE LTD. The Common Seal of ACE Tempest Life Reinsurance Ltd. was hereunto affixed in the presence of: --------------------------------------------- Director --------------------------------------------- Secretary (signatures continued) 16 ACE TEMPEST REINSURANCE LTD. The Common Seal of ACE Tempest Reinsurance Ltd. was hereunto affixed in the presence of: --------------------------------------------- Director --------------------------------------------- Secretary Accepted and agreed to: WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent By: _________________________________ Title: _________________________________ ANNEX A JURISDICTION OF ORGANIZATION/ LOCATION OF CHIEF EXECUTIVE OFFICE 1. ACE Limited Jurisdiction of organization: Cayman Islands Chief executive office: ACE Global Headquarters 17 Woodbourne Avenue Hamilton HM08 Bermuda 2. ACE Bermuda Insurance Ltd. Jurisdiction of organization: Bermuda Chief executive office: ACE Global Headquarters 17 Woodbourne Avenue Hamilton HM08 Bermuda 3. ACE Tempest Life Reinsurance Ltd. Jurisdiction of organization: Bermuda Chief executive office: ACE Global Headquarters 17 Woodbourne Avenue Hamilton HM08 Bermuda 4. ACE Tempest Reinsurance Ltd. Jurisdiction of organization: Bermuda Chief executive office: ACE Global Headquarters 17 Woodbourne Avenue Hamilton HM08 Bermuda Exhibit A Account Statements [attached hereto] Exhibit B Form of Control Agreement [attached hereto] Exhibit C Form of Pledge Supplement THIS PLEDGE SUPPLEMENT, dated as of _______________, _____, is delivered by [NAME OF PLEDGOR] (the "Pledgor") pursuant to Section 4(d) of the Pledge and Security Agreement referred to hereinbelow. The Pledgor hereby agrees that this Pledge Supplement may be attached to the Pledge and Security Agreement, dated as of September 30, 2002, made by the Pledgor and certain other pledgors named therein in favor of Wachovia Bank, National Association, as Administrative Agent (as amended, modified or supplemented from time to time, the "Pledge and Security Agreement," capitalized terms defined therein being used herein as therein defined). The Pledgor hereby pledges, assigns and delivers to the Administrative Agent, for the ratable benefit of the Secured Parties, and grants to the Administrative Agent, for the ratable benefit of the Secured Parties, a Lien upon and security interest in, all of the Pledgor's right, title and interest in and to the account listed on Annex A to this Pledge Supplement (the "New Account"), together with all securities, money, instruments and other assets now or at any time hereafter held or contained in or credited to the New Account (all as more completely described in clause (ii) of Section 1 of the Pledge and Security Agreement) and all Proceeds of the foregoing (the New Account, together with all such securities, money, instruments and other assets and the Proceeds thereof, collectively, the "New Collateral"). The Pledgor agrees that the New Account shall be deemed to be an "Account" within the meaning of the Pledge and Security Agreement, and that the New Account, together with all other New Collateral, shall become part of the Collateral and shall secure all of the Obligations [(other than the Guaranty Obligations prior to the Tempest Life Effective Date)]/1 as provided in the Pledge and Security Agreement. This Pledge Supplement and its attachments are hereby incorporated into the Pledge and Security Agreement and made a part thereof. [NAME OF PLEDGOR] By: ________________________________ Title: ________________________________ - ---------------- /1 Insert bracketed language if Tempest Life is the Pledgor. EXHIBIT E Form of Letter of Instruction ____________, 200_ Wachovia Bank, National Association as Administrative Agent Charlotte Plaza Building CP-23 201 South College Street Charlotte, North Carolina 28288-0680 Attn: Syndication Agency Services Ladies and Gentlemen: Reference is made to the Reimbursement Agreement, dated as of September 30, 2002, among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Life Reinsurance Ltd. and ACE Tempest Reinsurance Ltd., as Account Parties, the Banks party thereto, and Wachovia Bank, National Association, as Administrative Agent (as amended or otherwise modified from time to time, the "Reimbursement Agreement"). Terms defined in the Reimbursement Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. We refer to the notification received from the Administrative Agent pursuant to Section 2.03(a) of the Reimbursement Agreement that requires us to make on the date of this letter a reimbursement payment (the "Required Payment") with respect to a drawing under a Letter of Credit issued under the Reimbursement Agreement. Pursuant to this notification and inasmuch as the Required Payment has not been made, we hereby irrevocably authorize and direct you to liquidate and receive the proceeds of Collateral in an amount equal to the Required Payment plus interest thereon as provided in the Reimbursement Agreement. We further irrevocably authorize and direct you to deliver this letter to the Custodian or any other Person (and we agree that they may rely hereon and are hereby irrevocably authorized and instructed to act in reliance hereon without further consent or authorization from us or any other Account Party) as you may deem to be appropriate to give effect to the authorization and direction contained herein. Very truly yours, for and on behalf of - -------------------- EX-99.1 5 ex-991.txt Exhibit 99.1 ACE LIMITED CERTIFICATION CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned officer of ACE Limited (the "Corporation") hereby certifies that the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited. Dated: November 13, 2002 /s/ Brian Duperreault -------------------------------- Brian Duperreault Chairman and Chief Executive Officer EX-99.2 6 ex-992.txt Exhibit 99.2 ACE LIMITED CERTIFICATION CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned officer of ACE Limited (the "Corporation") hereby certifies that the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited. Dated: November 13, 2002 /s/ Philip V. Bancroft ----------------------------------------- Philip V. Bancroft Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----