-----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, WMmkryyfYw1xPqmG4TcOgeWwI7TGLD98HEfncWrPMT93qs+kg6UkAs0iF09G6Hjr FpJWspRpx54hDFkA5uQ4zg== 0000950131-97-007441.txt : 19971229 0000950131-97-007441.hdr.sgml : 19971229 ACCESSION NUMBER: 0000950131-97-007441 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971224 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE LTD CENTRAL INDEX KEY: 0000896159 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11778 FILM NUMBER: 97743954 BUSINESS ADDRESS: STREET 1: ACE BLDG STREET 2: P O BOX HM 1015 CITY: HAMILTON HM 08 BERMU STATE: D0 BUSINESS PHONE: 8092955200 MAIL ADDRESS: STREET 1: P O BOX HM 1015 CITY: HAMITON BERMUDA STATE: D0 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-11778 ---------------- ACE LIMITED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CAYMAN ISLANDS NOT APPLICABLE (JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) THE ACE BUILDING 30 WOODBOURNE AVENUE HAMILTON HM 08 BERMUDA (441) 295-5200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Ordinary Shares, par value $0.125 per share New York Stock Exchange
---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ---------------- 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 periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. () As of December 16, 1997, there were 54,519,540 Ordinary Shares par value $0.125 of the Registrant outstanding and the aggregate market value of voting stock held by non-affiliates at such date was approximately $4.71 billion. For the purposes of this computation, shares held by directors (and shares held by any entities in which they serve as officers) and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of registrant's definitive proxy statement relating to its Annual General Meeting of Shareholders scheduled to be held on February 6, 1998, are incorporated by reference into Part III of this report and certain portions of the 1997 Annual Report to Shareholders are incorporated by reference into Parts II and IV of this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ACE LIMITED INDEX TO 10-K
PAGE ---- PART I Item 1. Business....................................................... 1 Item 2. Properties..................................................... 21 Item 3. Legal Proceedings.............................................. 21 Item 4. Submission of Matters to a Vote of Security Holders............ 21 PART II Market for the Registrant's Ordinary Shares and Related Item 5. Stockholder Matters............................................ 23 Item 6. Selected Financial Data........................................ 23 Management's Discussion and Analysis of Results of Operations Item 7. and Financial Condition........................................ 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 23 Item 8. Financial Statements and Supplementary Data.................... 23 Changes in and Disagreements with Accountants on Accounting and Item 9. Financial Disclosure........................................... 23 PART III Item 10. Directors and Executive Officers of the Registrant............. 24 Item 11. Executive Compensation......................................... 24 Item 12. Security Ownership of Certain Beneficial Owners and Management. 24 Item 13. Certain Relationships and Related Transactions................. 24 PART IV Exhibits, Financial Statements, Schedules and Reports on Form Item 14. 8-K............................................................ 24
PART I ITEM 1. BUSINESS Certain terms used below are defined in the "Glossary of Selected Insurance Terms" appearing on page 15. General ACE Limited ("ACE") 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 Bermuda-based operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"), Corporate Officers & Directors Assurance Ltd. ("CODA") and Tempest Reinsurance Company Limited ("Tempest"), provides insurance and reinsurance for a diverse group of international clients. In addition, the Company provides funds at Lloyd's to support underwriting by syndicates managed by Methuen Underwriting Limited ("MUL"), ACE London Aviation Limited ("ALA") and ACE London Underwriting Limited ("ALU"), its indirect wholly owned subsidiaries. The term "the Company" refers to ACE and its subsidiaries excluding MUL, ALA and ALU. The Company's long-term business strategy focuses on achieving underwriting profits and providing value to its clients and shareholders through the utilization of its growing capital base within the insurance and reinsurance markets. As part of this strategy, the Company acquired CODA in 1993. During 1994 and 1995, the Company diversified its product portfolio from excess liability insurance and directors and officers liability insurance to accommodate the needs of its expanding, global client base of multinational corporations by adding satellite insurance, aviation insurance, excess property insurance and financial lines products. This diversification added balance to the risk of the existing portfolio of insurance products and enhanced the Company's overall profit potential while utilizing its existing capital base. The Company continued its strategic diversification with the acquisition in March 1996 of 51 percent of Methuen Group Limited ("Methuen"), the holding company for MUL, and in July 1996 of Tempest, a leading Bermuda- based property catastrophe reinsurer. The acquisition of Tempest provided the Company with a unique opportunity to expand into the property catastrophe reinsurance business through an established and well known reinsurance company. Tempest underwrites property catastrophe reinsurance on a worldwide basis, emphasizing excess layer coverages, and has large aggregate exposures to man-made and natural disasters. The short-tail nature of the property catastrophe business and shorter loss payout patterns complement the generally longer-tail nature of the Company's other product lines. In November 1996, the Company acquired the remaining 49 percent interest in Methuen. Also in November 1996, the company acquired Ockham Worldwide Holdings plc which subsequently changed its name to ACE London Holdings Ltd ("ACE London"). ACE London owns two Lloyd's managing agencies, ALA and ALU. 1 In March 1997, the Company, together with two other insurance companies, formed a managing general agency in Bermuda to provide underwriting services to the three organizations for political risk insurance coverage. The new company, Sovereign Risk Insurance Ltd ("Sovereign") issues subscription policies with the Company assuming 50 percent of each risk underwritten. The Company currently cedes 10 percent of all risks assumed from Sovereign. Sovereign offers limits of up to $50 million per project and $100 million per country. On September 18, 1997, the Company announced it had executed a definitive agreement for the acquisition, through a newly-created U.S. Holding Company, of Westchester Specialty Group, Inc. ("WSG"), an indirect wholly owned subsidiary of Xerox Corporation. WSG, through its insurance subsidiaries, provides specialty commercial property and umbrella liability coverages in the U.S. Under the terms of the agreement, the Company will purchase all of the outstanding capital stock of WSG for aggregate cash consideration of approximately $333 million. In connection with the acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, will provide $750 million (75 percent quota share of $1 billion) of reinsurance protection to WSG with respect to their loss reserves for the 1996 and prior accident years. The acquisition which is subject to, among other matters, regulatory approval and other customary closing conditions, is expected to close in early 1998. The Company expects to finance this transaction with $250 million of bank debt and the remainder with available cash. On September 30, 1997, the Company announced the incorporation of ACE Insurance Company Europe Limited (AICE), as part of the International Financial Services Centre in Dublin, Ireland. AICE has been granted a license to write all 18 classes of non-life insurance in all member states of the European Union. The following table sets forth an analysis of gross premiums written for each of the years ended September 30, 1997, 1996 and 1995:
FOR THE YEARS ENDED SEPTEMBER 30, -------------------------------------------------------- 1997 GROSS 1996 GROSS 1995 GROSS PREMIUMS PREMIUMS PREMIUMS WRITTEN PERCENT WRITTEN PERCENT WRITTEN PERCENT ---------- ------- ---------- ------- ---------- ------- (MILLIONS) ACE Insurance (including CODA) Excess liability...... $144.6 19% $210.2 33% $246.9 57% Financial lines....... 134.7 18% 120.2 19% 9.2 2% Satellite............. 111.2 15% 104.0 16% 44.9 10% Directors and Officers liability............ 85.4 11% 97.6 15% 105.0 24% Aviation.............. 35.5 5% 33.3 5% 8.9 2% Excess property....... 25.4 3% 16.5 3% 5.6 1% Other................. 7.4 1% 14.8 2% 15.3 4% ------ ---- ------ ---- ------ ---- Total............... 544.2 73% 596.6 92% 435.8 100% Lloyd's syndicates...... 78.8 11% 14.4 2% 0.0 0% Property catastrophe (Tempest).............. 119.6 16% 34.8 5% 0.0 0% ------ ---- ------ ---- ------ ---- $742.6 100% $645.8 100% $435.8 100% ====== ==== ====== ==== ====== ====
- -------- (1) Tempest was acquired on July 1, 1996 and thus gross premiums written for Tempest in fiscal 1996 only relate to the three month period since acquisition. Insurance Operations (excluding Lloyd's operations) The Company, through ACE Insurance and CODA, provides property and casualty insurance coverage, including excess liability insurance, directors and officers liability insurance, satellite insurance, aviation insurance, excess property insurance and financial lines products, to industrial, commercial and other enterprises. 2 The nature of the insurance coverages provided by the Company are generally expected to result in low frequency but high severity of individual losses. This loss pattern is particularly evident in the Company's excess liability insurance due to the high attachment points and large limits offered. The Company does purchase limited excess of loss clash reinsurance with respect to its excess liability policies and has also purchased reinsurance designed to limit its exposure on the satellite, financial lines, aviation and excess property lines of business. At September 30, 1997 approximately 67 percent of the Company's written premiums came from North America with approximately 23 percent coming from the United Kingdom and continental Europe and approximately 10 percent from other countries. Excess Liability The Company seeks to provide the highest layer of excess liability coverage in the insurance programs of the world's major corporations and requires that at least a portion of its coverage be the highest layer in a policyholder's insurance program. The Company writes excess liability coverage, on an occurrence first reported stand alone form, generally in excess of a minimum attachment point of $100 million per occurrence and with a minimum limit of $10 million and a maximum limit of $200 million per occurrence and in the aggregate for all covered occurrences of which notice is given during such year. Such limit is subject to reinstatement at the insureds election for incidents post reinstatement. Effective on or after December 15, 1994 the Company imposed an annual aggregate sublimit for integrated occurrences of $100 million for all new and renewal business that purchases limits greater than $100 million. During 1994, the Company reduced the minimum attachment point to $50 million (or the foreign currency equivalent) from $100 million for certain classes of non-U.S. domiciled excess liability risks. In this instance, the Company offers limits up to twice the reduced attachment point. The Company maintains excess of loss clash reinsurance on a calendar year basis which provides the Company with certain protection from losses arising from a single set of circumstances (occurrence) under more than one excess liability insurance policy. The clash reinsurance agreements do not cover all occurrences covered by the Company's policies and, in particular, do not cover integrated occurrences involving one insured or similar occurrences in which multiple insureds are found liable (e.g., similar defective products manufactured or sold by multiple insureds). Directors and Officers Liability The Company offers up to $75 million of directors and officers liability insurance with a maximum of $50 million being provided for corporate reimbursement coverage. The Company believes this to be the largest amount of directors and officers liability insurance available from a single underwriting source. The directors and officers liability insurance is written on a claims made form and is provided to large industrial corporations, not- for-profit corporations, financial institutions and others. Satellite The Company's satellite insurance operations offers separate gross limits of up to $50 million per risk for launch insurance, including ascent to orbit and/or initial testing and up to $50 million per risk for in-orbit insurance. The Company has entered into a surplus treaty arrangement which provides for up to $25 million of reinsurance on each risk. Prior to February 1996, the Company offered separate limits of up to $25 million per risk, which was fully retained by the Company. Satellite insurance falls within a small, well defined market characterized by a limited number of brokers, underwriters and international clients. There are also a limited number of satellite and launch vehicle manufacturers in the world. The growing worldwide demand for satellite communications capabilities by both governments and private enterprises has resulted in an increase in the number of satellites per annum requiring launch and/or in-orbit insurance coverage. The typical satellite insurance policy is written on a quota-share basis, 3 rather than on an excess of loss basis. The insured value of a commercial satellite now ranges from approximately $150 million to $300 million. Financial Lines Financial lines utilizes transactions which combine the concepts of finance with the principles of insurance. Typically, clients purchasing these products are seeking insurance or reinsurance for exposures which are difficult to place because of limited or nonexistent capacity, ineffective terms or inefficient pricing being provided by traditional insurance markets. Alternatively, they may use these insurance or reinsurance products to cover loss exposures which are not appropriately addressed by current products available. Unlike certain traditional insurance, each financial lines contract is individually tailored to meet the needs of the insured. Financial Lines programs typically have the following common characteristics: multi-year contract terms; broad coverage that includes stable capacity and pricing for the insured; insured participation in the results of their own loss experience; and aggregate limits. The specific product types offered by financial lines include the various forms of finite risk insurance. Examples of finite risk products include the combination of self-insurance with an excess program, the combination of various coverages subject to a single retention and insured limit or programs that insure large loss exposure or a portfolio of losses over a period of years. Other product types offered are specialty insurances which cover financial exposures or involve financial instruments. Financial lines products were created by the need to service the more complex risks of today's corporations. The Company anticipates drawing on the strong franchise the Company maintains with its current client base by providing a policy which will further enhance a client's risk management program. Using both insurance and reinsurance brokers and investment bankers, it also anticipates attracting new clients for the Company. The Company believes it has a competitive advantage in the marketplace because of the financial strength of the Company and its ability to offer significant risk transfer while still allowing the insured to retain some of its own exposures. Risk transfer is important to the insured thereby enabling it to meet the accounting and regulatory requirements related to the purchase of insurance or reinsurance. Financial lines has a flexible approach to limits offered, attachment points and coverages provided primarily due to the risk sharing feature and use of funding mechanisms which are generally included in the contract. Each contract is unique because it is tailored to the insurance needs, specific loss history and financial strength of the client. Premium volume, as well as the number of contracts written, can vary significantly from period to period due to the nature of the contracts being written. Profit margins may vary from contract to contract depending on the amount of underwriting risk and investment risk assumed on each contract. Aviation The aviation insurance group offers limits of up to $150 million per insured, with no minimum attachment point. The Company reduces its net exposure per policy to approximately $50 million with a dedicated reinsurance program. Classes of business written include aviation product liability, aviation manufacturers (including hull and all risks and products liability); aviation refuellers; and airport and airport contractors, together with certain aircraft risks. Generally, the Company will write aircraft liability in conjunction with one or more of the other aviation products, and where the aircraft (owned or non- owned) is used for corporate purposes. Coverage will include third party bodily injury, property damage and passenger legal liability. Excess Property The Company also offers excess property insurance. Its primary target markets are chemical, energy, electronics, heavy manufacturing, mineral, oil and gas, and utilities. Coverage is also available to select manufacturing, industrial and institutional risks. Excess property insurance coverage is offered with limits of up 4 to $50 million per risk, typically above an attachment point of $25 million. In certain circumstances, the Company uses reinsurance to establish the retained net limit per risk. Attachment levels, terms and pricing for each risk are derived from the Company's property underwriters' independent assessment of "probable maximum loss", a benchmark of risk frequency and severity. Marketing and Underwriting The Company, through ACE Insurance and CODA, markets its insurance products through brokers and seeks to maintain a competitive advantage by providing insurance coverages which require utilization of technical skills to underwrite individual risks, emphasizing quality rather than volume of business to obtain a suitable spread of risk. This enables the Company to operate with a relatively small number of employees and, together with the reduced costs of operating in a favorable regulatory and tax environment, results in significantly lower administrative expenses relative to other companies in the industry. Policyholders are obtained through non-U.S. insurance brokers who generally receive a brokerage commission on any business accepted and bound by the Company. The Company is not committed to accept any business from any particular broker and brokers do not have the authority to bind the Company. All policy applications (both for renewals and new policies) are subject to approval and acceptance by the Company in its Bermuda office. A substantial number of policyholders meet with the Company outside of the United States each year to discuss their insurance coverage. The Company does not believe that conducting its operations through its offices in Bermuda has materially affected its underwriting and marketing activities to date. The Company receives business from approximately 200 non-U.S. brokers of which 10 produced approximately 93 percent of the Company's business in 1997. The following table sets forth the percentage of the Company's insurance business placed through each broker and its affiliates placing more than 10 percent of the Company's business.
YEAR ENDED SEPTEMBER 30, --------------- 1997 1996 1995 ---- ---- ---- J&H Marsh & McLennan, Incorporated (1)(3)........................ 42% 42% 59% Aon Corporation (2)(3)........................................... 17% 16% 14%
- -------- (1) During 1997, Marsh & McLennan, Incorporated acquired Johnson & Higgins. For fiscal 1996 and 1995, the percentage of business placed by Marsh & McLennan, Incorporated was 31 percent and 43 percent, respectively and the percentage of business placed by Johnson & Higgins was 11 percent and 16 percent, respectively. (2) During 1997, Aon Corporation acquired Alexander & Alexander Services, Inc. For fiscal 1996 and 1995, the percentage of business placed by Aon Corporation was 10 percent and 8 percent, respectively and the percentage of business placed by Alexander & Alexander Services, Inc. was 6 percent for both years. (3) The percentages shown in the table for fiscal 1997 reflect the business placed by the combined entities and their affiliates for the entire year. The Company has experienced an increase in the number of submissions in non- North American business as a result of the activities of its London representative office since its opening in September 1994 and expects further growth as a result of its activities. The London representative office assists brokers throughout the United Kingdom, the rest of Europe, the Middle East, South Africa, the Far East and Australia in gaining access to the Company's underwriting capacity in Bermuda. All underwriting activity continues to take place in Bermuda. The Company employs underwriting staff with substantial industry experience. The underwriter's primary objective is to assess the potential for an underwriting profit, a process complicated in some cases by the limited amount of data for claims which would have been covered by the Company's policy form and which would have exceeded its policy's attachment point. The risk assessment process undertaken by the Company involves a comprehensive analysis of historical data and estimates of future value of losses which may not be evident in the historical data. The factors which the Company considers include the type of risk, the attachment point and coverage limits, the type, size, complexity and location of the potential insureds operations, financial data, the industry in which the potential insured operates, details of the underlying insurance coverage provided, loss history and future corporate plans. 5 Competition Competitive forces in the international property and casualty insurance business are substantial. Results are a function of underwriting and investment performance, direct costs associated with the delivery of insurance products, including the costs of regulation, the frequency and severity of both natural and man-made disasters, as well as inflation (actual, social and judicial), which impact loss costs. Decisions made by insurers concerning their mix of business (offering certain types of coverage but declining to write other types), their methods of operations and the quality and allocation of their assets (including any reinsurance recoverable balances) will all affect their competitive position. Some insurers continue to incur liability for business written decades earlier covering gradual pollution and certain product liability exposures. The relative size and reputation of insurers may influence purchasing decisions of present and prospective customers and will contribute to both geographic and industrial sector market penetration. Oversupply of available capital has historically had the effect of encouraging competition and depressing prices. Capital accumulation to support large excess liability policies and the availability of suitably experienced underwriters are partial barriers to entry, but insurance pricing will continue to be influenced by supply. The Company's competitive position in the casualty insurance industry is influenced by all of these factors. The Company believes it has a number of competitive advantages in the insurance products which it provides. Among the advantages are its strong capital base, its ability to market a number of insurance products to its existing client and potential client base and its ability to be flexible in providing contracts which extend coverage for periods in excess of one year. The Company believes that it is unique in that it offers up to $200 million of excess liability coverage and that all or a portion of its coverage is generally the highest layer of a client's insurance program. There are a small number of insurers that compete with the Company, including American International Group, Inc. ("AIG"), several large European insurers, Exel Limited ("EXEL"), certain Lloyd's syndicates and Starr Excess Liability Insurance Co. Ltd. ("Starr"). The Company has continued to experience competition during 1997 in this line of business. There is a small group of dominant insurers in the directors and officers liability insurance area and the Company faces strong competition in that area from competitors such as Executive Risk Insurance Company, AIG, Chubb Group of Insurance Cos., CNA, EXEL, certain Lloyd's syndicates and Starr. The Company continues to experience increased competition in this market. However, the Company has been successfully marketing its products through the London representative office, resulting in a number of new non-North American accounts. The Company believes that the available limits, stable capacity and financial security offered by the Company provide a competitive advantage in the satellite insurance market. There are currently a limited number of underwriters available to service the satellite insurance market, however, the amount of capacity available in the market place has grown substantially and there now appears to be excess capacity in this market. The Company believes that there will be continued demand for its services, as evidenced by commitments already provided by the Company for future satellite insurance coverage. Other major firms offering satellite coverage include Assicuraziona Generali S.p.A., International Technology Underwriters, Inc., La Reunion Aerienne, The Marchant Space Consortium, Munich Reinsurance and United States Aviation Insurance Group. There are a number of companies in the insurance market which form the competition for financial lines, including Centre Reinsurance (Bermuda) Limited and several of the major international insurance companies, such as AIG and American Reinsurance. The demand for individually tailored insurance products, such as those offered by financial lines is growing due to the ever-changing and more complex risks facing today's corporations. The Company believes it has a competitive advantage in the marketplace because of the financial strength of the Company and its ability to offer significant risk transfer in its contracts while still allowing the insured to retain some of its own exposures. In providing coverage for aviation insurance exposures, the Company faces significant competition from a small number of specialty firms, including certain Lloyd's syndicates and several large European insurers. The Company believes that the limited number of underwriters available to service the aviation insurance market, particularly in areas such as product manufacturers liability and airport liability, and the commitment of significant capital to this long-tail type of business are barriers to entry. The Company believes that the demand for this type of specialty coverage is growing, as evidenced by the volume of submissions received and the number of accounts written by the Company to date. 6 There are a diverse number of companies providing excess property insurance coverage for increasingly complex multi-site, multi-national risks. Although the market is very competitive, the Company believes that it has several competitive advantages in offering global excess "all risk" coverage, including its experienced underwriting team, access to the latest technology and analytical methods, a precise market focus and a capital base that is unburdened by historic unprofitability and/or uncontrolled accumulation of exposures. The Company expects that a significant portion of the future growth in most of its lines of business will continue to come from new non-U.S. accounts. Accordingly, the Company continues to promote its products overseas, particularly to large industrial companies in Latin America, Europe, the Middle East, South Africa, Australia and the Far East. The Company has received a group rating of A+ (Superior) from A.M. Best Company, a leading insurance rating company ("A.M. Best"). The most current rating covers the Company, together with its operating subsidiaries ACE Insurance and CODA. ACE Insurance and CODA have also received A+ (Good) claims paying ratings from Standard & Poor's Corporation (S&P). These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. Reinsurance Operations The Company's reinsurance activities are principally conducted through Tempest, its wholly owned subsidiary, which was acquired in July 1996. However, ACE Insurance offers financial lines reinsurance products (see "Insurance Operations") and the Lloyd's syndicates in which the Company participates also participate in certain reinsurance markets (see "Lloyd's operations"). In addition, in April 1997, ACE Insurance announced that it had signed a quota share treaty reinsurance agreement with the Multilateral Investment Guarantee Agency ("MIGA"), part of the World Bank Group. MIGA provides coverage for foreign investments in developing countries. The agreement allows MIGA to provide private investors and developing countries additional capacity to support developmentally sound investment projects. The coverages offered will be the same as those offered by MIGA's guarantee program, namely, transfer restriction, expropriation, war and civil disturbance and breach of contract. The quota share treaty offers limits of up to $25 million per contract with an aggregate of $100 million per country. Tempest provides property catastrophe reinsurance worldwide to insurers of commercial and personal property, typically under treaties having a duration of one year. Property catastrophe reinsurance protects a ceding company against an accumulation of losses covered by the insurance policies it has issued arising from a common event or "occurrence." Ceding companies may purchase reinsurance to achieve a number of results, including: reduction of net exposure on individual risks or groups of risks, which enables the ceding company to underwrite larger risks, or accept more business than its own capital resources would ordinarily support; diversification of risks; protection against the effect of major catastrophic losses, such as losses involving an accumulation of single retentions; stabilization of a ceding company's operating results by smoothing its loss experience to protect its financial position; and maintenance by a ceding company of acceptable surplus, reserve and other financial ratios. Tempest's property catastrophe reinsurance contracts cover unpredictable natural or man-made disasters, such as hurricanes, windstorms, hail storms, earthquakes, volcanic eruptions, conflagrations, freezes, floods, fires and explosions. Tempest's predominant exposure under such coverage is to property damage. However, other risks, such as business interruption may also be covered when arising from a covered peril. In accordance with market practice, Tempest's property catastrophe reinsurance contracts generally exclude certain risks such as war, nuclear contamination, and radiation. Tempest underwrites reinsurance principally on an excess of loss basis. During the twelve month period ended September 30, 1997, approximately 98 percent of premiums were written on an excess of loss basis. Other 7 property reinsurance written by Tempest on a limited basis for select clients, includes proportional property and per risk excess of loss treaty reinsurance. At September 30, 1997, Tempest had 224 programs in force with 174 clients. Tempest underwrites a substantial portion of its business in currencies other than U.S. dollars and may from time to time experience exchange gains and losses and incur significant underwriting losses in currencies other than U.S. dollars. The following table sets forth the amount of Tempest's gross premiums written allocated by territory of coverage:
TEN MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, NOVEMBER 30, 1997(I) 1996 1995 ------------- ------------- ------------ United States.................... 68.4% 64.0% 55.7% United Kingdom................... 12.8 13.3 15.9 Australia & New Zealand.......... 6.3 6.0 11.3 Japan............................ 3.6 3.8 7.2 Other............................ 8.9 12.9 9.9 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
- -------- (i) Tempest has a November 30 fiscal year-end. Marketing and Underwriting Tempest markets its reinsurance products worldwide through reinsurance brokers. Tempest's underwriting team builds relationships with key brokers and clients by explaining Tempest's approach and demonstrating responsiveness to customer needs. Tempest's approach to the business of reinsurance takes a long-term perspective. Management believes that continual strengthening of the relationships between Tempest, its producing brokers and their clients will continue to contribute to a stable portfolio necessary to achieve continuity. By retaining clients, Tempest seeks to build up extensive knowledge of them and gain additional insight to enable a more accurate assessment of their exposures. Tempest receives business from approximately 31 brokers. The following table sets forth the percentage of Tempest's business written through each broker and its affiliates placing more than 10 percent of Tempest's business:
TEN MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, NOVEMBER 30, 1997 1996 1995 ------------- ------------- ------------ J&H, Marsh & McLennan, Incorporated (1).............. 34% 30% 34% E.W. Blanche Co................ 15% 7% 5% Greig Fester International Limited....................... 7% 7% 16%
- -------- (1) During 1997, Marsh & McLennan, Incorporated acquired Johnson & Higgins. For 1996 and 1995 the percentage of business placed by Marsh & McLennan, Incorporated was 26 percent and 30 percent, respectively and the percentage of business placed by Johnson & Higgins was 4 percent for both periods. The percentage shown in the table for fiscal 1997 reflect the business placed by the combined entity and its affiliates for the entire fiscal 1997 year. Rates, limits, retention and other reinsurance terms and conditions are generally established in a worldwide competitive market that evaluates exposure and balances demand for property catastrophe coverage against the available supply. Tempest believes it is perceived by the market as being a "lead" reinsurer and is typically involved in the negotiation and quotation of the terms and conditions of the majority of the contracts in which it participates. Because Tempest underwrites property catastrophe reinsurance and has large aggregate exposures to natural and man-made disasters, Tempest's claims experience generally will involve infrequent events of great severity. Tempest seeks to diversify its reinsurance portfolio to moderate the impact of this severity. The principal means of diversification are by geographic coverage and by varying attachment points and imposing coverage limits per program. Tempest also establishes zonal accumulation limits to avoid concentrations of risk within particular geographic areas. 8 Tempest applies an underwriting process based on models that use exposure data submitted by prospective reinsureds in accordance with requirements set by Tempest's underwriters. The account review process includes an analysis of exposures both by line of business and geographic location. The underwriting models used by Tempest have been created and continue to be developed in- house. Tempest believes that these risk analysis tools provide greater utility and flexibility in comparison with external vendor catastrophe modeling products, especially when confronted with unique exposures or non-standard coverage. Tempest analyses its exposure in more detail using simulation modeling of loss scenarios and their effects on Tempest's overall portfolio. This approach enables Tempest to assess the portfolio risk, in particular to account for the risk of a combination of multiple events worldwide in a single year. Tempest purchased a modest amount of retrocessional cover during the current fiscal year. Competition The property catastrophe reinsurance industry is highly competitive. Tempest competes worldwide with major U.S. and non-U.S. property catastrophe reinsurers, other Bermuda-based property catastrophe reinsurers and reinsurance departments of numerous multi-line insurance organizations. Tempest competes effectively because of its strong capital position, the quality of service provided to customers, the leading role Tempest plays in setting the terms, pricing and conditions in negotiating contracts, its customised approach to risk selection and the sponsorship and support of its parent, ACE. Tempest has received a rating of A (Excellent) from A.M. Best and a claims paying ability rating of A (Good) from S&P. Lloyd's Operations Lloyd's is a long established insurance marketplace where many varied forms of insurance are sold by syndicates, which until 1994, were annual joint ventures of participating capital providers known as "Names". Participation as a Name on a syndicate carries with it unlimited liability for the Name's share of any insurance losses incurred by the syndicate (each Name participating severally). In 1994, the rules relating to membership of Lloyd's were changed to allow limited liability corporate capital vehicles to enter the Lloyd's marketplace as capital providers. Typically, Lloyd's syndicates now comprise a mixture of limited and unlimited liability capital combining in the annual joint venture. Several of the underwriting years of the late 1980's and early 1990's were particularly unprofitable for many of the syndicates operating at Lloyd's. This proved to be financially disastrous for some of the Names on the affected syndicates due to the unlimited liability of their participation. In August 1996, Lloyd's implemented it's "Reconstruction and Renewal" proposals which involved a new company, Equitas being authorised to reinsure the liabilities of the 1992 and prior years of account of most of the syndicates at Lloyd's. The funding to give effect to these proposals came from a variety of sources including the premiums on the liabilities assumed by Equitas as well as a series of levies charged to entities that had historically provided services to the Lloyds insurance market (including managing agencies and insurance brokers). Participation in selective syndicates in the Lloyd's insurance market provides the company with new lines of business in the aviation, marine and non-marine markets as well as the opportunity to diversify its insurance risk profile through markets to which it would otherwise not have access. This syndicate participation is through dedicated corporate capital vehicles thus limiting the liability of the Company. In order to more closely monitor its syndicate participations the Company has established a UK holding company (ACE UK Limited) which acquired three managing agencies at Lloyd's namely MUL, ALA and 9 ALU. Through a central service company, these three managing agencies provide accounting, reporting and ancillary insurance services to the syndicates managed by them and on which the Company participates. For the 1997 year of account the Company has committed approximately $120 million of capital spread amongst the thirteen syndicates managed by MUL, ALA and ALU supporting up to approximately $229 million of underwriting capacity. For the 1998 year of account, the Company has agreed to provide funds at Lloyd's of up to approximately $250 million to support up to approximately $485 million of underwriting capacity on syndicates managed by MUL, ALA and ALU. There is significant competition in all classes of business transacted by the syndicates emanating from a number of different markets worldwide. Depending on the class of business concerned competition comes from the London market; other Lloyd's syndicates and ILU Companies (Institute of London Underwriters), major international insurers and reinsurers. On international risks, competition also comes from the domestic insurers in the country of origin of the insured. The syndicates are able to compete successfully by developing and maintaining close, long term relationships with clients through a high quality service and an ability to deliver innovative solutions tailored to the client's needs. The Lloyd's market has received a rating of A (Excellent) from A.M. Best and a claims paying ability rating of A+ (Good) from S&P. Claims Administration Claims arising under policies issued by ACE Insurance and CODA are managed in Bermuda by ACE Insurance's claims department. This department maintains a claims database into which all notices of loss are entered. If the claims department determines that a loss is of sufficient severity, it makes a further inquiry of the facts surrounding the loss and, if deemed necessary, retains outside claims counsel to monitor claims. Based upon its evaluation of the claim, the claims department may recommend that a case reserve in a specified amount be established or that all or part of a claim be paid. The claims department monitors all claims and, where appropriate, will recommend the establishment of a new case reserve or the increase or decrease of an existing case reserve with respect to a claim. With the exception of certain aviation coverages, ACE Insurance does not undertake to defend its insureds. It has, in certain instances, provided advice to insureds with respect to the management of claims. ACE Insurance believes that its experience in resolving large claims and its proactive approach to claims management has contributed to the favourable resolution of several cases. Because ACE Insurance does not do business in the U.S., it must often rely on U.S. counsel to assist it in evaluating liability and damages confronting its insureds in the U.S. ACE Insurance does not believe that the information received or the procedures followed have materially or adversely affected its ability to identify, review or settle claims. Claims arising under contracts written by Tempest are managed in Bermuda by Tempest. Tempest also maintains a claims database into which all notices of loss are entered. Loss notices are received from brokers. They are reviewed and case reserves are established for Tempest's portion of the loss. Case reserves are then adjusted based on receipt of further notifications from brokers. With respect to claims arising in Lloyd's syndicates, each syndicate maintains a claims database into which all notices of loss are entered. These are primarily notified by various central market bureaux, such as, through a daily electronic data interchange message. Where a syndicate is a "leading" syndicate on a Lloyd's policy, then 10 it acts through its underwriters and claims adjusters, on behalf of itself and the following market, in dealing with the broker and/or insured for any particular claim. This may involve the appointment of attorneys and/or loss adjusters. The leading syndicates, together with the claims bureaux, advise movements in case reserves to all syndicates participating on the risk. All information received with respect to case reserves, whether on "lead business' or on "following business', are screened, validated and recorded by the syndicates. The syndicates' claims departments can vary the case reserves carried from those advised by the bureaux and can carry reserves for claims not processed by the bureaux. Any such adjustments and entries are specifically identifiable within the claims system. Unpaid Losses and Loss Expenses The Company is required to make provisions in its financial statements for the estimated unpaid liability for losses and loss expenses for claims made against it under the terms of its policies and agreements. Estimating the ultimate liability for losses and loss expenses is an imprecise science subject to variables that are influenced by both internal and external factors. This is true because claim settlements to be made in the future may be impacted by changing rates of inflation and other economic conditions, changing legislative, judicial and social environments and changes in the Company's claims handling procedures. In some cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the settlement of the Company's liability for that loss. In other cases, the period between first notice and final payment can be relatively short, even less than one year. Several aspects of the Company's operations exacerbate the inherent uncertainties in estimating its losses as compared to more conventional insurance companies. Primary among these aspects are the limited amount of statistically significant historical data regarding losses, particularly of the type intended to be covered by the Company's excess liability policies and the expectation that losses in excess of the attachment level of the policies will be characterized by low frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. Accordingly, the ultimate claims experience of the Company cannot be as reliably predicted as may be the case with more traditional insurance companies, and there can be no assurance that losses and loss expenses will not exceed the reserves. A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. Lawsuits, including class actions, involving thousands of implant recipients have been filed in both state and federal courts throughout the United States. Most of the federal cases have been consolidated pursuant to the rules for Multidistrict Litigation ("MDL") to a Federal District Court in Alabama, although cases are in the process of being transferred back to federal courts or remanded to state courts. At June 30, 1994, the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million. The increase in reserves was based on information made available in the pending lawsuits and information from the Company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the Company commenced underwriting operations). No additional reserves relating to breast implant claims have been added since June 30, 1994. The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. During 1997, the Company made payments of approximately $250 million with respect to breast implant claims. These payments were included in previous reserves and are consistent with the Company's belief that its reserves are adequate. Significant uncertainties continue to exist with regard to the ultimate outcome and cost of the Settlement and value of the opt-out claims. While the Company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company, may be necessary in 11 the future, the Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as at September 30, 1997. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Breast Implant Litigation" in the 1997 Annual Report to shareholders filed with this Form 10-K. After a claim is reported to the Company, a case reserve is established for the estimated ultimate losses and loss expenses, if any, with respect to the reported claim. The amount and timing of the reserve reflects the judgment of the claims personnel based upon general corporate reserving practices and on the experience and knowledge of the claims personnel (including, where appropriate, outside counsel and claim consultants) regarding the nature and value of the specific type of claim. The process in estimating ultimate liability employed by the Company is set forth in an actuarial report (the "Actuarial Report") prepared annually by the Company's Chief Actuary. The Company engages an independent actuarial firm to review the Actuarial Report on an annual basis. As stated in its actuarial review, such firm believed that the methods and assumptions contained in the Actuarial Report were reasonable and appropriate for use in setting loss reserves at September 30, 1997. Such Actuarial Report contains a number of qualifications with respect to the complications and relative uncertainty that exists in establishing reserves for the Company's lines of business, which qualifications are substantially similar to those discussed above. Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the estimated ultimate losses and loss expenses less paid losses and loss expenses and is composed of case reserves, loss expense reserves and IBNR loss reserves. During the loss settlement period, which can be many years in duration, additional facts regarding individual claims and trends often will become known. As these become apparent, case reserves may be adjusted by allocation from the IBNR loss reserve without any change in the overall reserve. In addition, application of statistical and actuarial methods may require the adjustment of the overall reserves upward or downward from time to time. The final liability nonetheless may be significantly greater than or less than the prior estimates. At September 30, 1997, the reserve for unpaid losses including IBNR loss reserves was $1,834.8 million and the reserve for loss expenses was $35.2 million. The Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as of September 30, 1997. The "Analysis of Loss and Loss Expense Development" shown on page 13 presents the subsequent development of the estimated year-end liability for unpaid losses and loss expenses at the end of each of the years in the eleven- year period ended September 30, 1997. The top line of the table shows the estimated liability for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss expenses for claims arising from all prior years' policies and agreements that were unpaid at the balance sheet date, including IBNR loss reserves. The upper (paid) portion of the table presents the amounts paid as of subsequent years on those claims for which reserves were carried as of each specified year. The lower portion of the table shows the re-estimated amount of the previously recorded liability as of the end of each succeeding year. Several aspects of the Company's operations, including the low frequency and high severity of losses in the high excess layers in which the Company provides insurance, complicate the actuarial reserving techniques utilized by the Company. Accordingly, the Company expects that ultimate losses and loss expenses attributable to any single underwriting year will be either more or less than the incremental changes in the lower portion of the following table. Management believes, however, that the losses and loss expenses which have been recorded through September 30, 1997, including those arising from breast implant claims, are adequate to cover the ultimate cost of losses and loss expenses incurred through September 30, 1997 under the terms of the Company's policies and agreements. Since such provisions are necessarily based on estimates, the ultimate losses and loss expenses may be significantly greater or less than such amounts. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- 12 Breast Implant Litigation" in the 1997 Annual Report to Shareholders filed with this Form 10-K. ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 -------- --------- --------- --------- ---------- ---------- (IN THOUSANDS) Unpaid........... $ 5,600 $ 22,500 $ 78,009 $ 319,230 $ 470,832 $ 813,849 Paid (Cumulative) As Of: 1 year later.... 167 431 26,190 181,525 149,493 340,836 2 years later... 469 1,195 82,715 207,587 490,116 465,074 3 years later... 672 21,307 108,689 531,502 590,847 517,366 4 years later... 674 42,450 432,541 601,811 611,133 551,887 5 years later... 674 182,110 459,183 622,097 627,691 881,198 6 years later... 674 182,110 476,570 631,371 764,607 7 years later... 674 195,939 484,549 641,060 8 years later... 674 196,207 493,326 9 years later... 674 196,861 10 years later.. 674 Liability Reestimated As Of: End of year..... $ 5,600 $ 22,500 $ 78,009 $ 319,230 $ 470,832 $ 813,849 1 year later.... 5,463 57,682 267,674 475,647 706,960 813,849 2 years later... 35,765 105,503 346,022 665,533 706,960 1,085,012 3 years later... 19,901 134,227 516,783 665,533 874,368 1,234,462 4 years later... 19,672 333,869 516,783 663,480 888,387 1,412,495 5 years later... 139,674 333,869 487,911 680,119 940,513 1,666,770 6 years later... 139,674 185,332 489,556 711,671 1,113,662 7 years later... 674 176,889 479,306 768,935 8 years later... 674 179,837 484,041 9 years later... 674 177,624 10 years later.. 674 Cumulative redundancy/ (deficiency).... 4,926 (155,124) (406,032) (449,705) (642,830) (852,921)
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Unpaid........... $ 766,402 $1,176,215 $1,474,924 $1,836,113 $1,869,995 Paid (Cumulative) As Of: 1 year later.... 126,566 66,888 68,482 349,512 2 years later... 183,439 121,628 402,368 3 years later... 228,638 451,746 4 years later... 558,625 5 years later... 6 years later... 7 years later... 8 years later... 9 years later... 10 years later.. Liability Reestimat As Of: End of year..... $ 766,402 $1,176,215 $1,474,924 $1,836,113 $1,869,995 1 year later.... 966,402 1,177,292 1,474,924 1,836,113 2 years later... 1,067,987 1,227,538 1,474,924 3 years later... 1,211,424 1,386,571 4 years later... 1,429,990 5 years later... 6 years later... 7 years later... 8 years later... 9 years later... 10 years later.. Cumulative redundancy/ (deficiency).... (663,588) (210,356) 0 0 0
The Company does not consider it appropriate to extrapolate future deficiencies or redundancies based upon the above tables, as conditions and trends that have affected development of liability in the past may not necessarily occur in the future. In 1994, the Company recorded an additional reserve of $200 million, related primarily to developments in breast implant litigation, in respect of years prior to 1994. In 1992, the Company began applying actuarial and statistical methods to estimate ultimate expected losses and loss expenses for all of the Company's business since inception. As at September 30, 1994 the Company changed its method of allocating IBNR to accident and balance sheet years. This allocation assigns IBNR to years based upon various risk factors including immaturity of year, amount of earned premium in that year, and development of known claims. As the Company's loss experience is characterized as low frequency, and high severity, IBNR is considered a bulk reserve, and is therefore available for loss development from whichever year it may arise. Prior to 1994, the allocation of IBNR to accident and balance sheet years was based upon a loss distribution indicated by the expected loss method employed by the Company. Losses paid for the year ending September 30, 1988 include an amount of $24.9 million, which is expected to be recovered from an insured. It should be noted that as of November 1, 1993 the Company acquired CODA and as of July 1, 1996 the Company acquired Tempest. However, the table has been re-stated to include CODA's and Tempest's loss experience as if both companies had been wholly owned subsidiaries of the Company from their inception. 13 The "cumulative redundancy/(deficiency)" shown in the table represents the aggregate change in the reserve estimates over all subsequent years. The amounts noted are cumulative in nature; that is, an increase in loss estimate for prior year losses generates a deficiency in each intermediate year. For instance, a deficiency recognized in 1994 relating to losses incurred during the year ending September 30, 1992 would be included in the cumulative deficiency amount for each year from September 30, 1992 to the year the loss was recognized (1994), yet the deficiency would be reflected in operating results only in 1994. An analysis of the changes in aggregate reserves for losses and loss expenses under GAAP is presented below. Since reserves are necessarily based upon estimates, the ultimate net costs may vary from the original estimates. As adjustments to these estimates become necessary, they are reflected in current operations. RECONCILIATION OF UNPAID LOSSES AND LOSS EXPENSES
YEAR ENDED SEPTEMBER 30, -------------------------------- 1997 1996 1995 ---------- ---------- ---------- (IN THOUSANDS) Unpaid losses and loss expenses at beginning of year......................... $1,836,113 $1,437,930 $1,160,392 Unpaid losses and loss expenses assumed in respect of acquired companies............. -- 34,735 -- ---------- ---------- ---------- 1,836,113 1,472,665 1,160,392 ---------- ---------- ---------- Losses and loss expenses incurred in respect of losses occurring in: Current year............................. 435,941 464,824 350,653 Prior years.............................. -- -- -- ---------- ---------- ---------- Total.................................. 435,941 464,824 350,653 ---------- ---------- ---------- Losses and loss expenses paid in respect of losses occurring in: Current year............................. 52,547 39,567 14,394 Prior years.............................. 349,512 61,809 58,721 ---------- ---------- ---------- Total.................................. 402,059 101,376 73,115 ---------- ---------- ---------- Unpaid losses and loss expenses at end of year...................................... $1,869,995 $1,836,113 $1,437,930 ========== ========== ==========
Investments The Finance Committee of the Board of Directors is responsible for the establishment of the Company's investment policy consistent with the Company's strategies, goals and objectives. The investment policy is reviewed with, and approved by, the Board of Directors. The Company's primary investment objectives are to ensure that funds will be available to meet its insurance and reinsurance obligations and then, to maximize its rate of return on invested funds within specifically approved constraints as to credit quality, liquidity and volatility. Accordingly, the Company's investment portfolio is invested primarily in fixed income instruments of high credit quality. The Company has divided the consolidated investment portfolio into three segments. Assets which are required to match and offset certain specifically identified liabilities are segregated in an asset-liability management ("ALM") segment. The second segment, the core portfolio, supports the current general insurance exposures and is structured to have low to moderate investment risk. The remainder of the portfolio, the discretionary segment, is invested to enhance total return and return on equity by taking on additional investment risks within prudent limits. The core and discretionary portfolios are managed by professional outside managers whose performance is measured against certain recognized broad market indices. Written investment guidelines, 14 approved by the Finance Committee, document standards to ensure portfolio liquidity and diversification, maintain credit quality, and limit volatility within approved asset allocation guidelines. The use of financial futures and options contracts, as well as certain mortgage derivative securities which do not provide a planned stable structure of principal and interest payments, require prior approval from the Finance Committee. Funds are invested in both U.S. and non-U.S. dollar denominated high-quality fixed maturity and equity securities. The approved asset allocation targets 20 percent of the consolidated investment portfolio to have an exposure to equities, with international equities limited to no more than 35 percent of total equities. This represents an increase from the period January 1995 to May 1996, when the target equity allocation was 15 percent, with international equities limited to no more than 20 percent of total equities. The remainder of the consolidated portfolio is to be invested in fixed income securities. Prior to the first quarter of fiscal 1995, total equity exposure was limited to 10 percent of the consolidated investment portfolio. The fixed maturity portion of the Company's investment portfolio includes U.S. and non-U.S. government obligations, corporate bonds, mortgage-backed securities, and other investment grade securities. The Company's investment guidelines do not permit investments in non-investment grade securities and limit the total "BBB" exposure of the portfolio. To ensure diversity and limit concentrations of credit risk, no more than 5 percent of the portfolio may be invested in the obligations of any one issuer (other than the U.S. government). Subsequent to September 30, 1997, the Company has made certain changes to its investment guidelines. These changes include revising the asset allocation targets to allow 5 percent of the consolidated investment portfolio to be invested in alternative investments. The allocation to fixed income securities will decrease from 80 percent to 75 percent. Also, the asset classes within the fixed maturity portion of the investment portfolio have been extended to include a 5 percent allocation to convertible bonds and a 5 percent allocation to high yield bonds with a minimum credit quality of "B'. Those fixed income investment managers with authorization to invest a portion of their portfolios in non-U.S. dollar securities are required to hedge a minimum of 75 percent of their total non-U.S. dollar exposure. Previously, currency hedging of fixed income securities was permitted at the discretion of the manager. Applicable insurance laws and regulations do not restrict the Company's investments except that certain types of investments (such as unquoted equity securities, investments in affiliates, real estate and collateral loans) may not qualify as a "relevant asset" for purposes of satisfying Bermuda statutory requirements. See "Regulation--Bermuda." For additional information regarding the investment portfolio, including breakdowns of the sector and maturity distributions, see note 4 to the consolidated financial statements included in the 1997 Annual Report to Shareholders. Regulation Bermuda The businesses of ACE Insurance, CODA and Tempest are regulated by the Insurance Act 1978 (as amended by the Insurance Amendment Act 1995) and related regulations (the "Act"). The Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements and grants the Minister of Finance (the "Minister") powers to supervise, investigate and intervene in the affairs of insurance companies. The Act provides for four classes of insurance company. ACE Insurance and Tempest have been designated as Class 4 insurers, which is the designation for the largest companies requiring capital and surplus in excess of $100 million. CODA has been designated a Class 3 insurer requiring capital and surplus in excess of $1 million. Each registered insurer must appoint an independent auditor to audit and report on the Statutory Financial Statements and Statutory Financial Return on an annual basis. The independent auditor must be approved by the Minister. Each Class 3 and Class 4 insurer must appoint a loss reserve specialist, who must also be approved by the Minister, to review and report on the loss reserves of the insurer on an annual basis. 15 Class 3 and Class 4 companies are required to file their Statutory Financial Return and Statutory Financial Statements with the Registrar of Companies in Bermuda (the "Registrar"), who is the chief administrative officer under the Act, no later than four months from the insurer's fiscal year end. The Statutory Financial Return includes, among other matters, the report of the approved independent auditor; the actuarial opinion on loss reserves prepared by the approved loss reserve specialist; a declaration of statutory ratios; and a solvency certificate. Both the declaration of statutory ratios and the solvency certificate must be signed by at least two directors of the insurer. United Kingdom London Representative Office The Company has established for marketing purposes, a representative office in London, England. However, all underwriting operations continue to be conducted in Bermuda. Lloyd's The Company and certain of its UK subsidiaries are subject to the regulatory jurisdiction of the Council of Lloyd's (the "Council") as a result of the acquisitions by the Company of Methuen and ACE London and the establishment of ACE Capital Limited ("ACE Capital"), a UK limited liability corporate member of Lloyd's formed in connection with the Methuen acquisition. In addition, the Company has acquired three other UK limited liability corporate Member's of Lloyd's, ACE Capital II Limited (formerly Ockham London Limited); ACE Capital III Limited (formerly ZIC Lloyd's Underwriting Limited and ACE Staff Corporate Member Limited (a vehicle to facilitate staff participation on managed Syndicates). Unlike other financial markets in the UK, Lloyd's is not subject to direct UK government regulation through the UK Financial Services Act 1986 but, instead, is self regulating by virtue of the Lloyd's Act 1971-1982 through bye-laws, regulations and codes of conduct made by the Council, which governs the market. Under the Council there are two Boards, the Market Board and the Regulatory Board. The former is led by working members of the Council and is responsible for strategy and the provision of services such as premium and claims handling, accounting and policy signing. The Regulatory Board is responsible for the regulation of the market, compliance and the protection of policyholders. Under the regulations, the approval of Council has to be obtained before any person can be a "controller" of a corporate member or a managing agency. The Company has been approved as a "controller". Lloyd's imposes an absolute prohibition on any company being a 10% controller of a corporate member without first notifying Lloyd's and receiving their consent. This prohibition is qualified in respect of becoming a 20%, 33%, 50% or majority controller in that the corporate member must do all that lies within its powers to comply with Lloyd's requirements. In these latter circumstances, this essentially means that notice must have been given to the Council that the relevant threshold will be exceeded and the Council has not objected. Persons seeking to become controllers may be required to deliver a declaration and undertaking to Lloyd's, in the form prescribed by Lloyd's, unless Lloyd's exempts such person from this requirement. As a "controller", the company is required to give certain undertakings, directed principally towards ensuring that there is no direct interference in the conduct of the business of the managing agency, but there are no provisions in the Lloyd's Acts, the byelaws or the regulations which provide for any liabilities of ACE's Corporate Members, Methuen or ACE London to be met by the Company. In addition, a managing agency is required to comply with various capital and solvency requirements, and to submit to regular monitoring and compliance procedures. ACE Capital and ACE Staff Corporate Member Limited, as corporate members of Lloyd's, are each required to commit an amount broadly equal to 50 percent of their underwriting capacity on the syndicates to support their underwriting on those syndicates. In the case of ACE Capital III Limited, this percentage is about 80 percent by virtue of it only participating on one syndicate. ACE Capital II Limited will not be underwriting for the 1998 year of account, its capacity having been transferred to ACE Capital and ACE Staff Corporate Member Limited. 16 Under English law, if any person that holds or subsequently becomes the holder of more than 5 percent of the Company's stock also owns any interest in a Lloyd's broker or is a partner or a director of a Lloyd's broker, that Lloyd's broker risks losing its Lloyd's license. For these purposes "Lloyd's broker" includes the holding company of a corporate Lloyd's broker, any company which controls (a test based on one-third voting rights or control of the board) such a Lloyd's broker or its holding company or if the Lloyd's broker is a partnership any person who controls (on a similar test) such a Lloyd's broker or one of its partners. United States of America The Company and its insurance subsidiaries, excluding its Lloyd's operations, are not admitted to do business as insurers in any jurisdiction in the U.S. Each state in the U.S. licenses insurers and prohibits, with some exceptions, the sale of insurance products by non-admitted insurers within their applicable jurisdictions. The Company conducts its insurance business from its offices in Bermuda. All of the Company's insurance clients are obtained through non-U.S. insurance brokers and non-U.S. affiliates of U.S. insurance brokers. All insurance policies are issued and delivered and premiums are received in Bermuda. Based on, among other things, the foregoing, the Company does not believe it is in violation of the insurance laws of any state in the U.S. Many states impose a premium tax (typically 2 percent to 4 percent of gross premiums) on insureds obtaining insurance from nonadmitted foreign insurers, such as ACE Insurance and CODA. The premiums charged by the Company do not include any American state premium tax. Each insured is responsible for determining whether it is subject to any such tax and for paying such tax as may be due. The U.S. also imposes on policyholders an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rates of tax applicable to premiums paid to ACE Insurance and CODA are 4 percent for insurance premiums and 1 percent for reinsurance premiums. The Company has from time to time received inquiries from certain U.S. state insurance regulators regarding the Company's activities in a particular jurisdiction. To date only the State of Nevada Department of Insurance has formally challenged the insurance activities of the Company and that challenge was resolved in favor of the Company by legislation. There can be no assurance that additional challenges will not be raised in the future or that the Company will be able to successfully defend against such challenges. Such challenges may arise, among other things, in connection with actions seeking the payment of state premium taxes from insureds. In the event that the Company is not able to successfully defend against challenges by certain U.S. jurisdictions, the Company's business could be adversely affected in the short term. However, should this occur, the Company could elect to qualify as a surplus lines insurer in such U.S. jurisdictions as were necessary. Were it necessary to do so, the Company believes that generally it could meet and comply with the prescribed legislative requirements, and such compliance would not have a material impact on the ability of the Company to conduct its business or its results of operations. If the Company is unable to defend successfully against challenges of U.S. jurisdiction, it is possible that a policyholder could attempt to sue the Company in a U.S. court. The Company's primary defense to such action is that it's policies have a mandatory arbitration clause for coverage disputes. Courts in some states can impose damages in excess of policy limits if an insurer is found to have improperly and in bad faith declined coverage. If a U.S. court took jurisdiction of such a claim, it is possible that the Company's exposure could be significantly greater than policy limits. It is also possible that an arbitration panel, if the issues were properly presented, could make an extra- contractual award for bad faith damage. There can be no assurance that new or additional legislation will not be proposed and enacted that has the effect of subjecting the Company to regulation in the U.S. 17 As previously discussed, on September 18, 1997, the Company executed a definitive agreement for the acquisition of WSG. WSG and its subsidiaries are U.S. companies subject to regulation in the U.S. This position will not change following the closing of the acquisition. Tax Matters United States of America Corporate Income Tax ACE is a Cayman Islands corporation and has never paid U.S. corporate income taxes (other than withholding taxes on dividend income) on the basis that it is not engaged in a trade or business in the U.S.; however, there can be no assurance that the Internal Revenue Service ("IRS") will not contend to the contrary. If the Company were subject to U.S. income tax, there could be a material adverse effect on the Company's shareholders' equity and earnings. The Company and its Bermuda-based insurance and reinsurance subsidiaries do not file U.S. income tax returns reporting income subject to U.S. income tax since they do not conduct business within the U.S. except that the Company and its Bermuda-based insurance and reinsurance subsidiaries have filed protective tax returns reporting no U.S. income to preserve their ability to deduct their ordinary and necessary business expenses should the IRS successfully challenge the Company's contention that none of its income is subject to a net income tax in the U.S. As previously discussed, on September 18, 1997, the Company executed a definitive agreement for the acquisition of WSG. WSG and its subsidiaries are U.S. companies subject to U.S. corporate income tax. This position will not change following the closing of the acquisitions. Related Person Insurance Income Each U.S. person who beneficially owns Ordinary Shares of the Company (directly or through foreign entities) on the last day of an insurance company subsidiary's fiscal year will have to include in such person's gross income for U.S. tax purposes a proportionate share (determined as described herein) of the related person insurance income ("RPII") of such insurance company subsidiary if the RPII of such insurance company subsidiary, determined on a gross basis, is 20 percent or more of that insurance company subsidiary's gross insurance income in such fiscal year. RPII is income attributable to insurance policies where the direct or indirect insureds are U.S. shareholders or are related to U.S. shareholders of the Company. RPII may be includible in a U.S. shareholder's gross income for U.S. tax purposes regardless of whether or not such shareholder is an insured. For the fiscal year ended September 30, 1997, the Company believes that gross RPII of each of its insurance company subsidiaries was below 20 percent for the year. Although no assurances can be given, the Company anticipates that gross RPII of each of its insurance company subsidiaries will be less than 20 percent of each such subsidiary's gross insurance income for subsequent years and the Company will endeavor to take such steps as it determines to be reasonable to cause its gross RPII to remain below such level. The RPII provisions of the Internal Revenue Code of 1986, as amended (the "Code"), have never been interpreted by the courts. Regulations interpreting the RPII provisions of the Code exist only in proposed form, having been proposed on April 16, 1991. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts, or otherwise, might have retroactive effect. For a more detailed discussion of RPII and other tax matters pertaining to an investment in the Company's shares, reference is hereby made to the section entitled "Taxation of Ace and its Shareholders" in the Company's Registration Statement on Form S-4 (No. 333-04153), which section is incorporated by reference herein. United Kingdom 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 18 of the Names in proportion to their participation in the relevant syndicates. ACE Capital is subject to this arrangement but, as a UK domiciled company, 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 UK Limited, Methuen and ACE London, as well as ACE Capital and ACE London Ltd., the Lloyd's corporate members participating in the syndicates managed by MUL, ALA and ALU, are subject to UK corporation tax and value added tax. Although the Company has a representative office in London, it has been advised that it is not deemed to be doing insurance business in the UK and therefore is subject only to minimal tax in the UK. With effect from October 1, 1994, the UK imposed an insurance premium tax on that portion of policies related to certain UK risks. ACE has registered to collect and pay this tax on behalf of UK domiciled policyholders. Bermuda Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes 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. Cayman Islands Under current Cayman Islands law, the Company is not required to pay any taxes 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. Employees At September 30, 1997, the Company employed a total of 382 persons, 140 of whom were located in Bermuda and 242 in London. Of the 140 persons employed in Bermuda, 14 are employed by Tempest. Of the 242 persons employed in London, 238 are employed by Methuen and ACE London. None of these employees is represented by a labor union. 19 GLOSSARY OF SELECTED INSURANCE TERMS Catastrophe Excess of Loss Reinsurance.. Catastrophe excess of loss reinsur- ance provides coverage to a primary insurer when aggregate claims and claim expenses from a single occur- rence of a peril covered under a portfolio of primary insurance con- tracts written by the insurer exceed the attachment point specified in the reinsurance contract with the insur- er. Claims made form........................ Insurance coverage which is dependent upon the filing of a claim, which must normally fall within the policy period. IBNR loss reserves...................... The reserves included in the Company's financial statements under the caption "Unpaid Losses and Loss Expenses" for the estimated ultimate unpaid liability which the Company has incurred under the terms of the Company's policies and agreements, less case reserves. Integrated occurrence................... All losses attributable directly or indirectly to the same event, condi- tion, cause, defect or hazard or failure to warn of such which are added together and treated as one oc- currence under an insured's policy. Occurrence first reported............... Manuscripted form of stand-alone in- surance coverage offered by the Com- pany, which generally ties the limits available and other policy terms to the date on which an occurrence is first reported to the Company. Proportional Property Reinsurance....... Proportional property reinsurance treaties assume a specified percent- age of the risk exposure under a portfolio of primary insurance con- tracts written by the ceding insurer and receive an equal percentage of the premium received by the ceding insurer. Risk Excess of Loss Reinsurance......... Property per risk excess of loss re- insurance responds to a loss of the reinsured in excess of its retention level on a single "risk", rather than to aggregate losses for all covered risks. A risk in this context might mean the insurance coverage on one building or a group of buildings. Stand alone basis....................... A term referring to an insurance pol- icy which is governed by its own terms, conditions, exclusions and re- tention and does not incorporate the terms, conditions or exclusions of underlying policies. 20 ITEM 2. PROPERTIES The Company leases office space in Hamilton, Bermuda for its principal offices. The lessor is a joint venture in which the Company has a 40 percent interest and there is an agreement with the joint venture partner which ensures the Company's ability to occupy a portion of the building until 2011. Tempest also leases office space in Hamilton, Bermuda for its principle offices under a non-cancelable lease expiring in 1998 with a three year renewal option. Methuen currently leases office space at 122 Leadenhall Street, London, England for its principal offices. The lease expires in 2012. Methuen also leases an office in the 1986 Lloyd's Building in London under a lease that expires in 2001. ACE London leases office space at Devonshire Square, London, England for its principal offices under two leases that expire in 2008. Subsequent to year end the Company consolidated the operations of Methuen and ACE London into one location in London, England. The lease for this office space expires in 2012. In April, 1997, the Company purchased a block of land in Hamilton, Bermuda and plans to develop the property to satisfy future office space requirements. ITEM 3. LEGAL PROCEEDINGS The Company, in common with the insurance industry in general, is subject to litigation in the normal course of its business. Although the Company's policies generally provide for resolution of disputes by arbitration in Bermuda or London, the Company has been sued by insureds several times in the United States and, with one exception which is currently on appeal, has been successful in either being dismissed from such suits or in having such suits dismissed on procedural grounds or stayed pending the results of arbitration. In addition, the Company is occasionally named as a party in Louisiana "direct action" suits by insureds. The Company has sought dismissal of these actions as well and decisions are pending in these actions. At September 30, 1997, the Company was not a party to any material litigation other than as encountered in claims activity and none of such litigation is expected by management to have a materially adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE COMPANY The table below sets forth the names, ages, positions and business experience of the executive officers of the Company.
NAME AGE POSITION ---- --- -------- Brian 50 Chairman, President and Chief Executive Officer & Director Duperreault Donald 60 Vice Chairman and Director; President and Chief Executive Kramer Officer of Tempest Reinsurance Company Limited Dominic J. 44 President of A.C.E. Insurance Company, Ltd. Frederico William J. 58 Chairman of ACE UK Limited Loschert (1) Christopher 41 Chief Financial Officer Z. Marshall (1) Peter N. 53 General Counsel & Secretary Mear (1) John C. 50 Chief Actuary Burville (1) Robin J.W. 42 Chief Investment Officer Masters (1) Keith P. 54 Chief Administration Officer White (1)
- -------- (1) In July 1997, as part of a group restructuring plan, certain corporate titles were amended. 21 Brian Duperreault has served as Chairman, President and Chief Executive Officer and as a director of the Company since October 1994. Mr. Duperreault joined AIG in 1973 and served in various senior executive positions with AIG from 1978 until September 1994, most recently as Executive Vice President, Foreign General Insurance and concurrently as Chairman and Chief Executive Officer of American International Underwriters, from April 1994 to September 1994. Mr. Duperreault was President of American International Underwriters, an affiliate of AIG, from 1991 to 1994, and Chief Executive Officer of AIG companies in Japan and Korea, from 1989 until 1991. Donald Kramer has served as Vice Chairman and a director of the Company and Chairman and Chief Executive Officer of Tempest since July 1996. Mr. Kramer previously served as Chairman of Tempest and was instrumental in the formation of Tempest in September 1993. Mr. Kramer was previously Chief Executive Officer of Kramer Capital Corp., National American Insurance Company of California and was the founder and Chairman of NAC Re Corp. where he served until his retirement in June 1993. Dominic J. Frederico has served as President of A.C.E. Insurance Company, Ltd. since July 1997. Mr. Frederico previously served as Executive Vice President, Underwriting since December 1, 1996, and as Executive Vice President, Financial Lines from January 1995 to December 1, 1996. Mr. Frederico served in various capacities at AIG in Europe and the U.S. from 1982 to January 1995, most recently as Senior Vice President and Chief Financial Officer of an AIG subsidiary, with multi-regional general management responsibilities. William J. Loschert was appointed as Chairman of ACE UK Limited with effect from December 1996 to oversee the Company's insurance operations at Lloyd's. Mr. Loschert previously served as Executive Vice President, Underwriting of the Company since January 1986. Christopher Z. Marshall has served as Chief Financial Officer of the Company since November 1992 and as Senior Vice President, Finance of the Company from January 1990 to November 1992. Peter N. Mear has served as General Counsel and Secretary of the Company since April 1996. Mr. Mear served as Vice President and Claims Counsel of Aetna Casualty and Surety Company from February 1991 to April 1996 and Counsel and Litigation Section Head of Aetna Life & Casualty from September 1977 to February 1991. John C. Burville has served as Chief Actuary of the Company since January 1992. Mr. Burville served as managing actuarial consultant with Tillinghast, Nelson & Warren (Bermuda) Ltd. (management consulting and actuaries) from March 1986 to December 1991. Robin J. W. Masters has served as Chief Investment Officer since July 1997. Ms. Masters previously served as Senior Vice President since February 1995 and as Treasurer of the Company since October 1992. Keith P. White has served as Chief Administration Officer since July 1997. Mr. White previously served as Senior Vice President, Administration of the Company since January 1990. PART II ITEM 5. MARKET FOR THE REGISTRANT'S ORDINARY SHARES AND RELATED STOCKHOLDER MATTERS (a) The Company's Ordinary Shares, par value $0.125 per share, have been listed on the New York Stock Exchange since March 25, 1993, under the symbol ACL. The following table sets forth the high and low closing sales prices of the Company's Ordinary Shares per fiscal quarters, as reported on the New York Stock Exchange Composite Tape for the periods indicated.
FISCAL 1997 FISCAL 1996 ------------- ------------- HIGH LOW HIGH LOW ------ ------ ------ ------ First Quarter................................. 60 1/8 52 3/8 39 3/4 33 Second Quarter................................ 66 1/4 56 5/8 48 3/4 38 Third Quarter................................. 74 5/8 58 1/4 49 1/4 41 3/4 Fourth Quarter................................ 96 1/2 73 1/2 52 7/8 41 3/4
22 The last reported sale price of the Ordinary Shares on the New York Stock Exchange Composite Tape on December 16, 1997 was $91 3/16. (b) The approximate number of record holders of Ordinary Shares as of December 16, 1997 was 297. (c) The Company paid quarterly dividends of $0.18 per share to shareholders of record on December 29, 1996 and March 31, 1997, and quarterly dividends of $0.22 per share to all shareholders of record on June 30, 1997 and September 30, 1997. On November 13, 1997 the Company declared a quarterly dividend of $0.24 per Ordinary Share, payable on January 16, 1998 to shareholders of record on December 13, 1997. On November 13, 1997, the Company approved a three-for-one split of the Company's stock. The stock split is subject to approval by ACE shareholders and it is expected that the stock split will be voted on at the Annual General Meeting of shareholders to be held on February 6, 1998. During 1997, the Company repurchased 3,031,000 Ordinary Shares under share repurchase programs for an aggregate cost of $182.6 million. On May 9, 1997, the Board of Directors authorized a new program for up to $300.0 million of the Company's Ordinary Shares. This program superceded and replaced the balance of the February 7, 1997 authorization. At September 30, 1997, approximately $268.0 million of the Board authorization had not been utilized. During 1996 the Company repurchased 1,268,000 Ordinary Shares under share repurchase programs for an aggregate cost of $57.8 million. ACE is a holding company whose principal source of income is investment income and dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to ACE and the Company's ability to pay dividends to its shareholders are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of the Board of Directors and will be dependent upon the profits and financial requirements of the Company and other factors, including legal restrictions on the payment of dividends and such other factors as the Board of Directors deems relevant. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources" in the 1997 Annual Report to Shareholders filed with this Form 10- K. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended September 30, 1997 is incorporated by reference to page 20 of the 1997 Annual Report to Shareholders filed with this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This item is incorporated by reference to pages 21 through 31 of the 1997 Annual Report to Shareholders filed with this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is incorporated by reference to page 30 of the 1997 Annual Report to Shareholders filed with this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item is incorporated by reference to pages 32 through 54 of the 1997 Annual Report to Shareholders filed with this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in nor any disagreements with accountants on accounting and financial disclosure within the 24 months ended September 30, 1997. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This item is incorporated by reference to the sections entitled "Election of Directors--Nominees for Election to Terms Expiring in 1999", "Election of Directors--Nominees for Election to Terms Expiring in 2000" and "--Directors Whose Terms of Office Will Continue After This Meeting" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 6, 1998, which involves the election of directors and will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. ITEM 11. EXECUTIVE COMPENSATION This item is incorporated by reference to the section entitled "Executive Compensation" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 6, 1998, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item is incorporated by reference to the section entitled "Beneficial Ownership of Ordinary Shares" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 6, 1998, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This item is incorporated by reference to the section entitled "Election of Directors--Certain Business Relationships" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 6, 1998, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS 1. Financial Statements The following is a list of financial statements filed as part of this Report, all of which have been incorporated by reference to the material in the 1997 Annual Report to Shareholders as described under item 8 of this Report --Report of Independent Accountants --Consolidated Balance Sheets at September 30, 1997 and 1996 --Consolidated Statements of Operations for the years ended September 30, 1997, 1996 and 1995 --Consolidated Statements of Shareholders' Equity for the years ended September 30, 1997, 1996 and 1995 --Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995 --Notes to Consolidated Financial Statements. 24 2. Financial Statement Schedules Included in Part IV of this report.
SCHEDULE NUMBER PAGE -------- ---- --Report of Independent Accountants on financial statement schedules included in Form 10-K 28 --Summary of Investments I 29 --Condensed financial information of the Registrant as of September 30, 1997 and 1996, and for the years ended September 30, 1997, 1996 and 1995 II 30 --Supplemental information concerning Property/Casualty Insurance Operations VI 33
Other schedules have been omitted as they are not applicable to the Company, or the required information has been included in the financial statements and related notes. 3. Exhibits 2.1 Agreement and Plan of Amalgamation, dated as of March 14, 1996, by and among ACE Limited, TRCL Acquisition Limited and Tempest Rein- surance Company Limited (incorporated by reference to Exhibit 2.1 to Form S-4 of the Company (No. 333-04153) 2.2 Stock Purchase Agreement, dated September 18, 1997 by and between ACE Limited and Talegen Holdings, Inc. 2.3 Tax Allocation and Indemnification Agreement, dated September 18, 1997 by and among Xerox Financial Services, Inc., Talegen Hold- ings, Inc., Westchester Specialty Group, Inc., and ACE Limited. 3.1 Memorandum of Association of the Company, (incorporated by refer- ence to Exhibit 3.1 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 3.2 Articles of Association of the Company, (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 4.1 Memorandum of Association of the Company (see Exhibit 3.1). 4.2 Articles of Association of the Company (see Exhibit 3.2). 4.3 Specimen certificate representing Ordinary Shares, (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.1* Employment Agreement dated December 23, 1985, between ACE Limited, A.C.E. Insurance Company Ltd., and William J. Loschert, (incorpo- rated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.2* Employment Agreement dated January 1, 1986, between ACE Limited, A.C.E. Insurance Company Ltd., and Christopher Z. Marshall, (in- corporated by reference to Exhibit 10.9 to the Registration State- ment on Form S-1 of the Company (No. 33-57206)). 10.3* ACE Limited Annual Performance Incentive Plan, (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.4* ACE Limited Equity Linked Incentive Plan, (incorporated by refer- ence to Exhibit 10.14 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.5* Amendment to ACE Limited Equity Linked Incentive Plan, (incorpo- rated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.6* ACE Limited Employee Retirement Plan, (incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1 of the Company (No. 33-57206)).
25 10.7* First Amendment to ACE Limited Employee Retirement Plan, (incorpo- rated by reference to Exhibit 10.22 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.8* Second Amendment to ACE Limited Employee Retirement Plan, (incor- porated by reference to Exhibit 10.23 to the Registration State- ment on Form S-1 of the Company (No. 33-57206)). 10.9* Third Amendment to ACE Limited Employee Retirement Plan, (incorpo- rated by reference to Exhibit 10.24 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.10* ACE Limited Supplement Retirement Plan, (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.11* First Amendment to ACE Limited Supplement Retirement Plan, (incor- porated by reference to Exhibit 10.26 to the Registration State- ment on Form S-1 of the Company (No. 33-57206)). 10.12* Second Amendment to ACE Limited Supplement Retirement Plan, (in- corporated by reference to Exhibit 10.27 to the Registration Statement on Form S-1 of the Company (No. 33-57206)). 10.13* Form of restricted stock award dated August 24, 1993 to ACE Lim- ited Directors, (incorporated by reference to Exhibit 10.39 to Form 10-K of the Company for the year ended September 30, 1993). 10.14* Employment Agreement, dated October 1, 1994, between ACE Limited and Brian Duperreault (incorporated by reference to Exhibit 10.42 to Form 10-K of the Company for the year ended September 30, 1994). 10.15* Option and Restricted Share Agreement, dated October 1, 1994, be- tween ACE Limited and Brian Duperreault (incorporated by reference to Exhibit 10.43 to Form 10-K of the Company for the year ended September 30, 1994). 10.16* Consulting Agreement, effective October 1, 1994, between ACE Lim- ited and Walter A. Scott (incorporated by reference to Exhibit 10.44 to Form 10-K of the Company for the year ended September 30, 1994). 10.17* Employment Agreement, dated January 9, 1995, between ACE Limited and Dominic J. Frederico (incorporated by reference to Exhibit 10.45 to Form 10-K of the Company for the year ended September 30, 1995). 10.18* Second amendment to ACE Limited Equity Linked Incentive Plan (in- corporated by reference to Exhibit 10.45 to Form 10-K of the Com- pany for the year ended September 30, 1995). 10.20* Employment Agreement, dated April 1, 1996, between ACE Limited and Peter N. Mear (incorporated by reference to Exhibit 10.48 to Form 10-Q of the Company for the quarter ended June 30, 1996). 10.21* ACE Limited 1995 Long Term Incentive Plan (incorporated by refer- ence to Exhibit 10.35 to Form 10-Q of the Company for the quarter ended March 31, 1996). 10.22* Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.36 to Form 10-Q of the Company for the quarter ended March 31, 1996). 10.23* 1995 Outside Directors Plan (incorporated by reference to Exhibit 10.37 to Form 10-Q of the Company for the quarter ended March 31, 1996). 10.24* ACE Limited 1996 Tempest Replacement Option Plan (incorporated by reference to Exhibit 10.24 to Form 10-K of the Company for the year ended September 30, 1996).
26 10.25 Credit Agreement between the Company and a syndicate of banks dated November 15, 1996 (incorporated by reference to Exhibit 10.25 to Form 10-K of the Company for the year ended September 30, 1996). 10.26 Reimbursement Agreement and Pledge Agreement between the Company and a syndicate of banks dated November 22, 1996 (incorporated by reference to Exhibit 10.26 to Form 10-K of the Company for the year ended September 30, 1996). 10.27* First Amendment of ACE Limited 1995 Long Term Incentive Plan (in- corporated by reference to Exhibit 10.27 to Form 10-K of the Com- pany for the year ended September 30, 1996). 10.28* Third Amendment to Equity Linked Incentive Plan--Stock Apprecia- tion Right Plan (incorporated by reference to Exhibit 10.28 to Form 10-Q of the Company for the quarter ended March 31, 1997). 10.29* First Amendment of ACE Limited 1995 Outstanding Directors Plan (incorporated by reference to Exhibit 10.29 to Form 10-Q of the Company for the quarter ended June 30, 1997). 10.30* 364 day Credit Agreement dated as of December 11, 1997 among ACE Limited, A.C.E. Insurance Company Ltd., Corporate Officers & Di- rectors Assurance Ltd. and Tempest Reinsurance Company Limited, the Banks listed on the signature pages hereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. 10.31* Five year Credit Agreement dated as of December 11, 1997 among ACE Limited, A.C.E. Insurance Company Ltd., Corporate Officers & Di- rectors Assurance Ltd. and Tempest Reinsurance Company Limited, the Banks listed on the signature pages hereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. 10.32 Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among A.C.E. Insurance Company, Ltd., the Banks listed on the signature pages hereof and Morgan Guaranty Trust Company of New York, as Issuing Bank and Administrative Agent. 10.33 Term Loan Agreement dated as of December 11, 1997 among ACE US Holdings, Inc., ACE Limited, the Banks listed on the signature pages hereof and Morgan Guaranty Trust Company of New York, as Ad- ministrative Agent. 11.1 Statement regarding computation of per share earnings. 13.1 Pages 20 through 53 of the 1997 Annual Report to Shareholders 21.1 Subsidiaries of the Company. 23.1 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule 99.1 Extracts from the Company's Registration Statement on Form S-1 (No. 333-04153) concerning taxation of ACE and its Subsidiaries.
- -------- *Management Contract or Compensatory Plan. (b) REPORTS ON FORM 8-K The Company filed Form 8-K current report dated September 18, 1997 pertaining to the Registrants press release relating to the proposed acquisition of Westchester Specialty Group, Inc. 27 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES INCLUDED IN FORM 10-K Our report on the consolidated financial statements of ACE LIMITED AND SUBSIDIARIES has been incorporated by reference in this Form 10-K from page 32 of the 1997 Annual Report to Shareholders of ACE Limited. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in item 14 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. New York, New York November 5, 1997 28 SCHEDULE I ACE LIMITED AND SUBSIDIARIES SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES SEPTEMBER 30, 1997
AMOUNT AT WHICH COST OR SHOWN IN THE AMORTIZED COST FAIR VALUE BALANCE SHEET -------------- ---------- --------------- (IN THOUSANDS OF U.S. DOLLARS) FIXED MATURITIES: Bonds: U.S. Treasury and agency......... $ 488,961 $ 505,783 $ 505,783 Non-U.S. governments............. 157,206 158,506 158,506 Corporate securities............. 1,255,837 1,283,606 1,283,606 Mortgage-backed securities....... 1,324,507 1,342,441 1,342,441 ---------- ---------- ---------- Total fixed maturities......... 3,226,511 3,290,336 3,290,336 ---------- ---------- ---------- EQUITY SECURITIES: Common stock: Public utilities................. 11,925 14,637 14,637 Banks, trust and insurance companies....................... 92,035 109,731 109,731 Industrial, miscellaneous and all other........................... 396,666 507,617 507,617 Non redeemable preferred stock..... 1,855 2,985 2,985 ---------- ---------- ---------- Total equity securities........ 502,481 634,970 634,970 ---------- ---------- ---------- Other investments.................. 78,691 78,691 78,691 ---------- ---------- ---------- Short-term investments and cash.... 470,888 470,768 470,768 ---------- ---------- ---------- Total investments and cash..... $4,278,571 $4,474,765 $4,474,765 ========== ========== ==========
29 SCHEDULE II ACE LIMITED AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (PARENT COMPANY ONLY) SEPTEMBER 30, 1997 AND 1996
1997 1996 ---------- ---------- (IN THOUSANDS OF U.S. DOLLARS) ASSETS Investments and cash Investments in subsidiaries and affiliate on equity basis.................................... $2,684,624 $2,252,319 Other investments, at cost....................... 33,151 13,334 Cash............................................. 17,770 2,297 ---------- ---------- Total investments and cash..................... 2,735,545 2,267,950 Due from subsidiaries and affiliates, net.......... 14,272 -- Other assets....................................... 10,891 10,554 ---------- ---------- Total assets................................... $2,760,708 $2,278,504 ========== ========== LIABILITIES Advances from affiliate............................ $ 122,270 $ -- Accounts payable and accrued liabilities........... 6,808 16,812 Dividend payable................................... 12,436 10,470 Due to subsidiaries and affiliate, net............. -- 6,944 ---------- ---------- Total liabilities.............................. 141,514 34,226 ---------- ---------- SHAREHOLDERS' EQUITY Ordinary shares.................................... 6,911 7,271 Additional paid-in capital......................... 1,102,824 1,156,194 Unearned stock grant compensation.................. (1,993) (1,299) Net unrealized appreciation on investments......... 196,194 61,281 Cumulative translation adjustment.................. 855 131 Retained earnings.................................. 1,314,403 1,020,700 ---------- ---------- Total shareholders' equity..................... 2,619,194 2,244,278 ---------- ---------- Total liabilities and shareholders' equity..... $2,760,708 $2,278,504 ========== ==========
30 SCHEDULE II--(CONTINUED) ACE LIMITED AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY) FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- (IN THOUSANDS OF U.S. DOLLARS) Revenues Management fees................................ $ 26,601 $ 21,081 $ 17,580 Investment income, including intercompany interest income............................... (17,348) (6,881) (9,034) Equity in net income of subsidiaries and affiliate..................................... 480,997 313,359 254,901 Net realized gains (losses) on investments..... (16) -- -- -------- -------- -------- 490,234 327,559 263,447 Expenses Administrative expenses........................ (28,880) (37,826) (25,881) -------- -------- -------- Net income................................... $461,354 $289,733 $237,566 ======== ======== ========
31 SCHEDULE II--(CONTINUED) ACE LIMITED AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995 --------- --------- --------- (IN THOUSANDS OF U.S. DOLLARS) Cash flows from operating activities Net income (loss)........................... $ 461,354 $ 289,733 $ 237,566 Adjustments to reconcile net income (loss) to net cash provided by operating activities Equity in net income of subsidiaries and affiliate................................ (480,997) (313,359) (254,901) Realized (gains) losses on investments.... 16 -- -- Amounts due to subsidiaries and affiliate, net...................................... (6,944) (4,036) (475) Accounts payable and accrued liabilities.. (10,004) 6,625 2,414 Accrued interest on advances to affiliate. 3,978 (9,729) 8,682 Other..................................... (6,804) (3,957) (2,935) --------- --------- --------- Net cash flows from (used for) operating activities............................. (39,401) 34,723 (9,649) --------- --------- --------- Cash flows from investing activities Dividends received from subsidiaries........ 190,000 135,000 -- Advances to affiliate....................... (241,000) (284,620) (300) Repayment of advances to affiliate.......... (19,817) -- -- Capitalization of subsidiary................ -- 74,123 -- --------- --------- --------- Net cash used for investing activities.. (70,817) (75,497) (300) --------- --------- --------- Cash flows from financing activities Proceeds from exercise of options for shares..................................... 2,191 28 168 Proceeds from shares issued under Stock Appreciation Rights Plan................... 4,156 -- -- Repurchase of Ordinary Shares............... (182,648) (57,931) (33,514) Dividends paid.............................. (43,028) (27,685) (22,058) Loan Repayments............................. (180,000) -- -- Advances from affiliate..................... 525,020 198,050 63,350 --------- --------- --------- Net cash from financing activities...... 125,691 112,462 7,946 --------- --------- --------- Net increase (decrease) in cash............... 15,473 2,242 (2,003) Cash--beginning of year....................... 2,297 55 2,058 --------- --------- --------- Cash--end of year............................. $ 17,770 $ 2,297 $ 55 ========= ========= =========
32 SCHEDULE VI ACE LIMITED AND SUBSIDIARIES SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY OPERATIONS
LOSSES AND LOSS RESERVES EXPENSES FOR UNPAID INCURRED RELATED TO AMORTIZATION PAID DEFERRED LOSSES NET ------------------- OF DEFERRED LOSSES NET ACQUISITION AND LOSS UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION AND LOSS PREMIUMS COSTS EXPENSES PREMIUM PREMIUM INCOME YEAR YEAR COSTS EXPENSES WRITTEN ----------- ---------- -------- -------- ---------- ------------------- ------------ -------- -------- (IN THOUSANDS OF U.S. DOLLARS) 1997............ $27,018 $1,869,995 $400,689 $644,838 $237,823 $ 435,941 -- $46,957 $402,059 $639,744 1996............ $34,546 $1,836,113 $398,731 $587,245 $206,524 $ 464,824 -- $52,954 $101,376 $602,707 1995............ $34,428 $1,437,930 $305,568 $428,661 $181,375 $ 350,653 -- $46,647 $ 73,115 $424,756
33 SIGNATURE PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. ACE Limited Christopher Z. Marshall By: _________________________________ Christopher Z. Marshall Chief Financial Officer December 22, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- Brian Duperreault - ------------------------------------ Brian Duperreault Chairman, President and Chief Executive Officer; Director December 22, 1997 Christopher Z. Marshall - ------------------------------------ Christopher Z. Marshall Chief Financial Officer (Principal Financial and Accounting Officer) December 22, 1997 Donald Kramer - ------------------------------------ Donald Kramer Vice Chairman; Director December 22, 1997 Michael G. Atieh - ------------------------------------ Michael G. Atieh Director December 22, 1997 Bruce L. Crockett - ------------------------------------ Bruce L. Crockett Director December 22, 1997 Jeffrey W. Greenberg - ------------------------------------ Jeffrey W. Greenberg Director December 22, 1997 Meryl D. Hartzband - ------------------------------------ Meryl D. Hartzband Director December 22, 1997 Robert M. Hernandez - ------------------------------------ Robert M. Hernandez Director December 22, 1997
34
SIGNATURE TITLE DATE --------- ----- ---- Peter Menikoff - ------------------------------------ Peter Menikoff Director December 22, 1997 Thomas J. Neff - ------------------------------------ Thomas J. Neff Director December 22, 1997 Glen M. Renfew - ------------------------------------ Glen M. Renfew Director December 22, 1997 Robert Ripp - ------------------------------------ Robert Ripp Director December 22, 1997 Walter A. Scott - ------------------------------------ Walter A. Scott Director December 22, 1997 Dermot F. Smurfit - ------------------------------------ Dermot F. Smurfit Director December 22, 1997 Robert W. Staley - ------------------------------------ Robert W. Staley Director December 22, 1997 Gary M. Stuart - ------------------------------------ Gary M. Stuart Director December 22, 1997 Sidney F. Wentz - ------------------------------------ Sidney F. Wentz Director December 22, 1997
35 EX-2.2 2 STOCK PURCHASE AGREEMENT EXHIBIT 2.2 STOCK PURCHASE AGREEMENT (Westchester Specialty Group, Inc.) BY AND BETWEEN TALEGEN HOLDINGS, INC., AND ACE LIMITED DATED AS OF SEPTEMBER 18, 1997 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS................................................................................. 2 Section 1.1 Definitions................................................................................ 2 ARTICLE II PURCHASE OF SHARES.......................................................................... 10 Section 2.1 Purchase of Shares......................................................................... 10 Section 2.2 Purchase Price Adjustments................................................................. 10 ARTICLE III THE CLOSING................................................................................. 10 Section 3.1 The Closing................................................................................ 10 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER.................................................... 11 Section 4.1 Organization and Related Matters........................................................... 11 Section 4.2 Subsidiaries............................................................................... 11 Section 4.3 Authority; No Violation.................................................................... 12 Section 4.4 Consents and Approvals..................................................................... 14 Section 4.5 Stock Ownership............................................................................ 14 Section 4.6 Financial Statements....................................................................... 14 Section 4.7 No Other Broker............................................................................ 15 Section 4.8 Legal Proceedings.......................................................................... 15 Section 4.9 Undisclosed Liabilities.................................................................... 16 Section 4.10 Compliance with Applicable Law; Insurance Operations...................................... 16 Section 4.11 Absence of Certain Changes................................................................ 17 Section 4.12 Technology and Intellectual Property...................................................... 19 Section 4.13 Employee Benefit Plans; ERISA............................................................. 20 Section 4.14 Taxes..................................................................................... 23 Section 4.15 Contracts................................................................................. 24 Section 4.16 No Material Adverse Change................................................................ 25 Section 4.17 Portfolio Investments..................................................................... 25 Section 4.18 Reserves.................................................................................. 25 Section 4.19 Title to Assets, etc...................................................................... 25 Section 4.20 Transactions with Certain Persons......................................................... 26 Section 4.21 Reinsurance and Retrocessions............................................................. 27 Section 4.22 Environmental Laws........................................................................ 27 Section 4.23 Insurance Coverage........................................................................ 28 Section 4.24 Labor Matters............................................................................. 28 Section 4.25 No Other Agreements to Sell the Assets or the Company..................................... 28 Section 4.26 1992/93 Restructuring..................................................................... 28 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER..................................................... 29 Section 5.1 Organization and Related Matters........................................................... 29 Section 5.2 Authority; No Violation.................................................................... 29 Section 5.3 Consents and Approvals..................................................................... 30 Section 5.4 Legal Proceedings.......................................................................... 30 Section 5.5 Investment Intent of Buyer................................................................. 30
-i-
Page ---- Section 5.6 Investment Company.......................................................................... 30 Section 5.7 No Other Broker............................................................................. 30 Section 5.8 Financing................................................................................... 31 ARTICLE VI COVENANTS.................................................................................... 31 Section 6.1 Conduct of Business......................................................................... 31 Section 6.2 Confidentiality and Announcements........................................................... 31 Section 6.3 Expenses.................................................................................... 31 Section 6.4 Access; Certain Communications.............................................................. 31 Section 6.5 Regulatory Matters; Third Party Consents.................................................... 32 Section 6.6 Further Assurances.......................................................................... 33 Section 6.7 Notification of Certain Matters............................................................. 34 Section 6.8 Maintenance of Records...................................................................... 34 Section 6.9 Employees and Employee Plans................................................................ 35 Section 6.10 Pre-Closing Dividends...................................................................... 37 Section 6.11 Crostex/Camfex............................................................................. 37 Section 6.12 Exclusivity................................................................................ 38 Section 6.13 Additional Financial Statements............................................................ 38 Section 6.14 Intercompany Accounts...................................................................... 39 Section 6.15 Rating Agency Presentations................................................................ 39 Section 6.16 Investment Portfolio....................................................................... 40 Section 6.17 Reinsurance Agreements..................................................................... 40 Section 6.18 Person Authorized to Act Prior to the Closing.............................................. 41 Section 6.19 Tax Sharing Agreement Releases............................................................. 41 ARTICLE VII CONDITIONS TO CLOSING........................................................................ 41 Section 7.1 Conditions to Buyer's Obligations........................................................... 41 Section 7.2 Conditions to Seller's Obligations.......................................................... 43 Section 7.3 Mutual Conditions........................................................................... 44 ARTICLE VIII SURVIVAL OF REPRESENTATIONS, WARRANTIES,COVENANTS AND AGREEMENTS; INDEMNIFICATION............ 45 Section 8.1 Survival.................................................................................... 45 Section 8.2 Obligation of Seller to Indemnify, Reimburse, etc........................................... 46 Section 8.3 Obligation of Buyer to Indemnify, Reimburse, etc............................................ 46 Section 8.4 Notice and Opportunity to Defend Against Third Party Claims................................. 46 Section 8.5 Net Indemnity............................................................................... 48 Section 8.6 Tax Indemnification......................................................................... 48 Section 8.7 Limits on Indemnification................................................................... 48 ARTICLE IX TERMINATION.................................................................................. 48 Section 9.1 Termination................................................................................. 48 Section 9.2 Obligations upon Termination................................................................ 49 ARTICLE X MISCELLANEOUS................................................................................ 49 Section 10.1 Amendments; Extension; Waiver.............................................................. 49 Section 10.2 Entire Agreement........................................................................... 49
-ii- Section 10.3 Interpretation.......................................................... 50 Section 10.4 Severability............................................................ 50 Section 10.5 Notices................................................................. 50 Section 10.6 Binding Effect; Persons Benefiting...................................... 51 Section 10.7 Assignment.............................................................. 51 Section 10.8 Counterparts............................................................ 51 Section 10.9 No Prejudice............................................................ 52 Section 10.10 Governing Law.......................................................... 52 Section 10.11 Service; Jurisdiction.................................................. 52 Section 10.12 Specific Performance................................................... 52
EXHIBITS Exhibit A Form of Guarantee Agreement Exhibit B Form of Ridge Re Amendment Exhibit C [Not Used] Exhibit D Form of Release of Tax Sharing Agreements Exhibit E Form of Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. Exhibit F Form of Opinions of Maples & Calder and Mayer, Brown & Platt SCHEDULES Schedule 1.1 Berkshire Hathaway Reinsurance Agreement Schedule 1.2 Exclusions from the Definition of Company Employees Schedule 1.3 Knowledge of Seller Schedule 4.2 Subsidiaries Schedule 4.4 Consents and Approvals Schedule 4.6 Financial Statements Schedule 4.8 Legal Proceedings Schedule 4.9 Undisclosed Liabilities Schedule 4.10 Compliance with Applicable Law; Insurance Operations Schedule 4.11 Absence of Certain Changes Schedule 4.12 Technology and Intellectual Property Schedule 4.13 Employee Benefit Plans; ERISA Schedule 4.14 Taxes Schedule 4.15 Contracts Schedule 4.16 No Material Adverse Change Schedule 4.17 Portfolio Investments Schedule 4.19 Title to Assets, etc. Schedule 4.20 Transactions with Certain Persons Schedule 4.21 Reinsurance and Retrocessions Schedule 4.22 Environmental Laws Schedule 4.24 Labor Matters Schedule 4.25 No Other Agreements to Sell the Assets of the Company Schedule 5.3 Consents and Approvals -iii- STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of September 18, 1997, by and between Talegen Holdings, Inc., a Delaware corporation ("Seller"), and ACE Limited, a Cayman Islands corporation ("Buyer"). RECITALS WHEREAS, Seller is the owner of 1,000 shares, par value $1.00 per share (the "Shares"), of common stock of Westchester Specialty Group, Inc., a Delaware corporation (the "Company"), which Shares constitute all of the issued and outstanding shares of the Company's capital stock; WHEREAS, certain of the Company's wholly-owned subsidiaries, Westchester Fire Insurance Company, a New York stock insurance company ("Westchester Fire"), Westchester Surplus Lines Insurance Company, a Georgia stock insurance company, and Industrial Underwriters Insurance Company, a Texas stock insurance company (collectively the "Insurance Subsidiaries"), are engaged in the property and casualty insurance business; WHEREAS, Buyer desires to purchase the Shares from Seller upon the terms and subject to the conditions set forth herein; WHEREAS, Seller desires to sell the Shares to Buyer upon the terms and subject to the conditions set forth herein; WHEREAS, Buyer and Seller have entered into the Tax Agreement (as defined in Section 1.1) simultaneously with the execution of this Agreement; and WHEREAS, Xerox Financial Services, Inc., a Delaware corporation ("Parent"), has agreed to enter into a guarantee of certain obligations of Seller pursuant to this Agreement in the form attached hereto as Exhibit A (the "Guarantee"). NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be bound hereby, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. For all purposes of this Agreement, the ----------- following terms shall have the respective meanings set forth in this Section 1.1 (such definitions to be equally applicable to both the singular and plural forms of the terms herein defined): "Action" means any legal, administrative, arbitration or other proceeding, claim, suit, action or governmental or regulatory investigation of any nature. "Affiliate" means, with respect to any Person, any other Person who directly or indirectly controls, is controlled by or is under common control with such Person. "Agreement" means this Stock Purchase Agreement, together with all Schedules and Exhibits referenced herein, between Buyer and Seller, as such may hereafter be amended from time to time. "Ancillary Agreements" means, collectively, the Ridge Re Agreement (as amended by the Ridge Re Amendment), the Guarantee and the Tax Agreement. "Applicable Law" means any domestic or foreign federal, state or local statute, law, ordinance, rule, regulation, order, writ, injunction, judgment or decree applicable to Seller, the Company, Buyer or any of their respective Subsidiaries, properties, assets, officers, directors, employees or agents. "Asserted Liability" has the meaning set forth in Section 8.4. "Berkshire Hathaway Reinsurance Agreement" means the reinsurance agreement between the Company and National Indemnity Company upon such terms and conditions as are described on Schedule 1.1. "Business Day" means any day other than a Saturday, a Sunday or a day on which banks in New York, New York are required to be closed for regular banking business. "Buyer" has the meaning set forth in the first paragraph of this Agreement. "CFI Entities" means, collectively, Crum & Forster Holdings, Inc., a subsidiary of Seller, and United States Fire Insurance Company and The North River Insurance Company, each of which is a subsidiary of Crum & Forster Holdings, Inc. "Claims Notice" has the meaning set forth in Section 8.4. "Closing" has the meaning set forth in Section 3.1. "Closing Date" means the date of the Closing. "Code" means the Internal Revenue Code of 1986, as amended . "Company" has the meaning set forth in the Recitals of this Agreement. -2- "Company Employees" means those current or former employees of the Company and its Subsidiaries who, on the Closing Date, are either: (a) actively employed by the Company or its Subsidiaries, including those who are absent from employment due to illness, injury, military service or other authorized absence (including those who are "disabled" within the meaning of either the short-term or the long-term disability plan currently applicable to the Company and its Subsidiaries (collectively, the "Disability Plans")); (b) former employees who, on the Closing Date, are receiving long-term disability benefits under the Disability Plans; and/or (c) former employees who have previously satisfied the requirements for retiree medical and/or life insurance coverage under the Talegen Holdings, Inc. Medical and Life Plans for Retirees and Disabled Employees, but excluding (i) other former employees, (ii) employees otherwise not actively employed by the Company or its Subsidiaries (other than as specifically included above), and (iii) those employees of the Company and its Subsidiaries whose names are set forth on Schedule 1.2. The names of those former employees who are described in paragraphs (b) and (c) above, as of July 18, 1997, are set forth on Schedule 1.2. "Company GAAP Financial Statements" means the audited Consolidated Balance Sheets of the Company (or its predecessors) as of December 31, 1996 and 1995 and the Consolidated Statements of Operations, Consolidated Statements of Shareholder's Equity and Consolidated Statements of Cash Flows of the Company (or its predecessors) for each of the three fiscal years included in the three- year period ended December 31, 1996, prepared in accordance with GAAP, together with the notes thereon and the related reports of KPMG Peat Marwick LLP. "Company Interim Financial Statements" shall mean the unaudited Consolidated Balance Sheets and the unaudited Consolidated Statements of Operations, Consolidated Statements of Shareholder's Equity and Consolidated Statements of Cash Flows of the Company as of and for the six-month periods ended June 30, 1997 and 1996, as provided in the Company's quarterly monitoring report. "Confidentiality Agreement" means that certain letter agreement, dated March 7, 1997, between Buyer and Seller with respect to the confidentiality of information about Seller, the Company and their respective Affiliates and other related Persons which was provided by or at the request of Seller or the Company to Buyer, as such letter agreement may have been or may hereafter be amended from time to time. "Contracts" has the meaning set forth in Section 4.15. "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled Person, whether through the ownership of voting securities, by agreement or otherwise. "Convention Statements" shall mean (i) the annual convention statements and the quarterly statement of each Insurance Subsidiary as filed with an Insurance Regulator for the years ended December 31, 1996, 1995 and 1994 and for the quarterly period ended June 30, 1997, and (ii) the annual -3- statutory financial reports of Ridge Re as filed with the insurance regulatory authorities in Bermuda for the years ended December 31, 1996, 1995 and 1994. "Crostex/Camfex Leases" shall mean the following: (a) that certain Amended and Restated Lease Agreement between Crostex Associates Limited Partnership, as Lessor, and the Crostex/Camfex Pool Companies, as Lessee, dated as of March 1, 1995, relating to 4040 North Central Expressway, Dallas, Texas (the "Dallas Lease"); and (b) that certain Amended and Restated Lease Agreement between Camfex Associates Limited Partnership, as Lessor, and the Crostex/Camfex Pool Companies, as Lessee, dated as of March 1, 1995, relating to 5724 W. Los Positos Blvd., Pleasanton, California (the "Pleasanton Lease"). "Crostex/Camfex Pool Companies" means United States Fire Insurance Company, The North River Insurance Company, Westchester Fire and International Insurance Company. "Crostex/Camfex Purchase Money Documents" shall mean the following: (a) that certain "Note Due December 1, 2009," dated December 21, 1984, in the principal amount of $4,468,097 from Crostex Associates Limited Partnership to the Crostex/Camfex Pool Companies, together with the related Purchase Money Mortgage, dated as of December 21, 1984, granting the holders of such promissory note a subordinated security interest in the building at 305 Madison Avenue, Morris Township, New Jersey, and any other related documents or instruments (collectively, the "305 Purchase Money Documents"); (b) that certain "Note Due December 1, 2009," dated December 21, 1984, in the principal amount of $1,263,595 from Crostex Associates Limited Partnership to the Crostex/Camfex Pool Companies, together with the related Purchase Money Mortgage, dated as of December 21, 1984, granting the holders of such promissory note a subordinated security interest in the building at 299 Madison Avenue, Morris Township, New Jersey, and any other related documents or instruments (collectively, the "299 Purchase Money Documents"); (c) that certain "Note Due December 1, 2009," dated December 21, 1984, in the principal amount of $2,214,788 from Crostex Associates Limited Partnership to the Crostex/Camfex Pool Companies, together with the related Deed of Trust, dated as of December 1, 1984, granting the holders of such promissory note a subordinated security interest in the building at 4040 North Central Expressway, Dallas, Texas, and any other related documents or instruments (collectively, the "Dallas Purchase Money Documents"); and (d) that certain "Note Due December 1, 2009," dated December 21, 1984, in the principal amount of $716,407 from Camfex Associates Limited Partnership to the Crostex/Camfex Pool Companies, together with the related Deed of Trust, dated as of December 1, 1984, granting the holders of such promissory note a subordinated security interest in the building at 5724 W. Los Positos Blvd., Pleasanton, California, and any other related documents or instruments (collectively, the "Pleasanton Purchase Money Documents"). "Dallas Lease" has the meaning set forth in the definition of "Crostex/Camfex Leases." -4- "Dallas Purchase Money Documents" has the meaning set forth in the definition of "Crostex/Camfex Purchase Money Documents." "Disability Plans" has the meaning set forth in the definition of "Company Employees." "Encumbrance" means any lien (statutory or other), mortgage, pledge, security interest, lease, claim, charge, easement, limitation, commitment, right of way, encroachment, restriction or encumbrance of any kind or nature whatsoever, or any agreement to give any of the foregoing; provided that, with respect to the Shares only, this definition of "Encumbrance" shall not include (i) any such encumbrance arising as a result of the status of, or any action taken by, Buyer or any of its Affiliates and (ii) any limitation or restriction imposed upon the transfer of the Shares by any registration provision of the Securities Act of 1933, as amended, or any applicable state securities law regulating the disposition of the Shares. "Environmental Law" means any Law which relates to or otherwise imposes liability or standards of conduct concerning environmental protection, health and safety of persons, discharges, emissions, releases or threatened releases of any noises, odors or Hazardous Materials into ambient air, water or land, or otherwise relating to the manufacture, processing, generation, distribution, use, treatment, storage, disposal, cleanup, transport or handling of Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act, as amended, the Occupational Safety and Health Act, as amended, the Resource Conservation and Recovery Act, as amended, the Toxic Substances Control Act, as amended, the Federal Water Pollution Control Act, as amended, the Clean Water Act, as amended, any so-called "Superlien" law, and any other similar federal, state or local Law. "Environmental Permit" means any permit, license, approval, consent or other authorization required by or pursuant to any applicable Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) which is a member of a controlled group including the Company, or under common control with the Company, within the meaning of Section 414 of the Code or Section 4001 of ERISA. "Exon-Florio Amendment" means Section 721 of the Defense Production Act of 1950, as amended. "GAAP" means generally accepted accounting principles as used in the United States as in effect at the time any applicable financial statements were prepared or any act requiring the application of GAAP was performed. "Governmental Authority" means the government of the United States or any foreign country or any state or political subdivision thereof and any entity, body or authority exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including the Pension Benefit Guaranty Corporation and other quasi-governmental entities established to perform such functions. "Guarantee" has the meaning set forth in the Recitals of this Agreement. -5- "Hazardous Material" means any (i) hazardous substance, toxic substance, hazardous waste or pollutant (as such terms are defined by or within the meaning of any Environmental Law), (ii) material or substance which is regulated or controlled as a hazardous substance, toxic substance, pollutant or other regulated or controlled material, substance or matter pursuant to any Environmental Law, (iii) petroleum, crude oil or fraction thereof, (iv) asbestos-containing material, (v) polychlorinated biphenyls, (vi) lead-based paint or (vii) radioactive material, except for those materials or substances that are subject to regulation or control solely as a result of being a listed chemical under the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65). "HoldCo" means the wholly owned United States subsidiary of Buyer formed for the purposes of acquiring and holding the Company and its Subsidiaries, and any other United States insurance operations Buyer may acquire from time to time, which has been assigned, prior to the Closing, the purchase rights of Buyer under this Agreement in accordance with Section 10.7. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Indemnifying Party" has the meaning set forth in Section 8.4. "Indemnitee" has the meaning set forth in Section 8.4. "Information Returns" shall have the meaning ascribed in the Tax Agreement. "Insurance Regulator" means the insurance regulatory authority in the state in which the applicable Insurance Subsidiary is domiciled. "Insurance Subsidiaries" has the meaning set forth in the Recitals of this Agreement. "Intellectual Property Right" has the meaning set forth in Section 4.12. "IRP" means The Individual Retirement Plan of Talegen Holdings, Inc. "IRS" means the Internal Revenue Service. "knowledge of Seller" means the actual knowledge of the individuals listed on Schedule 1.3. "KPMG Report" has the meaning set forth in Section 4.18. "Latest Balance Sheet" has the meaning set forth in Section 4.9. "Law" means any law, statute, regulation, ordinance, rule, order, decree, judgment, consent decree, settlement agreement or governmental requirement enacted, promulgated, entered into, agreed or imposed by any Governmental Authority. "Loss" means any and all claims, losses, liabilities, damages, judgments or settlements of any nature or kind, and any and all costs and expenses related thereto (including interest, penalties and attorney's, accountant's, consultant's and expert's fees and expenses), that are imposed upon or otherwise incurred or suffered by the relevant party. -6- "Material Adverse Effect" means any event, change, condition, fact or effect which (i) has a material adverse effect on the business, operations, assets, liabilities, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole, or (ii) would prevent or materially delay the performance by Seller of its obligations under this Agreement. "1992/93 Restructuring" shall mean the restructuring of the insurance operations of Seller and its subsidiaries pursuant to the Restructuring Agreement, dated as of September 3, 1993, among Seller, Ridge Re, the Company and the other parties thereto. "Parent" has the meaning set forth in the Recitals of this Agreement. "Permits" has the meaning set forth in Section 4.10. "Person" means any individual, corporation, company, partnership (limited or general), joint venture, limited liability company, association, trust or any other entity. "Plans" has the meaning set forth in Section 4.13. "Pleasanton Lease" has the meaning set forth in the definition of "Crostex/Camfex Leases." "Pleasanton Purchase Money Documents" has the meaning set forth in the definition of "Crostex/Camfex Purchase Money Documents." "Purchase Price" has the meaning set forth in Section 2.1. "Records" means all records and original documents which pertain to or are utilized primarily by the Company or its Subsidiaries to administer, reflect, monitor, evidence or record information relating to the business or conduct of the Company or its Subsidiaries and all such records and original documents, including all such records maintained on electronic or magnetic media, or in any electronic database system of the Company or its Subsidiaries, or necessary to comply with any Applicable Law with respect to the business of the Company or its Subsidiaries. "Reinsurance Agreement" has the meaning set forth in Section 4.21. "Retirement Plan" means the Retirement Plan of Talegen Holdings, Inc. "Ridge Re" means Ridge Reinsurance Limited, a Bermuda corporation. "Ridge Re Agreement" means that certain Springing First Aggregate Excess of Loss Reinsurance Agreement by and between the Insurance Subsidiaries, Ridge Re and Parent, dated as of December 31, 1992, together with all endorsements thereto. "Ridge Re Amendment" means that certain Endorsement #2 to the Springing First Aggregate Excess of Loss Reinsurance Agreement by and between the Insurance Subsidiaries, Ridge Re and Parent, in the form attached hereto as Exhibit B. "Ridge Re GAAP Financial Statements" shall mean the audited Consolidated Balance Sheets of Ridge Re as of December 31, 1996 and 1995 and the related Statements of Operations and -7- Retained Earnings and Cash Flows for the years ended December 31, 1996 and 1995, prepared in accordance with GAAP, together with the notes thereon and the related reports of KPMG Peat Marwick. "Ridge Re Interim Financial Statements" shall mean the unaudited Consolidated Balance Sheet of Ridge Re as of June 30, 1997, and the related Statements of Operations and Retained Earnings for the six-month periods ended June 30, 1997 and June 30, 1996. "SAP Financial Statements" has the meaning set forth in Section 4.6. "Section 4.15(b) Contracts" has the meaning set forth in Section 4.15. "Seller" has the meaning set forth in the first paragraph of this Agreement. "SERP" means the Talegen Holdings, Inc. Supplemental Executive Retirement Plan. "Shares" has the meaning set forth in the Recitals of this Agreement. "SIRP" means the Supplemental IRP of Talegen Holdings, Inc. "Subsidiaries" means the Insurance Subsidiaries and any other corporation, partnership, joint venture or other entity which the Company controls, directly or indirectly through one or more intermediaries. "Tax Agreement" means the Tax Allocation and Indemnification Agreement, dated as of the date hereof, among Parent, Seller, the Company and Buyer. "Tax Returns" shall have the meaning ascribed in the Tax Agreement. "Taxes" shall have the meaning ascribed in the Tax Agreement. "305 Purchase Money Documents" has the meaning set forth in the definition of "Crostex/Camfex Purchase Money Documents." "299 Purchase Money Documents" has the meaning set forth in the definition of "Crostex/Camfex Purchase Money Documents." "Westchester Fire" has the meaning set forth in the Recitals of this Agreement. "Wire Transfer" means a payment in immediately available funds by wire transfer in lawful money of the United States to such account or accounts as shall have been designated by notice to the paying party. "Xerox" has the meaning set forth in Section 4.14. -8- ARTICLE II PURCHASE OF SHARES Section 2.1 Purchase of Shares. Upon the terms and subject to the ------------------ conditions set forth in this Agreement, at the Closing Seller shall sell to Buyer, and Buyer shall purchase from Seller, the Shares free and clear of all Encumbrances for a purchase price of Three Hundred Thirty Three Million Dollars ($333,000,000), subject to adjustment in accordance with Sections 2.2 and 6.17 (as adjusted, the "Purchase Price"). Section 2.2 Purchase Price Adjustments. (a) If the Closing shall -------------------------- take place at any time after 150 days from the date hereof but on or prior to 180 days from the date hereof, Buyer shall pay to Seller, as an adjustment to the Purchase Price and in addition to the amount set forth in Section 2.1, an amount equal to $72,555, multiplied by the number of days subsequent to the 150th day from the date hereof to and inclusive of the Closing Date. (b) If the Closing shall take place at any time after 180 days from the date hereof but on or prior to 210 days from the date hereof, Buyer shall pay to Seller, as an adjustment to the Purchase Price and in addition to the amount set forth in Section 2.1, an amount equal to the sum of (i) $2,176,650, plus (ii) an amount equal to $81,805, multiplied by the number of days subsequent to the 180th day from the date hereof to and inclusive of the Closing Date. (c) If the Closing shall take place at any time after 210 days from the date hereof, Buyer shall pay to Seller, as an adjustment to the Purchase Price and in addition to the amount set forth in Section 2.1, an amount equal to the sum of (i) $4,630,800 plus (ii) an amount equal to $91,055, multiplied by the number of days subsequent to the 210th day from the date hereof to and inclusive of the Closing Date. (d) The parties agree to adjust appropriately the Purchase Price to take into account material adverse changes in U.S. Treasury yields between August 1, 1997 and the Closing Date. ARTICLE III THE CLOSING Section 3.1 The Closing. Upon the terms and subject to the ----------- conditions of this Agreement, the closing of the purchase and sale of the Shares (the "Closing") shall be at 10:00 A.M. at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York 10019, or at any other location designated by Seller, on the first Business Day of the calendar month following the date on which all of the conditions set forth in Article VII (other than those conditions designating instruments, certificates or other documents to be delivered at the Closing) shall have been satisfied or waived, or such other date and time as Buyer and Seller shall agree upon in writing. -9- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows : Section 4.1 Organization and Related Matters. Each of Parent, Seller -------------------------------- and the Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has the corporate power and authority to carry on its business as it is now being conducted and to own, lease or operate all of its properties and assets, and is duly qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character of the assets owned by it makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Seller has delivered or made available to Buyer complete and correct copies of the articles or certificate of incorporation and bylaws of each of Seller and the Company, in each case as amended through the date hereof. The minute books of the Company accurately reflect all formal actions taken at all meetings and all consents in lieu of meetings of the sole stockholder of the Company since August 1994 and all formal actions taken at all meetings and all consents in lieu of meetings of the board of directors of the Company and all committees thereof since August 1994. True and complete copies of such minute books have previously been made available for inspection by Buyer. Section 4.2 Subsidiaries. (a) Schedule 4.2 sets forth a complete and ------------ accurate list, as of the date hereof, of all of the Subsidiaries of the Company. Schedule 4.2 also contains the jurisdiction of incorporation or formation of each Subsidiary of the Company, each jurisdiction in which such Subsidiary is qualified or otherwise authorized to conduct insurance business, the number of issued and outstanding shares of capital stock of each such Subsidiary and the record holder(s) thereof. Except as set forth on Schedule 4.2, all of the outstanding shares of capital stock of the Subsidiaries are owned beneficially and of record by the Company, free and clear of all Encumbrances and other restrictions with respect to the transferability or assignability thereof, and no capital stock of any of its Subsidiaries is or may become required to be issued by reason of any options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable or exercisable for, shares of capital stock of any of its Subsidiaries and, other than as contemplated by this Agreement, there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may be bound to issue, redeem, purchase or sell shares of Subsidiary capital stock or securities convertible into or exchangeable or exercisable for any such shares. Schedule 4.2 contains true and complete copies of all agreements and other instruments pursuant to which the Company or any Subsidiary is obligated or required, under any circumstance, to make contributions to the capital of any Subsidiary. The Subsidiaries are each corporations duly organized, validly existing and in good standing under the laws of their respective states of incorporation or domicile, and have the corporate power and authority to carry on their respective businesses as now being conducted and to own, lease and operate all of their respective properties and assets. Each of the Subsidiaries is duly qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character of the assets owned by it makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Seller has delivered or made available to Buyer complete and correct copies of the articles or certificate of incorporation and bylaws of each of the Subsidiaries, in each case as amended through the date hereof. (b) Except as set forth on Schedule 4.2, and except for the stock of its Subsidiaries and portfolio investments made in the ordinary course of business, there are no corporations, partnerships, -10- business associations, joint ventures or other entities in which the Company owns, of record or beneficially, any direct or indirect equity interest or any right (contingent or otherwise) to acquire the same. Section 4.3 Authority; No Violation. (a) Seller has full corporate ----------------------- power and authority to execute and deliver this Agreement and the Tax Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Tax Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by all requisite corporate action on the part of Seller, and no other corporate proceedings on the part of Seller are necessary to approve this Agreement and the Tax Agreement or to consummate the transactions contemplated hereby and thereby. This Agreement and the Tax Agreement have been duly and validly executed and delivered by Seller and (assuming the due authorization, execution and delivery of this Agreement and the Tax Agreement by Buyer and any other parties thereto) constitute valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. (b) Neither the execution and delivery of this Agreement and the Tax Agreement by Seller, nor the consummation by Seller of the transactions contemplated hereby and thereby to be performed by it, nor compliance by Seller with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Certificate of Incorporation or By-Laws of Seller or the Company, or (ii) assuming that the consents and approvals referred to in Section 4.4 are duly obtained, (A) violate in any material respect any Applicable Law with respect to Seller, the Company or the Subsidiaries, or any of their respective material properties or assets, (B) result in the creation of any Encumbrance upon any of the Shares, or (C) violate, conflict with, result in a breach of any provision of, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or require the consent of any Person under, or result in the imposition of any Encumbrance on any of the properties or assets of the Company under, any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Seller, the Company or the Subsidiaries is a party, or by which Seller, the Company or the Subsidiaries, or any of their respective properties or assets, may be bound or affected, except for such Encumbrances, violations, conflicts, breaches or defaults which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (c) Parent has full corporate power and authority to execute and deliver the Ancillary Agreements and to consummate the transactions contemplated thereby. The execution and delivery of the Ancillary Agreements and the consummation of the transactions contemplated thereby have been duly and validly approved by all requisite corporate action on the part of Parent, and no other corporate proceedings on the part of Parent are necessary to approve the Ancillary Agreements or to consummate the transactions contemplated thereby. The Tax Agreement has been duly and validly executed and delivered by Parent and (assuming the due authorization, execution and delivery of the Tax Agreement by Buyer and any other parties thereto) constitutes a valid and binding obligation of Parent, enforceable against Parent in accordance with its terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. Subject to the occurrence of the Closing, the Guarantee and the Ridge Re Amendment will be duly and validly executed and delivered by Parent and the Guarantee and the Ridge Re Agreement, as amended by the Ridge Re Amendment (assuming the due authorization, execution and delivery of the Ridge Re Amendment by the other parties thereto), will constitute valid and binding obligations of Parent, enforceable against Parent in accordance with their respective terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court -11- of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. (d) Neither the execution and delivery of the Ancillary Agreements by Parent, nor the consummation by Parent of the transactions contemplated thereby to be performed by it, nor compliance by Parent with any of the terms or provisions thereof, will (i) violate any provision of the Certificate of Incorporation or By-Laws of Parent or (ii) violate in any material respect any Applicable Law with respect to Parent, or any of its material properties or assets. (e) Ridge Re is duly organized, validly existing and in good standing under the laws of Bermuda and has full corporate power and authority to enter into, and fulfill its obligations under, the Ridge Re Agreement (as amended by the Ridge Re Amendment) in accordance with its terms. Parent owns of record and beneficially all the outstanding capital stock of Ridge Re. (f) Each of Ridge Re and each Insurance Subsidiary has full corporate power and authority to enter into the Ridge Re Amendment and has taken all requisite corporate action to consummate the transactions contemplated thereby and to perform its obligations thereunder. Subject to the occurrence of the Closing, the Ridge Re Amendment will be duly and validly executed and delivered by Ridge Re and the Insurance Subsidiaries and the Ridge Re Agreement, as amended by the Ridge Re Amendment (assuming the due authorization, execution and delivery of the Ridge Re Amendment by the other parties thereto), will constitute a legal, valid and binding obligation of Ridge Re, enforceable against Ridge Re in accordance with its terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. Section 4.4 Consents and Approvals. Except for (i) the approval of ---------------------- this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby, and the new intercompany tax agreements among the Company and the Subsidiaries which shall be effective as of the Closing, by each of the applicable governmental and regulatory authorities listed on Schedule 4.4, (ii) the approval of this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby, and the new intercompany tax agreements among the Company and the Subsidiaries which shall be effective as of the Closing, by any other governmental or regulatory authorities, the failure of which to obtain would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (iii) the filing of premerger notification reports under the HSR Act, (iv) the filing of a notice pursuant to the Exon-Florio Amendment, and (v) consents, approvals, authorizations, declarations, filings and registrations required by the nature of the business or ownership of Buyer, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority, or any other Person, is required to be made or obtained by Parent, Seller, Ridge Re, the Company or any Subsidiary on or prior to the Closing Date in connection with the execution or delivery of this Agreement or any of the Ancillary Agreements, the performance of this Agreement or any Ancillary Agreement, or the consummation of the transactions contemplated hereby and thereby. Section 4.5 Stock Ownership. Seller owns beneficially and of record --------------- all of the Shares to be sold to Buyer by Seller, and Seller has full corporate power and authority to sell, assign, transfer and deliver the Shares to Buyer upon the terms and subject to the conditions of this Agreement free and clear of all Encumbrances. The Company has authorized 1,000 shares of common stock, $1.00 par value, 1,000 shares of which are issued and outstanding, and no shares of any other class or series of capital stock are authorized, issued or outstanding. Upon consummation of the transactions contemplated by this Agreement, Buyer will have good and valid title to such Shares, free and clear of all Encumbrances. All of the Shares are duly authorized, validly issued, fully paid, nonassessable and free of any preemptive rights. -12- There is no outstanding option, warrant, right, subscription, call, unsatisfied preemptive right or other agreement or right of any kind to purchase or otherwise acquire from the Company or Seller any capital stock of the Company. Section 4.6 Financial Statements. (a) Seller has heretofore -------------------- delivered to Buyer the Company GAAP Financial Statements, the Ridge Re GAAP Financial Statements, the Company Interim Financial Statements, the Ridge Re Interim Financial Statements and the Convention Statements. Except as otherwise set forth therein, (i) the Company GAAP Financial Statements are based on the books and records of the Company and its Subsidiaries, fairly present in all material respects the financial condition and consolidated results of operations of the Company and its Subsidiaries, as of the dates and for the periods indicated therein, have been prepared in accordance with GAAP (as in effect at the time of the respective financial statements) consistently applied, and have been audited by KPMG Peat Marwick LLP and (ii) the Ridge Re GAAP Financial Statements are based on the books and records of Ridge Re, fairly present in all material respects the financial condition and results of operation of Ridge Re, as of the dates and for the periods indicated therein, have been prepared in accordance with GAAP (as in effect at the time of the respective financial statements) consistently applied, and have been audited by KPMG Peat Marwick. The Company Interim Financial Statements and the Ridge Re Interim Financial Statements were prepared in the ordinary course of business and have been prepared on a consistent basis through the periods indicated and in a manner consistent with that employed in the Company GAAP Financial Statements and the Ridge Re GAAP Financial Statements, as the case may be. The Company Interim Financial Statements and the Ridge Re Interim Financial Statements do not contain footnote disclosures and are subject to normal recurring year-end adjustments, but otherwise fairly present in all material respects the financial condition and results of operations of the Company and Ridge Re, as the case may be, as of the dates and for the periods indicated therein except as otherwise set forth therein. (b) Seller has previously furnished Buyer with copies of audited statutory financial statements of each of the Insurance Subsidiaries as of December 31, 1996, 1995 and 1994, together with all exhibits and schedules thereto, and any actuarial opinion, affirmation or certification filed in connection therewith, prepared in conformity with the statutory accounting practices prescribed or permitted by the respective state of domicile for each Insurance Subsidiary (collectively, the "SAP Financial Statements"). Each of the balance sheets included in the SAP Financial Statements fairly presents in all material respects the financial position of the applicable Insurance Subsidiary as of its date and each of the statements of operations included in the SAP Financial Statements fairly presents in all material respects the results of operations of the applicable Insurance Subsidiary for the period therein set forth, in each case prepared in conformity with the statutory accounting practices prescribed or permitted by the respective state of domicile for each Insurance Subsidiary. Section 4.7 No Other Broker. Other than Morgan Stanley & Co. --------------- Incorporated, the fees and expenses of which will be paid by Seller, no broker, finder or similar intermediary has acted for or on behalf of Seller or the Company or the Subsidiaries, or is entitled to any broker's, finder's or similar fee or other commission from Seller, the Company or the Subsidiaries in connection with this Agreement or the transactions contemplated hereby. Section 4.8 Legal Proceedings. As of the date hereof, other than ----------------- Actions arising from or related to the obligations of any Subsidiary under any insurance policy or similar instrument written, assumed or reinsured by such Subsidiary, (a) neither the Company nor any of its Subsidiaries is a party to any, and there are no pending or, to the knowledge of Seller, threatened, Actions against or otherwise affecting the Company, any of its Subsidiaries or any of their respective properties or assets or challenging the validity or propriety of the transactions contemplated by this Agreement which, if adversely determined, would, individually or in the aggregate, reasonably be expected to have a Material Adverse -13- Effect, and (b) there is no injunction, order, judgment, decree or regulatory restriction imposed upon the Company, any of its Subsidiaries or any of their respective properties or assets which (i) has been issued by any insurance regulatory authority, (ii) would restrict the ability of the Company to conduct its business in the ordinary course of business consistent with past practice or (iii) has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Schedule 4.8 sets forth a true and complete list, as of the date hereof, of all pending litigation against the Company or any Subsidiary which (A) does not relate to any liability arising from insurance policies or similar instruments or (B) alleges "bad faith." Section 4.9 Undisclosed Liabilities. (a) As of the date hereof, ----------------------- except for (i) those liabilities or items set forth on Schedule 4.9, (ii) those liabilities that are reflected or reserved against on the audited balance sheet of the Company as of December 31, 1996 (the "Latest Balance Sheet"), and (iii) liabilities incurred in the ordinary course of business consistent with past practice since the date of such balance sheet, no liabilities, debts, claims or obligations of any nature, whether accrued, absolute, direct or indirect, contingent or otherwise, whether due or to become due, that would be required to be included on a balance sheet to be prepared in accordance with GAAP, have been incurred by the Company or the Subsidiaries (and, to the knowledge of Seller, there is no existing condition or set of circumstances which would reasonably be expected to result in such a liability) other than those that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (b) Each of the Company and each Subsidiary has paid in full all guaranty fund assessments required by any regulatory authority to be paid by it prior to the date of this Agreement. As of the date of this Agreement, except as set forth on Schedule 4.9 and except as and to the extent reserved against in the Convention Statements or disclosed in the notes thereto, the Company and the Subsidiaries have not received any guarantee fund assessments. Section 4.10 Compliance with Applicable Law; Insurance Operations. ---------------------------------------------------- (a) Each of the Company and its Subsidiaries holds in full force and effect all material licenses, franchises, permits and authorizations ("Permits") necessary for the lawful ownership and use of their respective properties and assets and the conduct of their respective businesses (as now conducted) under and pursuant to Applicable Laws relating to the Company and its Subsidiaries and, to the knowledge of Seller, there has been no violation of any Permit, nor has Seller received written notice asserting any such violation, except for such failures to be in full force and effect and for such violations, if any, which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 4.10 and except as provided in Applicable Law (including without limitation any requirements for relicensure of insurance companies), the consummation of the transactions contemplated by this Agreement will not result in any revocation, cancellation or suspension of any such Permit, except as a result of the status of Buyer and its Affiliates, and there are no pending or, to the knowledge of Seller, threatened suits, proceedings or investigations with respect to revocation, cancellation, suspension or nonrenewal thereof and there has occurred no event which (whether with notice or lapse of time or both) will result in such a revocation, cancellation, suspension or nonrenewal thereof, in any such case except where such a revocation, cancellation, suspension or non-renewal would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (b) Except as set forth on Schedule 4.10, each of the Company and its Subsidiaries is in compliance with each Applicable Law relating to it or any of its material assets, properties or operations, except where noncompliance with any such Applicable Law would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Affect. -14- (c) Each of the Insurance Subsidiaries (i) is an authorized insurer (on either an admitted or a nonadmitted basis) in each state in which it presently writes insurance for the type of insurance it presently writes in such states and (ii) meets in all material respects all statutory and regulatory requirements of all Governmental Authorities which have jurisdiction over it to be an authorized insurer on either an admitted or a nonadmitted basis. (d) Seller has previously made available to Buyer true and complete copies of the reports (or the most recent draft thereof, to the extent any final report is not available) reflecting the results of the most recent financial examinations and market conduct examinations of any of the Insurance Subsidiaries issued by any Insurance Regulator. Section 4.11 Absence of Certain Changes. Since December 31, 1996, -------------------------- except as set forth on Schedule 4.11 or as is expressly contemplated by this Agreement, the Berkshire Hathaway Reinsurance Agreement or an Ancillary Agreement, or as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the Company has conducted its business in the ordinary course of business, consistent with past practice and has not: (a) entered into any new lines of business (whether or not part of the insurance or reinsurance business), made, or permitted any Subsidiary to make, any material change in the underwriting, reinsurance, marketing, claim processing and payment, reserving, investment, financial or accounting practices or policies of the Company or any of its Subsidiaries or otherwise make material changes to the operations of the business, except as required by law, GAAP or the statutory accounting practices of the respective state of domicile of any such entity; (b) made any, or permitted any Subsidiary to make any, (i) entry into or modification of any reinsurance, coinsurance or retrocession agreement by the Company or any of its Subsidiaries other than in the ordinary course of business consistent with past practice, or (ii) termination or commutation of any reinsurance, coinsurance or retrocession agreement legally carried on the books of the Subsidiaries at the time of such termination or commutation involving payments of $1,000,000 or more; (c) issued or sold, or permitted any Subsidiary to issue or sell, any capital stock, notes, bonds or other securities, or any option, warrant or other right to acquire the same; (d) other than the $451,527 dividend paid to Seller in the first quarter of 1997, redeemed any capital stock or declared, made or paid any dividends or distributions (whether in cash, securities or other property) to the holders of capital stock; (e) merged with, entered into a consolidation with or acquired an interest of 5% or more in any Person or acquired a substantial portion of the assets or business of any Person or any division or line of business thereof, or otherwise acquired any assets (other than fixed maturity securities, equity securities, cash and short-term investments) with an aggregate value in excess of $250,000 other than in the ordinary course of the business consistent with past practice, or permitted any Subsidiary to do any of the foregoing; (f) made, or permitted any Subsidiary to make, any capital expenditure or commitment for any capital expenditure in excess of $250,000 in the aggregate with respect to any such entity; -15- (g) incurred, or permitted any Subsidiary to incur, indebtedness for money borrowed in excess of $250,000 in the aggregate; (h) made any loan to, guaranteed any indebtedness for money borrowed of, or otherwise incurred such indebtedness on behalf of, any Person in excess of $250,000 in the aggregate other than investments made in the ordinary course of business, or permitted any Subsidiary to do any of the foregoing; (i) (i) granted any increase, or announced any increase, in the wages, salaries, compensation, bonuses, incentives, severance, pension or other benefits payable to any of its employees who in the preceding 12 months received compensation in excess of $100,000, including, without limitation, any increase or change pursuant to any Plan, (ii) established or increased or promised to increase any benefits under any Plan, in either case except as required by law, rule or regulation or any collective bargaining agreement or involving ordinary increases consistent with past practice, (iii) entered into any employment, severance or termination agreement with any such officer or employee, or (iv) permitted any Subsidiary to do any of the foregoing; (j) amended or restated, or permitted any Subsidiary to amend or restate, its charter or by-laws (or other organizational documents); (k) except as expressly required herein, paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against on the Latest Balance Sheet or incurred in connection with the transactions contemplated by this Agreement or in the ordinary course of business and consistent with past practice; (l) adopted a plan of complete or partial liquidation or resolutions providing for the complete or partial liquidation, dissolution, amalgamation, consolidation, restructuring, recapitalization or other reorganization of the Company; (m) except as set forth on Schedule 4.17, acquired investments which are not rated in one of the four highest categories by a "nationally recognized statistical rating agency" as defined in the rules or regulations of the Securities and Exchange Commission; (n) sold (whether by merger, consolidation or otherwise), leased, created any Encumbrance with respect to, transferred or disposed of any material assets of the Company (including without limitation the Shares and rights of renewal) outside the ordinary course of business consistent with past practice or entered into any material commitment or transaction outside the ordinary course of business consistent with past practice; (o) made any Tax elections or settled or compromised any material United States federal, state, local or other foreign income tax liability, or waived or extended the statute of limitations in respect of any such Taxes; (p) other than in the ordinary course of business consistent with past practice, paid or agreed to pay in settlement or compromise of any suits or claims of liability against the Company, its directors, officers, employees or agents, more than an aggregate of $100,000 for all such suits and claims; -16- (q) entered into any agreement providing for the acceleration of payment or performance or other consequence as a result of a change in control of the Company; (r) made any prepayment of any liabilities, other than in the ordinary course of business consistent with past practice, individually or in the aggregate exceeding $250,000; (s) as of the date hereof, suffered any damage, destruction, or other casualty (whether or not covered by insurance) affecting any of the assets and properties of the Company or any of its Subsidiaries which damage, destruction, or loss individually or in the aggregate exceeds $250,000 or the result of which individually or in the aggregate exceeds $250,000; (t) made any amendment, termination, waiver, disposal, or lapse of, or other failure to preserve, any license or other form of authorization of the Company or any of its Subsidiaries, which is material to the conduct of the business of the Company and its Subsidiaries, taken as a whole; or (u) agreed, whether in writing or otherwise, to take any of the actions specified in this Section, except as expressly contemplated by this Agreement. Section 4.12 Technology and Intellectual Property. (a) Except as ------------------------------------ set forth on Schedule 4.12, the Company or its Subsidiaries own or possess, or have enforceable rights or licenses to use, the patents, trademarks, service marks, trade names, copyrights (including any registrations, applications, licenses or rights relating to any of the foregoing), technology, trade secrets, inventions, know-how and computer programs which are necessary to carry on their respective businesses as presently conducted (each, an "Intellectual Property Right"), and neither the Company nor its Subsidiaries has received any written notice of any infringement of the rights of others with respect to any such Intellectual Property Right that, if such infringement is determined to be unlawful, would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The execution and delivery of this Agreement by Seller, and the consummation of the transactions contemplated hereby, will neither cause the Company or any of its Subsidiaries to be in violation or default under any licenses, sublicenses or other agreements to which the Company or any of its Subsidiaries is a party and pursuant to which the Company or any of its Subsidiaries is authorized to use any Intellectual Property Right, nor entitle any other party to any such license, sublicense or agreement to terminate or modify such license, sublicense or agreement, except where any such violation, default, termination or modification would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 4.12, Parent, Seller and their Affiliates (other than the Company and the Subsidiaries) have no right or title to or interest in any Intellectual Property Right. Schedule 4.12 sets forth a complete and correct list, as of the date hereof, and a brief description of, the Intellectual Property Rights that are material to the Company or any Subsidiary. (b) To the knowledge of Seller, no use of any Intellectual Property Right by the Company or any Subsidiary breaches, violates or infringes any rights of any third party or (except for the payment of computer software licensing fees) requires any payment for the use of any patent, trade name, service mark, trade secret, trademark, copyright or other intellectual property right or technology owned by any third party. Section 4.13 Employee Benefit Plans; ERISA. (a) Except as set forth ----------------------------- on Schedule 4.13, neither Seller, the Company, nor any of the Subsidiaries is a party to, participates in or has any obligation under, and neither Seller, the Company, nor any of the Subsidiaries has any obligation with respect to Company Employees or any other current or former employees of the Company or its Subsidiaries under, -17- (A) any "employee welfare benefit plan" or "employee pension benefit plan" (as those terms are respectively defined in Section 3(1) and 3(2) of ERISA), (B) any retirement or deferred compensation plan, incentive compensation plan, stock plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program or any other fringe benefit arrangements for any current or former employee, director, consultant or agent, whether pursuant to contract, arrangement, custom or informal understanding, which does not constitute an employee benefit plan (as defined in Section 3(3) of ERISA), or (C) any employment agreement. (b) A true and correct copy each of the plans, arrangements and agreements set forth on Schedule 4.13 (the "Plans") and copies of all related trust agreements, schedules, benefit entitlement letters, insurance contracts (including "stop-loss" policies), and administration contracts, each as in effect on the date hereof, have been supplied to Buyer. In the case of any Plan which is not in written form, Buyer has been supplied with an accurate description of such Plan as in effect on the date hereof. A true and correct copy of the most recent annual report, actuarial report, summary plan description and IRS determination letter with respect to each Plan, to the extent applicable, has been supplied to Buyer, and there have been no material adverse changes in the financial condition of the respective Plans from that stated in the annual reports and actuarial reports supplied. (c) As to all Plans: (i) All Plans comply, and have been administered in form and in operation in all respects, with all applicable requirements of Applicable Law and, as of the date hereof, no event has occurred which will or would reasonably be expected to cause any such Plan to fail to comply with such requirements and, as of the date hereof, no notice has been issued by any governmental authority questioning or challenging such compliance, except where any such noncompliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (ii) All Plans which are employee pension benefit plans and are intended to be tax-qualified plans comply in form and in operation in all material respects with all applicable requirements of Sections 401(a) and 501(a) of the Code; there have been no amendments to such Plans which are not the subject of a favorable determination letter issued with respect thereto by the IRS, except for those amendments of which copies have been provided to Buyer prior to the date hereof and, as of the date hereof, no event has occurred which will or would reasonably be expected to give rise to disqualification of such Plan under such Sections or to a tax under Section 511 of the Code, except where any such disqualification would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (d) Except as set forth on Schedule 4.13, neither Seller, the Company nor any of the Subsidiaries has any commitment, intention or understanding to create, modify, terminate or adopt any Plan that would result in any additional material liability to Buyer, the Company or the Subsidiaries. (e) Neither Seller, the Company, any of their Subsidiaries nor any ERISA Affiliate maintains, has any obligation to contribute to or otherwise has any obligation under any multiemployer plan (as defined in Section 3(37) of ERISA). (f) Neither Seller, the Company nor any of their Subsidiaries maintains, has any obligation to contribute to, is a party to, or has any liability or contingent or potential liability under any "voluntary employees' beneficiary association" (within the meaning of Section 501(c)(9) of the Code). -18- (g) Except as set forth on Schedule 4.13, the execution and delivery of this Agreement and the performance of the transactions contemplated by this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Plan or agreement that will or would reasonably be expected to result in (i) any payment (whether of severance pay or otherwise), acceleration, vesting or increase in benefits with respect to any Company Employee or (ii) an "excess parachute payment" (within the meaning of Section 280G of the Code). (h) Except as set forth on Schedule 4.13, Seller shall remain solely liable for all liabilities, benefits or claims with respect to Company Employees accrued pursuant to any Plan which is a pension plan under Section 3(2)(A) of ERISA and which is not intended to be qualified under Section 401(a) of the Code. The accrued liabilities of the Company and its Subsidiaries under the SIRP with respect to Company Employees, and the assets associated therewith, are reflected on the financial statements of the Company and its Subsidiaries, and such assets are substantially equal to such accrued liabilities. (i) From and after the Closing, Buyer, the Company and the Subsidiaries may terminate or amend any Plan maintained solely by the Company or its Subsidiaries; provided, however, that Buyer shall pay or cause the Company or its Subsidiaries to pay, benefits in accordance with the terms of the Enhanced Severance Benefit Plan of Westchester Fire Insurance Company as in effect on the day before the Closing Date. (j) None of the assets of any Plan (other than the ESOP maintained by Xerox) is invested in employer securities or employer real property. (k) There have been no non-exempt "prohibited transactions" (as described in Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan and neither the Company nor any of its Subsidiaries has engaged in any non-exempt prohibited transaction which (in either case) would reasonably be expected to result in a material fine or penalty under Section 502 of ERISA or Section 4975 of the Code. (l) There have been no acts or omissions with respect to any Plan by the Company which have given rise to or would reasonably be expected to give rise to material fines, penalties, taxes of related charges under Section 502 of ERISA or Chapters 43, 47 or 68 of the Code for which the Company would reasonably be expected to be liable. (m) There are no material actions, suits or claims (other than routine claims for benefits) pending or, to the knowledge of Seller, threatened involving any Plan or the assets thereof and no facts exist which would reasonably be expected to give rise to any such actions, suits or claims (other than routine claims or benefits). (n) Except as set forth on Schedule 4.13, none of the Plans is subject to Title IV of ERISA, and the Company does not have any material liability or contingent liability with respect to any Plan that is or has been subject to Title IV of ERISA. (o) Each Plan which constitutes a "group health plan" (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code), including any plans of current and former subsidiaries of Seller which must be taken into account under Sections 4980B and 414(t) of the Code or Section 601 of ERISA, has been operated in material compliance with Applicable Law, including coverage requirements of Section 4980B of the Code and Section 601 of ERISA to the extent such requirements are applicable. The number of Company Employees, or other individuals who are or were related to or dependents of -19- Covered Employees, receiving continuation coverage under Section 4980B of the Code or Section 601 of ERISA was nine as of July 18, 1997. (p) Except as set forth on Schedule 4.13, the Company and its Subsidiaries do not have any liability or contingent liability for providing, under any Plan or otherwise, any post-retirement medical or life insurance benefits, other than statutory liability for providing group health plan continuation coverage under Part 6 of Title I of ERISA and Section 4980B of the Code. (q) Actuarially adequate accruals for all obligations of the Company and its Subsidiaries under the Plans are reflected in the financial statements of the Company and its Subsidiaries and such obligations include a pro rata amount of the contributions which would otherwise have been made in accordance with past practices and Applicable Law for the plan years which include the Closing Date. (r) No compensation which the Company or its Subsidiaries has paid or is obligated to pay to any employee is nondeductible on account of Section 162(m) of the Code. Section 4.14 Taxes. (a) Seller and the Company (and any affiliated ----- group of which the Company is a member) have timely filed with the appropriate taxing authorities all federal and, to the knowledge of Seller, state and local Tax Returns and Information Returns required to be filed through the date hereof (taking into account all valid extensions). All such federal and, to the knowledge of Seller, state and local Tax Returns and Information Returns are complete and accurate in all material respects. The Company is a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code, that includes Seller, Parent and Xerox Corporation ("Xerox"), which is the common parent of the affiliated group. (b) All Taxes shown in the Tax Returns referred to in Section 4.14(a) that are due and payable by the Company and its Subsidiaries before the date hereof have been timely paid. (c) Except as set forth on Schedule 4.14, there are no Encumbrances on any of the assets of the Company or any of its Subsidiaries that arose in connection with any failure (or alleged failure) to pay any Taxes (other than Taxes that are not due as of the date hereof). (d) Except as set forth on Schedule 4.14, to the knowledge of Seller, there is no action, suit, proceeding, investigation, audit, extensions of the statute of limitations or claim now pending that relates to Tax liabilities attributable to items of income, gain, deduction, loss or credits of the Company or any of its Subsidiaries. (e) The Company and the Subsidiaries have withheld and paid all federal and, to the knowledge of Seller, all state and local Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party. (f) A representation with respect to Taxes contained in this Section 4.14 shall be deemed to be accurate unless an inaccuracy contained therein would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 4.15 Contracts. (a) Schedule 4.15(a) sets forth a complete --------- and accurate list, as of the date hereof, of all contracts, agreements, commitments, arrangements, leases, insurance policies or other instruments, written or oral, to which the Company or any of its Subsidiaries is a party (excluding policies of insurance or reinsurance in the ordinary course of business), or by which any of their respective -20- assets, business or operations may be bound or affected, which contain obligations of the Company or its Subsidiaries in excess of $250,000 in any one fiscal year or $500,000 in the aggregate in any five year period (unless such contract is terminable on not more than one year's notice without cause and payment of penalty) or which are otherwise necessary or material to the business of the Company and its Subsidiaries taken as a whole (collectively, the "Contracts"). (b) Except as set forth on Schedule 4.15(b), as of the date hereof none of the Company or any of its Subsidiaries is a party to or owner of any: (i) agreement, contract, commitment or undertaking (other than contracts of insurance or reinsurance or retrocession agreements) the performance or non-performance of which is individually or, with respect to any related series of agreements, in the aggregate, material to the Company and the Subsidiaries, taken as a whole; (ii) agreement, contract, commitment or undertaking (other than contracts of insurance or reinsurance or retrocession agreements) which provides for an aggregate purchase price or payments of more than $100,000 under any agreement during any two-year period (or $100,000 in the aggregate, during any two-year period, in the case of any related series of agreements); (iii) agreement for the sale or lease of any of the assets and properties of the Company or any of its Subsidiaries other than in the ordinary course of business consistent with past practice; (iv) material mortgage, pledge, conditional sales contract, security agreement, factoring agreement, or other similar material agreement with respect to any real or personal property of the Company or any of its Subsidiaries; (v) agreement with a labor union or labor association; (vi) loan agreement, promissory note issued by it, guarantee, subordination or similar type of agreement; (vii) noncompetition or non-solicitation agreement; (viii) power of attorney or agreement with a managing general agent or third party administrator; or (ix) support agreement, guarantee or other agreement for the benefit of any Affiliate of the Company (including any Affiliate of Seller). (c) With respect to each Contract and each contract set forth on Schedule 4.15(b) (each a "Section 4.15(b) Contract"), (i) to the knowledge of Seller, assuming the due authorization, execution and delivery thereof by the other party or parties thereto, such Contract or Schedule 4.15(b) Contract is valid and binding in all material respects in accordance with its terms and is in full force and effect, (ii) the Company and its Subsidiaries are not, and, to the knowledge of Seller, no other party thereto is, in default in the performance, observance or fulfillment of any obligation, covenant or condition contained therein except where such defaults would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect and (iii) to the knowledge of Seller, no event has occurred which, with or without the giving of notice or lapse of time, or both, would constitute a default thereunder -21- except where such defaults would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 4.15(a) or 4.15(b), no Contract or Schedule 4.15(b) Contract requires the consent of any party in connection with the transactions contemplated hereby. Section 4.16 No Material Adverse Change. Except as set forth on -------------------------- Schedule 4.16, since December 31, 1996, there has been no change in the business, operations, assets, liabilities, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries which has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; provided, however, to the extent such effect results from any of the following, such effect shall not be considered a Material Adverse Effect for purposes of this Section 4.16: (i) general conditions applicable to the economy of the United States, including changes in interest rates, (ii) conditions affecting the property and casualty insurance or reinsurance business as a whole, or (iii) conditions or effects resulting from the announcement of the existence and terms of this Agreement. Section 4.17 Portfolio Investments. Seller has previously delivered --------------------- to Buyer true and complete lists, as of July 31, 1997, of all assets held in the investment portfolios of the Company and its Subsidiaries as of such date and has attached such lists hereto as Schedule 4.17. All such assets included in such investment portfolios were purchased by the Company or a Subsidiary in compliance with Applicable Law. Section 4.18 Reserves. Seller has delivered to Buyer a true and -------- complete copy of that certain report entitled "Westchester Specialty Group, Inc. Review of Loss and Loss Adjustment Expense Reserves as of December 31, 1996" (the "KPMG Report"). The Ridge Re Agreement is in full force and effect. Notwithstanding any other provision of this Agreement (including Sections 4.6 and 4.9), Seller makes no representation or warranty that the reserves of the Company or any of its Subsidiaries for losses, loss adjustment expenses or uncollectible reinsurance are adequate or sufficient. The sole provisions of this Agreement with respect to the adequacy or sufficiency of such reserves are set forth in this Section 4.18. Section 4.19 Title to Assets, etc. The Company and its Subsidiaries --------------------- have good and marketable title to, or valid and subsisting leasehold interests in, all real and material personal property and other material assets on their books and reflected on the Company's balance sheet at December 31, 1996 or acquired in the ordinary course of business since December 31, 1996 which would have been required to be reflected on such balance sheet if acquired on or prior to December 31, 1996, other than assets which have been disposed of in the ordinary course of business. The Company and its Subsidiaries do not own any real estate. Schedule 4.19 sets forth a true and complete listing, as of the date hereof, of all real estate leases or subleases to which the Company or any of its Subsidiaries is a party. None of such assets is subject to any Encumbrance, except for Encumbrances reflected in the financial statements of the Company as of December 31, 1996 or which in the aggregate are not substantial in amount or do not materially interfere with the present use of such property or assets. Assuming the due authorization, execution and delivery of all such leases by the other parties thereto, all such leases are valid, binding and enforceable against the Company (and, to the knowledge of Seller, against each other party thereto) in accordance with their respective terms, and, to the knowledge of Seller, there does not exist, under any lease of real property or personal property, any material defect or any event which, with notice or lapse of time or both, would constitute a material default by the Company or by any other party thereto. Except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the Company and its Subsidiaries have the right to quiet enjoyment of all real property leased by any of them for the full term of each such lease or sublease or similar agreement (or any renewal option) relating thereto and such leased property is not subject to any failure to have the right to quiet enjoyment. -22- Section 4.20 Transactions with Certain Persons. (a) Except as set --------------------------------- forth on Schedule 4.20, neither any officer, director or employee of Parent, Seller, the Company, any Subsidiary or any Affiliate nor any member of any such Person's immediate family is presently a party to any material transaction with the Company or any of its Subsidiaries which would be required to be disclosed under Item 404 of Regulation S-K promulgated by the Securities and Exchange Commission, including any contract or other binding arrangement (i) providing for the furnishing of material services by such Person (except in such Person's capacity as an officer, director, employee or consultant), (ii) providing for the rental of material real or personal property from such Person, or (iii) otherwise requiring material payments to (other than for services as officers, directors or employees of Xerox, Parent, Seller, the Company or any Subsidiary) such Person. (b) Except as set forth on Schedule 4.20 or in the ordinary course of business consistent with past practice, since December 31, 1996 no intercompany trade receivables and payables have been settled between Seller or any Affiliate (other than the Company and its Subsidiaries) on the one hand and the Company and/or any Subsidiary on the other hand. (c) Schedule 4.20 sets forth a true and complete list of all written (and a true and complete summary of all oral) contracts, agreements or commitments between the Company or any of its Subsidiaries and Xerox or any Affiliate (other than the Company and its Subsidiaries) thereof as of the date of this Agreement which (i) cannot be terminated upon less than 30 days' notice, and (ii) require payments annually of more than $250,000. (d) Except as set forth on Schedule 4.20, no indebtedness for money borrowed is owed by the Company or any of its Subsidiaries to Seller or any of its Affiliates (except for the Company and its Subsidiaries). Section 4.21 Reinsurance and Retrocessions. Schedule 4.21 contains a ----------------------------- true and complete list of all reinsurance and retrocession treaties and agreements in force as of the date of this Agreement to which any Subsidiary is a ceding party (including any terminated or expired treaty or agreement under which as of December 31, 1996 there remains an outstanding liability with respect to paid or unpaid case reserves in excess of $500,000), any terminated or expired treaty or agreement under which there remains any outstanding liability from one reinsurer with respect to paid or unpaid case reserves in excess of $100,000 and any treaty or agreement with any Affiliate of such Subsidiary, the effective date of each such treaty or agreement, and the termination date of any treaty or agreement which has a definite termination date (individually a "Reinsurance Agreement" and collectively, the "Reinsurance Agreements"), copies of which have been delivered or made available to Buyer. Assuming the due authorization, execution and delivery of each such Reinsurance Agreement by the other parties thereto, each such Reinsurance Agreement is valid and binding in all material respects in accordance with its terms and is in full force and effect. None of the in-force Reinsurance Agreements may be terminated by any party thereto due to a change of control of the Company or any of the Subsidiaries. No other party to any Reinsurance Agreement has given notice to the Company or any of its Subsidiaries that it intends to terminate or cancel any such Reinsurance Agreement as a result of the transactions contemplated hereby or the contemplated operations of the Company or its Subsidiaries after the consummation of the transactions contemplated hereby, which termination or change would reasonably be expected to have a Material Adverse Effect. To the knowledge of Seller, no Subsidiary is in default in any respect as to any provision of any reinsurance or retrocession treaty or agreement or has failed to meet the underwriting standards required for any business reinsurance thereunder except for defaults, which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. -23- Section 4.22 Environmental Laws. (a) To the knowledge of Seller, ------------------ except as set forth on Schedule 4.22 and as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect: (i) the Company and each of its Subsidiaries is in compliance with all applicable Environmental Laws, and possesses and is in compliance with all Environmental Permits required under such laws for the conduct of its business and operations, (ii) there are no past, present or future events, conditions, circumstances, practices, plans or legal requirements that would reasonably be expected to prevent, or increase the burden on the Company or any of its Subsidiaries of complying with applicable Environmental Laws or of their obtaining, renewing or complying with all Environmental Permits required under such laws for the conduct of its business and operations, (iii) there are and have been no conditions at any property owned, operated or otherwise used by the Company or any Subsidiary now or in the past, or at any other location, that would reasonably be expected to give rise to liability of the Company or any of its Subsidiaries under any Environmental Law, and (iv) since September 3, 1993, there have been no past and there are now no pending or threatened Actions regarding the Company or any of its Subsidiaries brought by any Person or Governmental Authority regarding any Environmental Law or Hazardous Material. (b) Notwithstanding the representations contained in this Section, Buyer acknowledges that Seller is not making any representations (express or implied in or pursuant to this Agreement) with respect to any violation of or noncompliance with Environmental Law or Environmental Permits, or failure to obtain Environmental Permits, in each case by reason of any insurance, reinsurance, indemnity, guaranty or assumption of liability policy of any party, entered into by the Company or any Insurance Subsidiary. Section 4.23 Insurance Coverage. The Company has furnished to Buyer ------------------ a true and correct list, as of the date hereof, of all policies of insurance relating to the assets, properties, business, operations, employees, officers or directors of the Company and each of its Subsidiaries. The Company maintains insurance relating to such assets, properties, business, operations, employees, officers and directors which is reasonable for a company of its size engaged in the property and casualty insurance business. Section 4.24 Labor Matters. Since December 31, 1996, the operation ------------- of the business of the Company and its Subsidiaries has not been materially and adversely affected by labor problems. To the knowledge of Seller, (i) no such problem would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect and (ii) the activities of the Company and its Subsidiaries have been in compliance in all material respects with all Applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours. Schedule 4.24 sets forth as of the date hereof, to the knowledge of Seller, a description of all pending or threatened disputes or claims applicable to the Company or any of its Subsidiaries alleging employment discrimination, sexual harassment or any unfair employment practice. Section 4.25 No Other Agreements to Sell the Assets or the Company. ----------------------------------------------------- Except as set forth on Schedule 4.25, none of Parent, Seller, the Company or any Subsidiary has any agreement, absolute or contingent, with any other Person to sell the capital stock, material assets (other than with respect to the sale of portfolio assets in the ordinary course of business consistent with past practice) or business of the Company or any Subsidiary or to effect any merger, consolidation or other reorganization of the Company or any Subsidiary or to enter into any agreement with respect thereto. Section 4.26 1992/93 Restructuring. The 1992/93 Restructuring --------------------- complied with, and all novations made pursuant to the 1992/93 Restructuring were made in accordance with, all applicable statutes, rules, regulations, orders, writs, injunctions, judgments and decrees, except for such failures to be -24- in accordance therewith which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. To the knowledge of Seller, as of the date hereof, no party has raised any judicial, regulatory or other formal challenge: (i) seeking to overturn the contracts and arrangements entered into in connection with the 1992/93 Restructuring or (ii) seeking to invalidate the novation process (not including challenges to the novation status of individual policies in the context of insurance policy claims or litigation) provided for under the Assumption and Indemnity Reinsurance Agreements entered into as a part of the 1992/93 Restructuring. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows: Section 5.1 Organization and Related Matters. Buyer is a -------------------------------- corporation, duly organized, validly existing and in good standing under the laws of the Cayman Islands. The copies of the Memorandum of Association and the Articles of Association, and any amendments thereto, of Buyer previously delivered to the Company are complete and correct copies of such instruments as in effect as of the date of this Agreement. Section 5.2 Authority; No Violation. (a) Buyer has full corporate ----------------------- power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by all requisite corporate action on the part of Buyer, and no other corporate proceedings on the part of Buyer are necessary to approve this Agreement and the Ancillary Agreements or to consummate the transactions contemplated hereby and thereby. This Agreement and the Tax Agreement have been duly and validly executed and delivered by Buyer and (assuming the due authorization, execution and delivery of this Agreement and the Tax Agreement by Seller and the other parties thereto) constitute valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. (b) Neither the execution and delivery of this Agreement and the Ancillary Agreements by Buyer, nor the consummation by Buyer of the transactions contemplated hereby and thereby to be performed by it, nor compliance by Buyer with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Memorandum of Association or the Articles of Association of Buyer, or (ii) assuming that the consents and approvals referred to in Section 5.3 are duly obtained, (A) violate in any material respect any Applicable Law with respect to Buyer, or any of its material properties or assets or (B) violate, conflict with, result in a breach of any provision of, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or require the consent of any Person under, or result in the imposition of any Encumbrance on any of the properties or assets of Buyer under, any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Buyer is a party, or by which Buyer or any of its properties or assets may be bound or affected, except for such violations, conflicts, breaches or defaults which, would not, individually or in the aggregate, prevent or materially delay the performance by Buyer of any of its obligations hereunder. -25- Section 5.3 Consents and Approvals. Except for (i) the approval of ---------------------- this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby, and the new intercompany tax agreements among the Company and the Subsidiaries which shall be effective as of the Closing, by each of the applicable governmental and regulatory authorities set forth on Schedule 5.3, (ii) the approval of this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby, and the new intercompany tax agreements among the Company and the Subsidiaries which shall be effective as of the Closing, by any other governmental or regulatory authorities, the failure of which to obtain would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (iii) the filing of premerger notification reports under the HSR Act, (iv) the filing of a notice pursuant to the Exon-Florio Amendment, and (iv) consents, approvals, authorizations, declarations, filings and registrations required by the nature of the business or ownership of Seller, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority, or any other Person, is required to be made or obtained by Buyer on or prior to the Closing Date in connection with the execution or delivery of this Agreement or any of the Ancillary Agreements, the performance of this Agreement or any Ancillary Agreement, or the consummation of the transactions contemplated hereby and thereby. Section 5.4 Legal Proceedings. As of the date hereof, Buyer is not a ----------------- party to any, and there are no pending or, to the knowledge of Buyer, threatened, Actions against or otherwise affecting Buyer or its properties or assets or challenging the validity or propriety of the transactions contemplated by this Agreement which, if adversely determined, would, individually or in the aggregate, prevent or materially delay the performance by Buyer of any of its obligations pursuant to this Agreement, and there is no injunction, order, judgment, decree or regulatory restriction imposed upon Buyer or its properties or assets which would, individually or in the aggregate, prevent or materially delay the performance by Buyer of any of its obligations pursuant to this Agreement. Section 5.5 Investment Intent of Buyer. The Shares to be acquired -------------------------- under this Agreement will be acquired by Buyer for its own account and not for the purpose of a distribution. Buyer will refrain from transferring or otherwise disposing of any of the Shares acquired by it, or any interest therein, in such manner as to violate any registration provision of the Securities Act of 1933, as amended, or any applicable state securities law regulating the disposition thereof. Section 5.6 Investment Company. Buyer is not an investment company ------------------ subject to registration and regulation under the Investment Company Act of 1940, as amended. Section 5.7 No Other Broker. Other than Donaldson, Lufkin & Jenrette --------------- Securities Corporation, the fees and expenses of which will be paid by Buyer, no broker, finder or similar intermediary has acted for or on behalf of Buyer or any Affiliate of Buyer, or is entitled to any broker's, finder's or similar fee or other commission from Buyer, or any Affiliate of Buyer, in connection with this Agreement or the transactions contemplated hereby. Section 5.8 Financing. Buyer has, and at the Closing will have, --------- sufficient cash to consummate the transactions contemplated hereby and to pay all related fees and expenses. ARTICLE VI COVENANTS Section 6.1 Conduct of Business. During the period from the date of ------------------- this Agreement through the Closing Date, except as contemplated or permitted by this Agreement or with the consent of -26- Buyer, the Company shall (and shall cause its Subsidiaries to) (a) carry on its business in the ordinary course consistent with past practice, (b) use reasonable best efforts to (i) preserve its present business organization and relationships and those of its Subsidiaries, (ii) keep available the present services of its employees, and (iii) preserve the rights, franchises, goodwill and relations of its customers and others with whom business relationships exist, (c) not pay or agree to pay in settlement or compromise of any suits or claims of liability against the Company, its directors, officers, employees or agents, more than an aggregate of $250,000 for all such suits and claims, (d) not make any prepayment of any liabilities, individually or in the aggregate, exceeding $250,000, and (e) not enter into any agreement described in Section 4.15(b). Without limiting the generality of the foregoing, except as contemplated or permitted by this Agreement or consented to by Buyer, Seller shall not take any of the actions referred to in paragraphs (a) through (u) (excluding paragraph (s)) of Section 4.11 between the date of this Agreement and the Closing Date. Section 6.2 Confidentiality and Announcements. (a) Except as --------------------------------- provided in Section 6.2(b), neither Seller or Buyer, nor any of their respective Affiliates, shall publicly disclose the execution, delivery or contents of this Agreement, other than with the prior written consent of the other party hereto, or other than as required by any Applicable Law or the rules of any stock exchange upon prior notice to the other party hereto. (b) Buyer and Seller shall agree with each other as to the form and substance of any press release related to this Agreement or the transactions contemplated hereby, and shall consult each other as to the form and substance of other public disclosures related thereto, provided, however, that nothing contained herein shall prohibit either party, following notification to the other party if practicable, from making any disclosure which its counsel determines to be required by any Applicable Law or the rules of any stock exchange. Section 6.3 Expenses. Regardless of whether any or all of the -------- transactions contemplated by this Agreement are consummated, and except as otherwise expressly provided herein, Buyer and Seller shall each bear their respective direct and indirect expenses incurred in connection with the negotiation and preparation of this Agreement and the consummation of the transactions contemplated hereby. Section 6.4 Access; Certain Communications. Between the date of ------------------------------ this Agreement and the Closing Date, subject to Applicable Laws relating to the exchange of information, Seller shall (and shall cause the Company and its Subsidiaries to) afford to Buyer and its authorized agents and representatives complete access, upon reasonable notice and during normal business hours, to all contracts, documents and information of or relating to the assets, liabilities, business, operations and other aspects of the business of the Company and its Subsidiaries and, during such period, Seller shall (and shall cause the Company and each of its Subsidiaries to) furnish promptly to Buyer, (a) all correspondence or written communication between the Company or any of its Subsidiaries and A.M. Best, Standard & Poor's Corporation, Moody's Investor Services, Inc., any Governmental Authority or any Insurance Regulator which relates to the transactions contemplated hereby or which is otherwise material to the financial condition or operation of the Company and its Subsidiaries taken as a whole, and (b) subject to any attorney-client privilege applicable to the Company or its Subsidiaries, all other information concerning its business, properties and personnel as Buyer may reasonably request. Seller shall cause the Company Employees (subject to any attorney-client privilege applicable to the Company or its Subsidiaries) to provide reasonable assistance to Buyer in Buyer's investigation of matters relating to the purchase of the Shares, provided, however, that Buyer's investigation shall be conducted in a manner which does not interfere with the Company's or its Subsidiaries' normal operations, customers and employee relations. Without limiting any of the terms thereof, the terms of the Confidentiality Agreement shall govern Buyer's and its agents' and representatives' obligations with respect to all confidential information with respect to -27- the Company or its Subsidiaries which has been provided or made available to them at any time, including during the period between the date of this Agreement and the Closing Date. Section 6.5 Regulatory Matters; Third Party Consents. (a) Buyer and ---------------------------------------- Seller shall cooperate with each other and use reasonable best efforts promptly to prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, and to obtain as promptly as practicable all permits, consents, approvals, waivers and authorizations of all third parties and Governmental Authorities which are necessary or advisable to consummate the transactions contemplated by this Agreement. Buyer and Seller shall have the right to review in advance, and shall consult with the other on, in each case subject to Applicable Laws relating to the exchange of information, all the information relating to Seller, the Company and the Subsidiaries or Buyer, as the case may be, and any of their respective Affiliates, which appear in any filing made with, or written materials submitted to, any third party or any Governmental Authority in connection with the transactions contemplated by this Agreement, provided, however, that nothing contained herein shall be deemed to provide either party with a right to review any information provided to any Governmental Authority on a confidential basis in connection with the transactions contemplated hereby. The parties hereto agree that they will consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and Governmental Authorities necessary or advisable to consummate the transactions contemplated by this Agreement and each party shall keep the other apprised of the status of matters relating to completion of the transactions contemplated herein. The party responsible for any such filing shall promptly deliver to the other party evidence of the filing of all applications, filings, registrations and notifications relating thereto (except for any confidential portions thereof), and any supplement, amendment or item of additional information in connection therewith (except for any confidential portions thereof). The party responsible for a filing shall also promptly deliver to the other party a copy of each material notice, order, opinion and other item of correspondence received by such filing party from any Governmental Authority in respect of any such application (except for any confidential portions thereof). In exercising the foregoing rights and obligations, Buyer and Seller shall act reasonably and as promptly as practicable. (b) Without limiting the generality of the foregoing, within 20 Business Days after the date hereof, Buyer shall make Form A filings with the insurance departments of the States of New York, California (if required), Georgia and Texas with respect to the transactions contemplated hereby. Buyer shall promptly make any and all other filings and submissions of information with such insurance departments which are required or requested by such insurance departments in order to obtain the approvals required by such insurance departments to consummate the transactions contemplated hereby. Seller agrees to furnish Buyer with such necessary information and reasonable assistance as Buyer may reasonably request in connection with its preparation of such Form A filings and other filings or submissions. Buyer shall keep Seller fully apprised of its actions with respect to all such filings and submissions and shall provide Seller with copies of such Form A filings and other filings or submissions. (c) Buyer and Seller shall, upon request, furnish each other with all information concerning themselves, their subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary in connection with any statement, filing, notice or application made by or on behalf of Buyer, the Company or any of their respective Affiliates to any Governmental Authority in connection with the transactions contemplated by this Agreement (except to the extent that such information would be, or relates to information that would be, filed under a claim of confidentiality). (d) Buyer and Seller shall promptly advise each other upon receiving any communication from any Governmental Authority whose consent or approval is required for consummation of the transactions contemplated by this Agreement which causes such party to believe that -28- there is a reasonable likelihood that any requisite regulatory approval will not be obtained or that the receipt of any such approval will be materially delayed. (e) Seller shall use commercially reasonable efforts to obtain, with respect to each Insurance Subsidiary, copies of certificates of admission or authority from the insurance commissioner or similar authority of each state in which such Insurance Subsidiary is admitted or authorized to conduct business. Section 6.6 Further Assurances. Each of the parties hereto shall ------------------ execute such documents and other papers and perform such further acts as may be reasonably required to carry out the provisions hereof and the transactions contemplated hereby. Each such party shall, on or prior to the Closing Date, use reasonable best efforts to fulfill or obtain the fulfillment of the conditions precedent to the consummation of the transactions contemplated hereby, including the execution and delivery of any documents, certificates, instruments or other papers that are reasonably required for the consummation of the transactions contemplated hereby. Section 6.7 Notification of Certain Matters. (a) Each party shall ------------------------------- give prompt notice to the other party of (i) the occurrence, or failure to occur, of any event or existence of any condition that has caused or would reasonably be expected to cause any of its representations or warranties contained in this Agreement to be untrue or inaccurate in any material respect at any time after the date of this Agreement, up to and including the Closing Date (except to the extent such representations and warranties speak as of a particular date), and (ii) any failure on its part to comply with or satisfy, in any material respect, any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. (b) Seller may, prior to the Closing, by written notice to Buyer, supplement any Schedule to reflect any change or event that occurs after the date of this Agreement or to otherwise correct or amend any such Schedule, provided that all such supplemental Schedules shall be delivered to Buyer by Seller at the same time on a Business Day not fewer than three Business Days prior to the Closing. (c) Such supplemental Schedules shall be deemed to cure any breach of any of Seller's representations or warranties for purposes of Section 7.1(a) unless the impact of all matters disclosed on such supplemental Schedules would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as set forth in Section 6.7(d), such supplemental Schedules shall not be deemed to have cured any breach of any of Seller's representations or warranties for purposes of Article VIII hereof. (d) Such supplemental Schedules shall be deemed to cure any breach of any of Seller's representations or warranties for purposes of Article VIII hereof if the impact of all matters disclosed on such supplemental Schedules is reasonably expected to have a Material Adverse Effect and Buyer exercises its right to proceed with the Closing. (e) The delivery by Seller to Buyer of such supplemental Schedules shall be accompanied by a written statement that, in Seller's opinion, the impact of all matters disclosed on such supplemental Schedules either would or would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. If Seller's written opinion is that such impact would reasonably be expected to have a Material Adverse Effect, Buyer shall be deemed to have agreed with such opinion. If Seller's written opinion is that such impact would not reasonably be expected to have a Material Adverse Effect, Buyer may dispute such opinion, provided that Buyer shall deliver to Seller, at least one Business Day prior to the Closing, a written statement that, in Buyer's opinion, the impact of all -29- matters disclosed on such supplemental Schedules would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 6.8 Maintenance of Records. Through the Closing Date the ---------------------- Company shall maintain the Records in all material respects in the same manner and with the same care that the Records have been maintained prior to the execution of this Agreement. From and after the Closing Date, each of the parties shall permit the other party reasonable access to any applicable Records in its possession, and the right to duplicate such Records, to the extent that the requesting party has a reasonable business purpose for requesting such access or duplication. Each party hereto shall notify the other party of any extension of any applicable statute of limitations related to such Records and Buyer shall obtain the consent of Seller before destroying any of the Records retained pursuant to this Section. Notwithstanding any other provision of this Section, access to any Records may be denied to the requesting party if the other party is required under Applicable Law to deny such access. Section 6.9 Employees and Employee Plans. (a) (i) Except as ---------------------------- provided otherwise in Section 4.13(i), no provision of this Agreement shall be construed to prohibit the Company or its Subsidiaries from having the right to terminate the employment of any Company Employee, with or without cause, or to amend or to terminate after the Closing any employee benefit plan established, maintained or contributed to by the Company or its Subsidiaries. (ii) Service by the Company Employees with the Company, Seller or any of their Affiliates shall be recognized under each benefit plan, program or arrangement established, maintained or contributed to for the benefit of any Company Employee by Buyer, the Company or any of their Affiliates after the Closing for purposes of eligibility to participate and vesting, but in no event shall this Agreement require that such service prior to the Closing Date be taken into account in determining the accrual of benefits under any such benefit plan or arrangement, including, without limitation, a defined benefit plan. Seller shall provide Buyer prior to the Closing with evidence of full vesting of Company Employees under the Retirement Plan, the SERP and the IRP, and Buyer and Seller each acknowledge that the IRP vesting rules also govern participating Company Employees' vesting under the SIRP. (iii) The parties acknowledge that any former employees included within the definition of Company Employees shall have, after the Closing, such re-employment rights, if any, as may be available to them under Applicable Law with respect to the Company and its Subsidiaries and not with respect to Seller or any of its other Affiliates. (iv) Buyer shall, or shall cause the Company to, (A) notify Seller if the employment of any Company Employee, who also is a "Covered Employee" under the Talegen Holdings, Inc. Retention Incentive Plan, terminates within the 12-month period beginning on the Closing Date and (B) provide to Seller such information as Seller may reasonably request to enable Seller to determine such Company Employee's eligibility for a retention benefit under such Plan. Seller hereby acknowledges and agrees that it shall remain solely liable for, and either retain all liability for (or reimburse the Company with respect to) all obligations arising under and benefits payable from, the Talegen Holdings, Inc. Retention Incentive Plan. Buyer shall not be responsible for any obligations arising thereunder and shall not be liable for any payments required to be made thereunder. Buyer hereby acknowledges and agrees that the Company will remain, after the Closing Date, subject to the obligations imposed on the "Company" under the Enhanced Severance Benefit Plan of Westchester Fire Insurance Company. (b) Prior to the Closing Date, Seller shall take whatever corporate action is necessary to ensure that the Company and its Subsidiaries shall cease being "participating employers" and shall cease co-sponsorship of any welfare plans (as defined in Section 3(1) of ERISA) jointly adopted, sponsored or -30- maintained by Seller and the Company or the Subsidiaries as of the Closing Date; provided, however, that at the option of Buyer, Buyer may elect, by written notice to Seller, given no less than 30 days prior to the Closing Date, to continue coverage of Company Employees under the Talegen Holdings, Inc. Medical and Dental Plans for the period commencing on the Closing Date and ending on December 31, 1997 or such earlier date as specified by Buyer, by written notice to Seller, given no less than 30 days prior to such earlier ending date. If Buyer makes such election, Buyer shall reimburse Seller on a monthly basis, within 10 Business Days of notification by Seller of the amount of such costs, for the monthly costs (including its pro rata share of administrative expenses and "stop-loss" premiums) incurred in providing such coverage. Such costs of coverage shall be determined by Seller in accordance with substantially the same methods and procedures under which such costs of coverage were determined by Seller immediately prior to the Closing Date. Subject to Section 6.9(a)(i), the Company shall retain responsibility for providing medical benefits to all Company Employees, including Company Employees who are receiving, or who are eligible to receive (as described in paragraph (a) of the "Company Employee" definition), benefits under the Disability Plans. (c) Seller retains all current, contingent and potential liability with respect to the Retirement Plan and SERP, and the Retirement Plan shall retain liability for all benefits accrued through the Closing Date with respect to the Company Employees. Effective as of the Closing Date, all Company Employees shall be deemed, for all purposes in applying the Retirement Plan, to have terminated their service on that date. (d) As soon as practicable following the Closing Date, Seller shall take whatever action is necessary (i) to permit Company Employees to elect a distribution of their benefits from the IRP in accordance with the IRP and Applicable Law, and (ii) in accordance with Seller's current practice and Applicable Law, to permit Company Employees who do not elect a distribution of their benefits from the IRP to continue to repay (by check) any outstanding loan balances existing under the IRP as of the Closing Date. As soon as practicable following the Closing Date, Seller shall take whatever action is necessary to cause Company and its Subsidiaries (i) to cease being "participating companies" and co-sponsors of the SIRP, (ii) to transfer to the Company any assets associated with the liabilities of the Company and its Subsidiaries that are not held by the Company as of the Closing Date, and (iii) to enable the Company and its Subsidiaries to effect the distribution of Company Employees' benefits under the SIRP in accordance with the SIRP and Applicable Law. (e) (i) The Company shall, or shall cause its Subsidiaries to, retain in place and be responsible for all payments required under the Enhanced Severance Plan of Westchester Fire Insurance Company. Seller shall have no liability for any payments made or owing under such Plan with respect to terminations of employment which occur subsequent to the Closing Date. (ii) Subject to Section 6.9(a)(iv), the Company or one of its Subsidiaries shall make all payments required to be made to any current or former Company or Subsidiary employee under the Retention Incentive Plan of Talegen Holdings, Inc. Seller shall promptly reimburse, on an after-tax basis (determined at 75% of the maximum applicable federal corporate income tax rate), the Company and its Subsidiaries, as appropriate, for any such payments. If it is later determined that any payment made pursuant to this Section 6.9(e)(ii) is non deductible by the Company under Section 280G of the Code, then Seller shall pay to the Company an amount equal to the excess of such payment made by the Company over the amount previously reimbursed by Seller under this Section 6.9(e)(ii). (f) Buyer and Seller agree to cooperate to carry out the duties and responsibilities set forth in this Section 6.9. In addition, Seller agrees to make available to Buyer such information as Buyer may reasonably request to carry out the provisions of this Section 6.9. -31- Section 6.10 Pre-Closing Dividends. Between the date hereof and the --------------------- Closing, the Company shall not pay dividends to Seller other than as is expressly contemplated by this Agreement or an Ancillary Agreement. Section 6.11 Crostex/Camfex. (a) On or prior to the Closing Date, -------------- subject to obtaining any necessary consents from Crostex Associates Limited Partnership, Camfex Associates Limited Partnership or other third parties (including applicable Governmental Authorities), Seller shall cause the following to occur with respect to the Crostex/Camfex Leases: (i) Seller shall cause Westchester Fire to transfer its interest in the Dallas Lease to one of the CFI Entities, and shall cause such CFI Entity to assume such interest in the Dallas Lease and indemnify Westchester Fire for all liabilities and other Loss thereunder; and (ii) Seller shall cause Westchester Fire to transfer its interest in the Pleasanton Lease to Talegen Properties, Inc., a subsidiary of Seller, and shall cause Talegen Properties, Inc. to assume such interest in the Pleasanton Lease and indemnify Westchester Fire for all liabilities and other Loss thereunder. (b) On or prior to the Closing Date, subject to obtaining any necessary consents from Crostex Associates Limited Partnership, Camfex Associates Limited Partnership or other third parties (including applicable Governmental Authorities), Seller shall cause the following to occur with respect to the Crostex/Camfex Purchase Money Documents: (i) Seller shall cause Westchester Fire to transfer its interests in the 305 Purchase Money Documents and the Dallas Purchase Money Documents to one of the CFI Entities, for consideration equal to the respective statutory carrying values of Westchester Fire's percentage interests in the two promissory notes each entitled "Note Due December 1, 2009" that are part of the 305 Purchase Money Documents and the Dallas Purchase Money Documents, respectively; and (ii) Seller shall cause Westchester Fire to transfer its interests in the 299 Purchase Money Documents and the Pleasanton Purchase Money Documents to Talegen Properties, Inc. or another designee of Seller, for consideration equal to the respective statutory carrying values of Westchester Fire's percentage interests in the two promissory notes each entitled "Note Due December 1, 2009" that are part of the 299 Purchase Money Documents and the Pleasanton Purchase Money Documents, respectively. Section 6.12 Exclusivity. During the period from the date of this ----------- Agreement through the Closing Date: (a) Parent, Seller and the Company shall cease any discussions or negotiations with any third party regarding (i) any merger, sale of assets not in the ordinary course of business, acquisition, business combination, change of control or other similar transaction involving the Company or any Subsidiary or any division of the Company or any Subsidiary, (ii) any purchase or other acquisition by any Person of Shares, or (iii) any sale or issuance by the Company or any Subsidiary of any shares of its capital stock; (b) Neither Parent, Seller, the Company nor any Subsidiary shall, nor shall any of them authorize or permit any of their respective directors, officers, employees, representatives, agents or Affiliates to, directly or indirectly, solicit, initiate, encourage, respond favorably to, -32- permit or condone inquiries or proposals from, or provide any confidential information to, or participate in any discussions or negotiations with, any Person (other than Buyer and its directors, officers, employees, representatives and agents) concerning (i) any merger, sale of assets not in the ordinary course of business, acquisition, business combination, change of control or other similar transaction involving the Company or any Subsidiary or any division of the Company or any Subsidiary, (ii) any purchase or other acquisition by any Person of Shares, or (iii) any sale or issuance by the Company or any Subsidiary of any shares of its capital stock; (c) Seller will promptly advise Buyer of, and communicate to Buyer the terms and conditions of (and the identity of the Person making), any such inquiry or proposal received; and (d) Seller shall use commercially reasonable efforts to enforce the terms of any confidentiality or standstill agreements with third parties relating to the Company or any of its Subsidiaries or any of their respective businesses, assets or employees and to require any such party to return any confidential information regarding the Company and its Subsidiaries and their respective businesses which they may have obtained pursuant to any such agreement. All of Seller's rights in and to such confidentiality and standstill agreements shall be assigned to Buyer upon the occurrence of the Closing. Section 6.13 Additional Financial Statements. During the period from ------------------------------- the date of this Agreement through the Closing Date, as soon as is reasonably practicable after the end of the applicable financial period, Seller shall furnish to Buyer (a) each annual convention statement filed by the Insurance Subsidiaries during such period pursuant to the requirements of any Applicable Law, (b) the quarterly convention statements of the Insurance Subsidiaries for each interim quarterly period subsequent to June 30, 1997, which shall have been prepared on an accounting basis consistent with the Convention Statements, subject to normal year-end adjustments, and, with respect to the financial statements included therein, in conformity with the statutory accounting practices prescribed or permitted by the respective state of domicile for each Insurance Subsidiary, (c) the quarterly financial statements of the Company and Ridge Re for all quarterly periods subsequent to June 30, 1997, which shall have been prepared on a basis consistent with the Company GAAP Financial Statements and the Ridge Re GAAP Financial Statements, as the case may be, subject to normal year-end adjustments and the absence of footnote disclosure, (d) the consolidated financial statements for the Company and Ridge Re for the year ended December 31, 1997, which shall have been prepared in accordance with GAAP and on a basis consistent with the Company GAAP Financial Statements and the Ridge Re GAAP Financial Statements, as the case may be, and (e) (to the extent ordinarily prepared) all monthly financial statements of the Company, the Subsidiaries and Ridge Re (for months subsequent to June 1997), which shall have been prepared in a manner consistent with past practice. Section 6.14 Intercompany Accounts. (a) All intercompany accounts --------------------- (other than those relating to Taxes and those under or relating to reinsurance contracts and arrangements) between the Company and any Subsidiary, on the one hand, and Parent and any of its Affiliates (other than the Company and its Subsidiaries), on the other hand, as of the Closing shall be settled in accordance with the financial terms of such intercompany accounts (but irrespective of the terms of payment of such intercompany accounts) in the manner provided in this Section. At least five business days prior to the Closing, Seller shall prepare and deliver to Buyer a statement setting out in reasonable detail the calculation of all such intercompany account balances based upon the latest available financial information as of such date and, to the extent reasonably requested by Buyer, provide Buyer with supporting documentation to verify the underlying intercompany charges and transactions. All such intercompany account balances shall be paid in full in cash prior to the Closing. All intercompany accounts relating to Taxes will be governed by the Tax Agreement. -33- (b) As promptly as practicable, but no later than 60 days after the Closing Date, Seller shall cause to be prepared and delivered to Buyer a statement setting out in reasonable detail the calculation of such intercompany account balances as of the Closing Date (giving effect to any settlement under Section 6.14(a) and any other payments). Buyer and Seller shall cooperate in the preparation of any such calculation including the provision of supporting documentation to verify the underlying intercompany charges, transactions and payments. If Buyer disagrees with Seller's calculation of such intercompany balances Buyer may, within 30 days after delivery of such statement, deliver a notice to Seller disagreeing with such calculation and setting forth Buyer's calculation of such amount. If Buyer and Seller are unable to resolve such disagreement within 30 days thereafter, such disagreement shall be resolved by independent accountants of nationally recognized standing reasonably satisfactory to Buyer and Seller. The net amount of any such intercompany balance shall be paid in cash promptly thereafter, together with interest thereon from and including the Closing Date to but excluding the date of payment at a rate equal to 5% per annum. Such interest shall be payable at the same time as the payable to which it relates and shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. Section 6.15 Rating Agency Presentations. Buyer shall give Seller --------------------------- reasonable notice of any meetings prior to the Closing Date with any rating agency (including without limitation A.M. Best and Standard & Poor's Corporation) to discuss the ratings (including insurance claims paying ratings) of the Insurance Subsidiaries, and Seller at its option may have a representative at such meetings. Seller shall give Buyer reasonable notice of any meetings prior to the Closing Date with any rating agency (including without limitation A.M. Best and Standard & Poor's Corporation) to discuss the ratings (including insurance claims paying ratings) of the Insurance Subsidiaries, and Buyer at its option may have a representative at such meetings. Section 6.16 Investment Portfolio. Five days prior to the Closing -------------------- Date, Seller shall cause the Company to deliver to Buyer a list of all investments in the investment portfolio for the Company and the Subsidiaries as of such date. Section 6.17 Reinsurance Agreements. (a) Except in the ordinary ---------------------- course of business consistent with past practice and except for the Berkshire Hathaway Reinsurance Agreement, without the prior written approval of Buyer (which approval shall not be unreasonably withheld), Seller shall cause the Company and each Subsidiary not to (i) amend any reinsurance or retrocession agreement (except for the Ridge Re Amendment), (ii) enter into or commit to enter into any loss portfolio transfer or other similar transaction, agreement or arrangement or series of related transactions, agreements or arrangements involving any ceded reinsurance of the Company or any Subsidiary, (iii) enter into or commit to enter into any reinsurance or retrocession contract or treaty except to replace, renew or extend existing reinsurance and retrocession agreements and treaties on terms which are not different in any material respect from the terms of the agreement or treaty being replaced, renewed or extended, as the case may be, or (iv) commute or terminate any contract of reinsurance. (b) [Not used.] (c) Seller shall use reasonable best efforts to cause, at or immediately prior to the Closing, the transfer of $69,000,000 from Westchester Fire to the Company, and from the Company to Seller, as a return of capital, in either case as a return of capital, dividend, repurchase or redemption of its capital stock. -34- (d) If the amount transferred to the Company by Westchester Fire, and to Seller by the Company, pursuant to Section 6.17(c) is less than $69,000,000, Buyer shall pay to Seller as an adjustment to the Purchase Price at the Closing the amount of such deficiency. (e) [Not used.] (f) Seller shall not have any obligation to pay more than (i) $60,000,000 ($500,000 of which has been paid prior to the date of this Agreement), plus (ii) the amount transferred to the Company by Westchester Fire, and to Seller by the Company, pursuant to Section 6.17(c), as consideration for the reinsurance contemplated by the Berkshire Hathaway Reinsurance Agreement unless Buyer pays to Seller an amount pursuant to Section 6.17(d), in which case Seller shall also be obligated to pay as consideration for such reinsurance an additional amount equal to such amount paid by Buyer to Seller pursuant to Section 6.17(d). (g) Seller shall pay or cause to be paid the balance of the consideration for the reinsurance contemplated by the Berkshire Hathaway Reinsurance Agreement. (h) Nothing in this Section 6.17 shall limit or impair in any manner any of the rights of the parties under any other Section of this Agreement or any of its Schedules or Exhibits. Section 6.18 Person Authorized to Act Prior to the Closing. Seller --------------------------------------------- shall deliver (a) a true and complete list of the names and locations of all banks, trust companies, securities brokers, and other financial institutions at which each of the Company and each of its Subsidiaries have an account or safe deposit box or maintain a banking, custodial, trading, or other similar relationship, (b) a true and complete list and description of each such account, box, and relationship, indicating in each case the account number and the names of the respective officers, employees, agents, or other similar representatives of the Company and its Subsidiaries transacting business with respect thereto, (c) a true and complete list of each Person authorized to draw on each such account, entitled to have access thereto or authorized to borrow money (or furnish security for the same) therefrom, and (d) a true and complete list of each power of attorney granted to any Person or Persons for any purpose. Section 6.19 Tax Sharing Agreement Releases. At or prior to the ------------------------------ Closing, Seller shall cause the Company and each of its Subsidiaries to execute and deliver to Seller, and Seller shall execute and deliver to the Company and each of its Subsidiaries, releases with respect to any prior tax sharing agreements in the form attached hereto as Exhibit D. ARTICLE VII CONDITIONS TO CLOSING Section 7.1 Conditions to Buyer's Obligations. In addition to the --------------------------------- conditions set forth in Section 7.3, the obligations of Buyer to effect the Closing shall be subject to the following conditions, any one or more of which may be waived in writing by Buyer: (a) The representations and warranties of Seller set forth in this Agreement shall be true and correct in all material respects (except that representations and warranties qualified by materiality or Material Adverse Effect shall be true and correct in all respects) as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date, in which case such representations and warranties shall be true and correct, or true and -35- correct in all material respects, as applicable, as of such earlier date) as of the Closing Date as though made on and as of the Closing Date; (b) Seller shall have performed and complied in all material respects with all agreements, covenants, obligations and conditions required by this Agreement to be performed or complied with by Seller on or prior to the Closing Date; (c) Seller shall have caused to be delivered to Buyer one or more certificates representing all of the Shares, free and clear of all Encumbrances, duly executed in blank or accompanied by stock powers duly executed in blank, in proper form for transfer, with all appropriate stock transfer tax stamps affixed, and shall have paid one half of all other transfer taxes required to be paid by any United States federal, state or local Governmental Authority in connection with the sale and delivery to Buyer of the Shares; (d) Seller shall have caused to be delivered to Buyer a receipt evidencing payment by Buyer of the Purchase Price; (e) Seller shall have caused to be delivered to Buyer the Guarantee, duly executed on behalf of Parent; (f) Seller shall have caused to be delivered to Buyer the Records of the Company and its Subsidiaries to the extent not located at offices of the Company or its Subsidiaries (unless such Records have been previously delivered to such offices prior to the Closing); (g) Seller shall have caused to be delivered to Buyer certificates as to the good standing of the Company and its Subsidiaries in the respective jurisdictions of their incorporation or domicile, dated as of a date not earlier than 10 days prior to the Closing Date, together with copies of the Certificates of Incorporation of the Company and its Subsidiaries certified by the applicable Secretary of State or other appropriate authority; (h) Seller shall have caused to be delivered to Buyer resolutions of the board of directors of Seller, certified by the Secretary or Assistant Secretary of Seller, approving and authorizing the execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby, and the By-laws of the Company and each of its Subsidiaries, certified by the respective Secretary or Assistant Secretary of the Company and each of its Subsidiaries as of the Closing Date; (i) On or prior to the Closing Date, the General Services Agreements between Seller and each of the Insurance Subsidiaries, each dated January 1, 1993, as amended, shall have been terminated; (j) Seller shall cause to be delivered to Buyer those certificates of admission or authority from the insurance commissioner or similar authority of each state in which an Insurance Subsidiary is admitted or authorized to conduct business which were obtained by Seller in accordance with Section 6.5(e); (k) Seller shall cause to be delivered to Buyer the resignations of (i) each person who is a director of the Company, and (ii) each person who is a director and/or an officer of the Company and/or any of the Subsidiaries if such person's principal employment is as an officer or an employee of Seller and/or Parent; -36- (l) Buyer shall have received written evidence reasonably satisfactory to Buyer that all consents and approvals required for the consummation of the transactions contemplated hereby or the ownership and operation by Buyer of the Company, the Subsidiaries and their respective businesses have been obtained, and all required filings have been made, including (without limitation) those set forth on Schedule 4.4; (m) Seller shall have delivered to Buyer an opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., substantially in the form attached hereto as Exhibit E; (n) Buyer shall have entered into an amendment to the Claims Services Agreement with Envision Claims Management Corporation which provides for substantially the same terms as are currently in effect, with a minimum term of one year after the Closing Date on a cost-plus-15% pricing basis, and which provides only to Buyer the right to terminate such agreement at no cost upon 30 days notice; (o) A financial report of KPMG Peat Marwick LLP with respect to the Company Interim Financial Statements pursuant to the requirements of SAS No. 71, Interim Financial Information (AICPA, Professional Standards); (p) Buyer shall have received from Seller, the Company and each of its Subsidiaries releases with respect to any prior tax sharing agreements in the form attached hereto as Exhibit D; and (q) Seller shall have caused to be delivered to Buyer a certificate executed by a duly authorized officer of Seller certifying that the conditions set forth in this Section 7.1 have all been satisfied. Section 7.2 Conditions to Seller's Obligations. In addition to the ---------------------------------- conditions set forth in Section 7.3, the obligations of Seller to effect the Closing shall be subject to the following conditions, any one or more of which may be waived in writing by Seller: (a) The representations and warranties of Buyer contained in this Agreement shall be true in all material respects (except representations and warranties qualified by materiality shall be true and correct in all respects) as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date, in which case such representations and warranties shall be true and correct, or true and correct in all material respects, as applicable, as of such earlier date) on the Closing Date as though made on and as of the Closing Date; (b) Buyer shall have performed and complied in all material respects with all agreements, covenants, obligations and conditions required by this Agreement to be performed or complied with by Buyer on or prior to the Closing Date; (c) Buyer shall have caused to be delivered to Seller an amount equal to the Purchase Price by Wire Transfer; (d) Buyer shall have paid all transfer taxes required to be paid in connection with the sale and delivery to Buyer of the Shares, other than transfer taxes paid by Seller pursuant to Section 7.1(c); -37- (e) Buyer shall have caused to be delivered to Seller a receipt evidencing receipt by Buyer of the Shares; (f) Buyer shall have caused to be delivered to Seller the Guarantee duly executed by Buyer; (g) Buyer shall have caused to be delivered to Seller a certificate as to good standing of Buyer in the jurisdiction of its incorporation, dated as of a date not earlier than 10 days prior to the Closing Date, together with a copy of the Memorandum of Association of Buyer certified by the Registrar of Companies or other appropriate authority; (h) Buyer shall have caused to be delivered to Seller resolutions of the board of directors of Buyer, certified by the Secretary or Assistant Secretary of Buyer, approving and authorizing the execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby; (i) Buyer shall have delivered to Seller an opinion of Maples & Calder and an opinion of Mayer, Brown & Platt, each substantially in the form attached hereto as Exhibit F; (j) A binding commitment in form and substance reasonably satisfactory to Seller for the Berkshire Hathaway Reinsurance Agreement shall have been duly executed by all the parties thereto and be in full force and effect; and (k) Buyer shall have caused to be delivered to Seller a certificate executed by a duly authorized officer of Buyer certifying that the conditions set forth in this Section 7.2 have all been satisfied. Section 7.3 Mutual Conditions. The obligations of each of Buyer and ----------------- Seller to effect the Closing shall be subject to the following conditions, any one or more of which may be waived in writing, as to itself, by either party: (a) No order, injunction or decree issued by any Governmental Authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect. No proceeding initiated by any Governmental Authority seeking an injunction against the transactions contemplated by this Agreement shall be pending. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Authority which prohibits, restricts or makes illegal consummation of the transactions contemplated hereby; (b) All approvals of Governmental Authorities required to consummate the transactions contemplated hereby (including, without limitation, required approvals from the insurance regulatory authorities of the States of New York, California (if required), Georgia and Texas) shall have been obtained without any conditions, restrictions or limitations which would reasonably be expected to have either a Material Adverse Effect or a material adverse effect on the business, operations, assets, liabilities, condition (financial or otherwise) or results of operations of (i) Buyer and its subsidiaries, taken as a whole, or (ii) HoldCo and its subsidiaries (including the Insurance Subsidiaries and any other entities which will be subsidiaries of HoldCo immediately after the Closing has occurred), taken as a whole, and such consents, approvals and waivers shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired; provided that, for purposes of this Section 7.3(b) only, in determining whether a material -38- adverse effect with respect to HoldCo would reasonably be expected to occur, the GAAP consolidated stockholders' equity of HoldCo shall be deemed to be equal to the GAAP consolidated stockholders' equity of the Company and its Subsidiaries as of the end of the most recently completed calendar quarter prior to the Closing; (c) In respect of the notifications of Buyer and Seller pursuant to the HSR Act, the applicable waiting period and any extensions thereof shall have expired or been terminated; and (d) Article XIII of the Ridge Re Agreement shall be amended through the entering into of the Ridge Re Amendment (and such amendment shall have the effect of eliminating any profit commission payment upon the expiration of the term of such agreement and any commutation payment upon the commutation of such agreement). ARTICLE VIII SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS; INDEMNIFICATION Section 8.1 Survival. (a) Notwithstanding any right of Buyer to -------- investigate the affairs of the Company and its Subsidiaries, and notwithstanding any knowledge of facts determined or determinable by Buyer pursuant to such investigation or right of investigation, Buyer has the right to rely upon the representations, warranties, covenants and agreements of Seller contained in this Agreement. The representations and warranties of the parties set forth in Sections 4.1, 4.2, 4.3, 4.5, 4.7, 5.1, 5.2, 5.5, 5.6 and 5.7 shall survive the Closing without limitation as to time. All other representations and warranties of the parties set forth in this Agreement shall terminate and expire on (i) March 31, 1999, if the Closing occurs prior to January 1, 1998, or (ii) the date 18 months after the Closing Date if the Closing occurs on or after January 1, 1998, except that the representations and warranties of Seller in Sections 4.13 and 4.14 shall survive until 90 days after the expiration of the applicable statute of limitations or extensions thereof with respect to the subject matter thereof. Notice with respect to any claim in respect of any inaccuracy in or breach of any representation or warranty shall be in writing and shall be given to the party against which such claim is asserted. Any representation or warranty shall survive the time it would otherwise terminate pursuant to this Section 8.1 to the extent that the party claiming indemnification for such breach shall have delivered to the other party written notice setting forth with reasonable specificity the basis of such claim prior to the expiration of such time pursuant to this Section 8.1. (b) All covenants and agreements made by the parties to this Agreement which contemplate performance following the Closing Date shall survive the Closing Date. All other covenants and agreements shall not survive the Closing Date and shall terminate as of the Closing. Section 8.2 Obligation of Seller to Indemnify, Reimburse, etc. -------------------------------------------------- Subject to the limitations set forth in Sections 8.1, 8.5, 8.6 and 8.7, Seller shall indemnify, reimburse, defend and hold harmless Buyer and its directors, officers, employees, Affiliates, and their respective successors and assigns from and against any Loss incurred by any of them based upon, arising out of or otherwise in respect of (i) any inaccuracy in or any breach of any representation or warranty of Seller (after taking into account the exceptions to such representations and warranties which are set forth on the Schedules, as supplemented in accordance with Sections 6.7(b) and 6.7(d), related to such representations and warranties), (ii) the nonfulfillment on the part of Seller of any unwaived covenant or agreement set forth in this Agreement which survives the Closing Date in accordance with Section 8.1, (iii) the failure of Seller or any ERISA Affiliate on or before the Closing Date to operate any employee benefit plan (as defined in Section 3(3) of -39- ERISA) established, maintained or sponsored by Seller or any ERISA Affiliate in accordance with the terms of any such plan or Applicable Law, and (iv) the transactions described in Section 6.11. Section 8.3 Obligation of Buyer to Indemnify, Reimburse, etc. ------------------------------------------------- Subject to the limitations set forth in Sections 8.1, 8.5 and 8.7, Buyer shall indemnify, defend and hold harmless Seller and its directors, officers, employees, Affiliates, and their respective successors and assigns from and against any Loss incurred by any of them based upon, arising out of or otherwise in respect of (i) any inaccuracy in or breach of any representation or warranty of Buyer (after taking into account the exceptions to such representations and warranties which are set forth on the Schedules related to such representations and warranties), and (ii) the nonfulfillment on the part of Buyer of any unwaived covenant or agreement set forth in this Agreement which survives the Closing Date in accordance with Section 8.1. Section 8.4 Notice and Opportunity to Defend Against Third Party ---------------------------------------------------- Claims. (a) Promptly after receipt from any third party by either party hereto - ------ (the "Indemnitee") of a notice of any demand, claim or circumstance that, immediately or with the lapse of time, would give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an "Asserted Liability") that may result in a Loss for which indemnification may be sought hereunder, the Indemnitee shall give written notice thereof (the "Claims Notice") to the party obligated to provide indemnification pursuant to Section 8.2 or 8.3 (the "Indemnifying Party"), provided, however, that a failure to give such notice shall not prejudice the Indemnitee's right to indemnification hereunder except to the extent that the Indemnifying Party is actually prejudiced thereby. The Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary) of the Loss that has been or may be suffered by the Indemnitee. (b) The Indemnifying Party may elect to compromise or defend, at its own expense and by its own counsel (reasonably acceptable to the Indemnified Party), any Asserted Liability. If the Indemnifying Party elects to compromise or defend such Asserted Liability, it shall, within 20 Business Days following its receipt of the Claims Notice (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnitee of its intent to do so, and the Indemnitee shall cooperate, at the expense of the Indemnifying Party, in the compromise of, or defense against, such Asserted Liability. If the Indemnifying Party (i) elects to compromise or defend the Asserted Liability but fails to notify the Indemnitee of its election as herein provided, (ii) contests its obligation to provide indemnification under this Agreement or (iii) fails to contest such Asserted Liability in good faith in a timely manner, the Indemnitee may pay, compromise or defend such Asserted Liability and the Indemnifying Party shall be bound by the determination made in such Action. Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnitee may settle or compromise any claim without the consent of the other party, provided, however, that such consent to settlement or compromise shall not be unreasonably withheld provided that an Indemnitee shall not be required to consent to any settlement that (A) does not include as an unconditional term thereof the giving by the claimant or the plaintiff of a release of the Indemnitee from all liability with respect to such Action or (B) involves the imposition of equitable remedies or the imposition of any material obligations on such Indemnitee other than financial obligations for which such Indemnitee will be indemnified hereunder. In any event, the Indemnitee and the Indemnifying Party may participate, at their own expense, in the defense of such Asserted Liability; provided, however, that if the defendants in any Action shall include both an Indemnifying Party and any Indemnitee and such Indemnitee shall have reasonably concluded that counsel selected by Indemnifying Party has a conflict of interest because of the availability of different or additional defenses to such Indemnitee, such Indemnitee shall have the right to select separate counsel to participate in the defense of such Action on its behalf, at the expense of the Indemnifying Party; provided that the Indemnifying Party shall not be obligated to pay the expenses of more than one separate counsel for all Indemnitees, taken together. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to -40- the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. (c) Amounts payable by the Indemnifying Party to the Indemnitee in respect of any Losses for which such party is entitled to indemnification hereunder shall be payable by the Indemnifying Party as incurred by the Indemnitee. (d) In the event of any dispute between the parties regarding the applicability of the indemnification provisions of this Agreement, the prevailing party shall be entitled to recover all Losses incurred by such party arising out of, resulting from or relating to such dispute. Section 8.5 Net Indemnity. The amount of any Loss from and against ------------- which either party is liable to indemnify, reimburse, defend and hold harmless the other party or any other Person pursuant to Section 8.2 or Section 8.3 shall be reduced by any insurance or other recoveries or any Tax benefit that such indemnified Person realizes at any time as a result of or in connection with such Loss and increased by any Taxes such indemnified Person realizes at any time in respect of indemnification for such Loss. Section 8.6 Tax Indemnification. Section 8.2 hereof shall provide ------------------- indemnification to Buyer for Taxes only to the extent that such Taxes are not addressed by the Tax Agreement. To the extent that Taxes are addressed by the Tax Agreement, the provisions of the Tax Agreement shall govern the liabilities and the indemnification rights and obligations of the parties without regard to the limitations provided in this Article VIII. Section 8.7 Limits on Indemnification. No party shall have any right ------------------------- to seek indemnification under this Agreement (i) until Losses which would otherwise be indemnifiable hereunder have been incurred by such party (including by all other indemnitees affiliated with or related to such party), exceed $3,000,000 in the aggregate, after insurance or other recoveries and on an after-tax basis, and such party (including such affiliated or related Persons) shall only be entitled to be indemnified for Losses in excess of such aggregate amount, (ii) for an aggregate amount in excess of $116,550,000, (iii) for punitive, special or consequential damages, or (iv) in respect of Losses to the extent such Losses result from or arise out of actions taken by such party or an Affiliate, employee, representative or agent thereof after the Closing. If the Closing has occurred, except as provided in Section 10.12, the remedies provided by this Section 8.7 shall be the sole and exclusive remedy for the parties to this Agreement with respect to any breach of this Agreement. ARTICLE IX TERMINATION Section 9.1 Termination. (a) This Agreement may be terminated on or ----------- prior to the Closing Date only as follows: (i) by mutual written consent of Buyer and Seller; (ii) at the election of either Buyer or Seller, if the Closing Date shall not have occurred on or before February 28, 1998; provided that if the conditions set forth in Section 7.3(b) have not been satisfied as of such date, this Agreement may not be terminated until April 30, 1998, if it can reasonably be anticipated that such conditions can be satisfied by April 30, 1998, provided that no party shall be entitled to terminate this Agreement pursuant to this Section 9.1(a)(ii) if such -41- party's failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; (iii) by either Buyer or Seller if a court of competent jurisdiction shall have issued an order, decree or ruling permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable; or (iv) by Buyer if the impact of all matters disclosed on the supplemental Schedules permitted by Section 6.7(b) would be reasonably expected to have a Material Adverse Effect. (b) The termination of this Agreement shall be effectuated by the delivery of a written notice of such termination from the party terminating this Agreement to the other party. Section 9.2 Obligations upon Termination. In the event that this ---------------------------- Agreement shall be terminated pursuant to Section 9.1, all obligations of the parties hereto under this Agreement shall terminate and there shall be no liability of any party hereto to any other party except (i) as set forth in Section 6.2 and Section 6.3, and (ii) that nothing herein will relieve any party from liability for any breach of this Agreement. ARTICLE X MISCELLANEOUS Section 10.1 Amendments; Extension; Waiver. This Agreement may not ----------------------------- be amended, altered or modified except by written instrument executed by Buyer and Seller. Section 10.2 Entire Agreement. (a) This Agreement, the Tax ---------------- Agreement, the Ancillary Agreements and the Confidentiality Agreement constitute the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and supersede all prior agreements and understandings, written and oral, among the parties with respect to the subject matter hereof. Buyer acknowledges that neither Seller or any of its Affiliates, nor any representative or advisor of any of them, has made any representation or warranty to Buyer except as specifically made in this Agreement. Except as specifically provided for in this Agreement, all Tax matters among the parties shall be governed by the Tax Agreement. (b) Buyer acknowledges that neither Seller or any of its Affiliates, nor any representative or advisor of any of them, has made any representation or warranty to Buyer except as specifically made in this Agreement. In particular, no such Person has made any representation or warranty to Buyer with respect to: (i) any information set forth in the Confidential Offering Memorandum distributed by Morgan Stanley & Co. Incorporated in connection with the proposed sale of the Company and its Subsidiaries, or (ii) any financial projection or forecast relating to the Company or its Subsidiaries. With respect to any such projection or forecast delivered by or on behalf of Seller to Buyer, Buyer acknowledges that: (A) there are uncertainties inherent in attempting to make such projections and forecasts, (B) it is familiar with such uncertainties, (C) it is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it, (D) it is not acting in reliance on any such projection or forecast so furnished to it, and (E) it shall have no claim against any such Person with respect to any such projection or forecast. -42- Section 10.3 Interpretation. When reference is made in this -------------- Agreement to Sections, Exhibits or Schedules, such reference is to the Sections, Exhibits or Schedules of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The phrases "the date of this Agreement," "the date hereof" and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date set forth in the first paragraph of this Agreement. The words "hereof", "herein", "hereby" and other words of similar import refer to this Agreement as a whole unless otherwise indicated. Whenever the singular is used herein, the same shall include the plural, and whenever the plural is used herein, the same shall include the singular, where appropriate. Section 10.4 Severability. Any term or provision of this Agreement ------------ which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. Section 10.5 Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed given if they are: (a) delivered in person, (b) transmitted by facsimile (with confirmation), (c) mailed by certified or registered mail (return receipt requested), or (d) delivered by an express courier (with confirmation) to a party at its address listed below (or at such other address as such party shall deliver to the other party by like notice): To Seller: Talegen Holdings, Inc. 1011 Western Avenue, Suite 1000 Seattle, Washington 98104 Facsimile: (206) 654-2601 Attention: Richard N. Frasch, Esq. General Counsel With a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10019-4513 Facsimile: (212) 424-8500 Attention: Peter R. O'Flinn, Esq. To Buyer: ACE Limited The ACE Building 30 Woodbourne Avenue Hamilton HM 08 Bermuda Facsimile: (441) 292-8620 Attention: Peter Mear, Esq., General Counsel -43- With a copy to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603 Facsimile: (312) 701-7711 Attention: Edward S. Best, Esq. Section 10.6 Binding Effect; Persons Benefiting. This Agreement ---------------------------------- shall inure to the benefit of and be binding upon the parties hereto and the respective successors and permitted assigns of the parties and such Persons. Nothing in this Agreement is intended or shall be construed to confer upon any entity or Person other than the parties hereto and their respective successors and permitted assigns any right, remedy or claim under or by reason of this Agreement or any part hereof. Section 10.7 Assignment. Neither this Agreement or the Ancillary ---------- Agreements, nor any of the rights, interests or obligations under this Agreement or the Ancillary Agreements, shall be assigned, in whole or in part, by operation of law or otherwise by either of the parties hereto without the prior written consent of the other party, and any such assignment that is not consented to shall be null and void, except that before or after the Closing Buyer shall have the right, without such consent, to assign to a direct or indirect wholly-owned subsidiary of Buyer its rights and obligations under this Agreement and the Ancillary Agreements, provided that no such assignment shall relieve Buyer of its obligations hereunder or thereunder if such assignee does not perform such obligations. Section 10.8 Counterparts. This Agreement may be executed in two or ------------ more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same agreement, it being understood that all of the parties need not sign the same counterpart. Section 10.9 No Prejudice. This Agreement has been jointly prepared ------------ by the parties hereto and the terms hereof shall not be construed in favor of or against any party on account of its participation in such preparation. Section 10.10 Governing Law. THIS AGREEMENT, THE LEGAL RELATIONS ------------- BETWEEN THE PARTIES AND THE ADJUDICATION AND THE ENFORCEMENT THEREOF SHALL BE GOVERNED BY AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK. Section 10.11 Service; Jurisdiction. Each of the parties hereto --------------------- agrees to personal jurisdiction in any action brought in any court, federal or state, within the State of New York having subject matter jurisdiction over matters arising under this Agreement. Section 10.12 Specific Performance. Each of the parties hereto -------------------- acknowledges and agrees that the other parties hereto would be irreparably damaged in the event any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, each of the parties hereto agrees that they each shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having subject matter jurisdiction, in addition to any other remedy to which any of the parties may be entitled, at law or in equity. -44- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above. TALEGEN HOLDINGS, INC. By: _____________________ Name: Title: ACE LIMITED By: _____________________ Name: Title: -45- EXHIBIT A FORM OF GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (this "Guarantee") is made and entered into as of _________, 199_ by and between Xerox Financial Services, Inc. (the "Guarantor"), a Delaware corporation, and ACE Limited, a Cayman Islands corporation ("Buyer"). WHEREAS, Buyer and Talegen Holdings, Inc., a Delaware corporation ("Talegen") and a wholly-owned subsidiary of the Guarantor, have entered into a Stock Purchase Agreement, dated as of September 18, 1997 (the "Purchase Agreement"), which provides for the acquisition by Buyer of all of the outstanding capital stock of Westchester Specialty Group, Inc., a Delaware corporation ("WSG"), a wholly-owned subsidiary of Talegen; WHEREAS, Ridge Reinsurance Limited, a Bermuda corporation ("Ridge Re"), and the Insurance Subsidiaries (as defined in the Purchase Agreement) have entered into an Aggregate Excess of Loss Reinsurance Agreement, dated as of December 31, 1992, as amended (the "Ridge Re Agreement"); and WHEREAS, as an inducement to Buyer to enter into and consummate the transactions contemplated by the Purchase Agreement, the Guarantor has agreed to enter into this Guarantee; NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. The Guarantor hereby unconditionally and irrevocably guarantees to Buyer and to the other Protected Parties (as defined below) the due, punctual and full payment of (a) all amounts payable by Talegen under Article VIII of the Purchase Agreement and (b) all amounts payable by Ridge Re under the Ridge Re Agreement, in each case as and when the same shall become due and payable in accordance with the terms thereof. As used in this Agreement, the term "Protected Parties" shall mean Buyer and its directors, officers, employees, Affiliates (as defined in the Purchase Agreement) and their respective successors and assigns, including WSG and its subsidiaries. 2. This Guarantee is a guarantee of payment, performance and compliance when due, and is in no way conditional or contingent upon any other event, contingency or circumstance whatsoever (other than the condition that Talegen or Ridge Re, as the case may be, fails to pay or perform its respective obligations when due or when required to be performed). 3. The covenants and agreements of the Guarantor set forth in this Guarantee and the Guarantor's obligations under this Agreement shall be absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction, diminution, abatement, recoupment, suspension, deferment, reduction or defense (other than full and strict compliance by the Guarantor with its obligations hereunder) based upon any claim that the Guarantor or any other Person or entity has against Talegen, Ridge Re or any other Person or entity (other than Buyer), and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by, any circumstance or condition whatsoever (whether or not the Guarantor shall have any knowledge or notice thereof). The obligations of the Guarantor set forth in this Guarantee constitute the full recourse obligations of the Guarantor enforceable against it to the full extent of all of the Guarantor's assets and properties, notwithstanding any provision in any agreement limiting the liability of any other Person or entity. 4. The Guarantor hereby waives notice of, and consents to, any change in the time, manner or place of payment or performance, and any other amendment or waiver, or any consent to departure or other indulgence, from time to time granted to Talegen or Ridge Re by Buyer or any other Protected Party with respect to the matters guaranteed hereunder, and the Guarantor hereby waives notice of nonperformance or nonpayment and, except as provided herein, all other notices and demands whatsoever and any requirement that Buyer or any other Protected Party protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right. 5. No amendment or waiver of any provision of this Guarantee nor any consent to any departure by the Guarantor herefrom shall in any event be effective unless the same shall be in writing and signed by the party or parties against whom such amendment or waiver is sought to be enforced, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of any party to exercise or delay in exercising any right hereunder shall operate as a waiver of, nor shall any single or partial exercise of any right hereunder 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. 6. The Guarantor represents and warrants to Buyer and to the other Protected Parties as follows: (a) The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Guarantor is duly qualified to do business in each jurisdiction in which the ownership of properties by the Guarantor and the business and activities of the Guarantor require such qualification, except where the failure to be so qualified would not have a material adverse effect on the financial condition, business or results of operation of the Guarantor or on the ability of the Guarantor to perform its obligations under this Guarantee; (b) The Guarantor has full power, authority and legal right to own its properties and to carry on its business as now conducted and is duly authorized and empowered to execute, deliver and perform its obligations under this Guarantee; (c) This Guarantee has been duly authorized, executed and delivered by the Guarantor and constitutes a legal, valid and binding instrument, enforceable against the Guarantor in accordance with its terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally; and (d) Neither the execution and delivery of this Guarantee by the Guarantor, nor the consummation by the Guarantor of the transactions contemplated hereby to be performed by it, nor compliance by the Guarantor with any of the terms or provisions hereof, will (i) violate any provision of the Certificate of Incorporation or By-Laws of the Guarantor or (ii) violate in any material respect any Applicable Law with respect to the Guarantor, or any of its material properties or assets. 7. This Guarantee is a continuing guarantee and shall remain in full force and effect until payment in full of the obligations and all other amounts payable under this Guarantee and shall(a) be A-2 binding upon the Guarantor, its successors and assigns, and (b) inure to the benefit of and be enforceable by (i) any successors of Buyer, or any transferee of all or substantially all of the assets of Buyer, and (ii) any successors, heirs, executors or beneficiaries of any of the other Protected Parties. Neither the terms nor execution of this Guarantee shall prohibit the Guarantor's sale, assignment or transfer of all or a part of its interest in Talegen or Ridge Re; provided, however, that in the event of any such sale, assignment or transfer, this Guarantee shall remain in full force and effect. 8. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall be, as to such jurisdiction, ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition on unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9. This Guarantee shall be governed, construed, applied and enforced in accordance with the laws of the State of New York, and no defense given or allowed by the laws of any other state or country shall be interposed in any action hereon unless such defense is also given or allowed by the laws of the State of New York. 10. This Agreement is not intended to confer upon any person other than the parties hereto and the other Protected Parties any rights or remedies hereunder. 11. This Guarantee may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. This Guarantee shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that the parties need not sign the same counterpart. A-3 IN WITNESS WHEREOF, each of the parties hereto has caused this Guarantee to be executed on its behalf by its duly authorized officer. XEROX FINANCIAL SERVICES, INC. By:___________________________ Name: Title: ACE LIMITED By:___________________________ Name: Title: A-4 EXHIBIT B FORM OF RIDGE RE AMENDMENT ENDORSEMENT #2 TO THE SPRINGING FIRST AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT By and between WESTCHESTER FIRE INSURANCE COMPANY WESTCHESTER SURPLUS LINES INSURANCE COMPANY (formerly Industrial Indemnity Company of Hawaii) INDUSTRIAL UNDERWRITERS INSURANCE COMPANY and RIDGE REINSURANCE LIMITED and XEROX FINANCIAL SERVICES, INC. I. Article XIII entitled "Term, Termination and Commutation" is hereby amended by deleting it in its entirety and inserting the following new Article XIII entitled "Term, Termination and Commutation": ARTICLE XIII ------------ TERM, TERMINATION AND COMMUTATION --------------------------------- (a) Term. This Agreement shall be effective as of the date hereof and ---- shall remain in effect until the natural expiry of all liabilities on the Subject Business, or until termination or commutation in accordance with Sections (b) and (c) of this Article XIII. (b) Termination. Except as provided for in Section (c) of this ----------- Article, this Agreement shall be noncancelable, except at the discretion of the Commissioner acting as rehabilitator, liquidator or receiver of the Company or the Reinsurer. (c) Commutation. At the end of each full calendar year from and ----------- including 2002 to and including 2007, the Company and the Reinsurer shall attempt to commute this Agreement by mutual consent. If no commutation or other termination of this Agreement occurs prior to the end of the calendar year 2007, the Company and the Reinsurer shall commute this Agreement either by mutual consent at a price to be agreed or, if no agreement is reached by June 30, 2008, the Company and the Reinsurer shall submit to binding arbitration by a nationally recognized actuarial firm, reasonably acceptable to both parties, whose decision as to price shall be final and binding on the Company and the Reinsurer. Notwithstanding anything in the foregoing to the contrary, until June 30, 2008 the parties may arbitrarily refuse to agree to a commutation. (d) Due and Unpaid Obligations. Notwithstanding anything herein to -------------------------- the contrary, any unpaid or outstanding obligations of the Reinsurer due or overdue the Company at the time of the termination, commutation or expiration of this Agreement shall be paid upon such termination, commutation or expiration of this Agreement. II. Article XVIII entitled "Miscellaneous" is hereby amended by inserting at the end thereof a Section (g) to read as follows: "(g) Waiver of Offset Rights by Reinsurer. The Reinsurer shall pay to ------------------------------------ the Company any and all amounts payable hereunder without regard to any rights of offset that the Reinsurer may have against the Company or XFS, any such rights of offset hereby being waived." IN WITNESS WHEREOF the parties hereto have caused this Endorsement to be executed on their behalf by their respective officers thereunto duly authorized as of the date first written in the Agreement to which this Endorsement applies. RIDGE REINSURANCE LIMITED B-2 By:___________________________ Name: Title: Attest: By:_______________________ Name: Title: WESTCHESTER FIRE INSURANCE COMPANY By:___________________________ Name: Title: Attest: By:_______________________ Name: Title: B-3 WESTCHESTER SURPLUS LINES INSURANCE COMPANY By:___________________________ Name: Title: Attest: By:_______________________ Name: Title: INDUSTRIAL UNDERWRITERS INSURANCE COMPANY By:___________________________ Name: Title: Attest: By:_______________________ Name: Title: XEROX FINANCIAL SERVICES, INC. By:___________________________ Name: Title: Attest: By:_______________________ Name: Title: B-4 EXHIBIT C [NOT USED] EXHIBIT D FORM OF RELEASE OF TAX SHARING AGREEMENTS This Release of obligations under the Xerox Corporation/Crum and Forster, Inc. Federal Income Tax Allocation Agreement ("Xerox/C&F Tax Sharing Agreement") and obligations under the Crum and Forster, Inc. Federal Income Tax Allocation Agreement ("C&F Tax Sharing Agreement") is made and entered into by and among Xerox Corporation, a New York corporation ("Xerox"); Xerox Financial Services, Inc., a Delaware corporation ("XFS"); Talegen Holdings, Inc., a Delaware corporation ("Talegen"); and Westchester Specialty Group, Inc., a Delaware corporation (the "Company"), Westchester Fire Insurance Company, a New York corporation, Westchester Surplus Lines Insurance Company, a Georgia corporation, Industrial Underwriters Insurance Company, a Texas corporation, Westchester Specialty Insurance Services, Inc., a Nevada corporation, and Industrial Excess & Surplus Insurance Brokers, a California corporation (collectively, the "Company Subsidiaries"), dated as of ____________ __, 1997. WHEREAS, XFS, Talegen, and the Company are among the parties to the Purchase Agreement and the Tax Agreement, as defined herein; WHEREAS, as of the Closing Date, Section 11(d) of the Tax Agreement terminates, with respect to the Company and the Company Subsidiaries, any and all agreements with respect to Taxes (other than the Purchase Agreement and the Tax Agreement) to which the Company or any of the Company Subsidiaries, on the one hand, and Talegen or any of its subsidiaries (other than the Company and the Company Subsidiaries), on the other hand, are or were parties at any time at or before the Closing Date; WHEREAS, as of the Closing Date, Section 11(d) of the Tax Agreement extinguishes, with respect to the Company and the Company Subsidiaries, any and all liabilities with respect to Taxes (other than under the Purchase Agreement and the Tax Agreement) between the Company or any of the Company Subsidiaries, on the one hand, and Talegen or any of its subsidiaries (other than the Company and the Company Subsidiaries), on the other hand, that exist on the Closing Date; and WHEREAS, pursuant to paragraph 6.19 of the Purchase Agreement, it has been agreed that the Company and each of the Company Subsidiaries shall execute and deliver to Xerox, XFS and Talegen, and Xerox, XFS and Talegen shall execute and deliver to the Company and each of the Company Subsidiaries, releases of any and all obligations under tax sharing agreements (other than under the Tax Agreement) existing as of the Closing Date; NOW THEREFORE, in consideration of the mutual promises contained herein and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. a. "C&F TAX SHARING AGREEMENT" -- the Federal Income Tax Allocation Agreement by and between Crum and Forster, Inc., a New Jersey Corporation ("C&F") (now Talegen), and each of its subsidiaries incorporated in the United States, effective January 11, 1983 and amended April 15, 1992, referenced in and made part of the Xerox/C&F Tax Sharing Agreement. b. "CLOSING DATE" -- the Closing Date as defined in the Purchase Agreement. c. "PURCHASE AGREEMENT" -- the stock purchase agreement, dated as of September 18, 1997, pursuant to which ACE Limited, a Cayman Islands corporation ("Buyer"), will purchase from Talegen, and Talegen will sell to Buyer, all of the issued and outstanding capital stock of the Company. d. "TAX AGREEMENT" -- the Tax Allocation and Indemnification Agreement dated as of the date of the Purchase Agreement and made and entered into among XFS, Talegen, the Company and Buyer. e. "TAXES" -- Taxes as defined in the Tax Agreement. f. "XEROX/C&F TAX SHARING AGREEMENT" -- the Federal Income Tax Allocation Agreement by and between Xerox and C&F on behalf of C&F and its subsidiaries incorporated in the United States, effective January 11, 1983, and amended April 15, 1992. 2. As of the Closing Date, the Company and each of the Company Subsidiaries hereby fully and completely release Xerox, XFS and Talegen, and each of them, and Xerox, XFS and Talegen hereby fully and completely release the Company and each of the Company Subsidiaries, from any and all obligations contained in or derived from either the Xerox/C&F Tax Sharing Agreement or the C&F Tax Sharing Agreement. There shall be no continuing obligations pursuant to the termination provisions of either the Xerox/C&F Tax Sharing Agreement or the C&F Tax Sharing Agreement. 3. The Company and each of the Company Subsidiaries understands that neither Xerox, XFS, nor Talegen shall make any payments on or after the Closing Date to the Company or any of the Company Subsidiaries under either the Xerox/C&F Tax Sharing Agreement or the C&F Tax Sharing Agreement, and that payments, if any, to the Company and the Company Subsidiaries from Xerox, XFS or Talegen on and after the Closing Date with respect to Taxes shall be made pursuant only to the Tax Agreement. 4. Xerox, XFS and Talegen understand that the Company and the Company Subsidiaries shall not make any payments on or after the Closing Date under either the Xerox/C&F Tax Sharing Agreement or the C&F Tax Sharing Agreement and that any payments to Xerox, XFS or Talegen on or after the Closing Date with respect to Taxes shall be made pursuant only to the Tax Agreement. 5. This Release shall be binding on and inure to the benefit of any successor, by merger, acquisition of assets, or otherwise, to any of the parties hereto to the same extent as if such successor had been an original party to this Release. 6. Except as provided in paragraph 5 above, this Release shall be neither assignable nor transferable by any party hereto, whether by operation of law or otherwise, without the prior consent of the other parties hereto. D-2 7. This Release shall be governed by and construed in accordance with the laws of the State of New York. XEROX CORPORATION By:_____________________________ Name: Title: XEROX FINANCIAL SERVICES, INC. By:_____________________________ Name: Title: TALEGEN HOLDINGS, INC. By:_____________________________ Name: Title: WESTCHESTER SPECIALTY GROUP, INC. By:_____________________________ Name: Title: WESTCHESTER FIRE INSURANCE COMPANY By:_____________________________ Name: Title: WESTCHESTER SURPLUS LINES INSURANCE COMPANY By:_____________________________ Name: D-3 Title: INDUSTRIAL UNDERWRITERS INSURANCE COMPANY By:_____________________________ Name: Title: WESTCHESTER SPECIALTY INSURANCE SERVICES, INC. By:_____________________________ Name: Title: INDUSTRIAL EXCESS & SURPLUS INSURANCE BROKERS By:_____________________________ Name: Title: D-4 EXHIBIT E FORM OF OPINION OF LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. 1. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 2. Upon the delivery of and payment for the Shares as provided under the Agreement, and issuance of new certificates representing the Shares in the name of Buyer, and assuming that Buyer effected its purchase in good faith and without notice of an adverse claim within the meaning of Section 8-302 of the New York Uniform Commercial Code, Buyer will acquire Seller's rights in the Shares free of any adverse claim. 3. (a) Seller has full corporate power and authority to execute and deliver the Agreement and the Tax Agreement and to consummate the transactions contemplated thereby. The execution and delivery of the Agreement and the Tax Agreement and the consummation of the transactions contemplated thereby have been duly and validly approved by all requisite corporate action on the part of Seller, and no other corporate proceedings on the part of Seller are necessary to approve the Agreement or the Tax Agreement or to consummate the transactions contemplated thereby. The Agreement and the Tax Agreement have been duly and validly executed and delivered by Seller and (assuming the due authorization, execution and delivery of the Agreement and the Tax Agreement by Buyer and the other parties thereto) constitute valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. (b) Parent has full corporate power and authority to enter into the Guarantee and to consummate the transactions contemplated thereby. The execution and delivery by Parent of the Guarantee and the consummation of the transactions contemplated thereby have been duly authorized by all requisite corporate action on the part of Parent, and no other corporate proceedings are required on the part of Parent to approve the Guarantee or to authorize the transactions contemplated thereby. The Guarantee has been duly executed and delivered by Parent and, assuming the due authorization, execution and delivery by the other party thereto, constitutes the valid and binding obligations of Parent, enforceable in accordance with its terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. 4. Except for the applicable filings under the HSR Act and the filing of a notice pursuant to the Exon-Florio Amendment, no consents or approvals of or filings or registrations under New York law or the federal law of the United States are necessary in connection with (i) the execution and delivery by Seller of the Agreement, and (ii) the consummation by Seller of the transactions contemplated thereby, other than those filings, consents and approvals which have been obtained. EXHIBIT F FORM OF OPINION OF MAPLES & CALDER 1. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the Cayman Islands. 2. Buyer has full corporate power and authority to execute and deliver the Agreement and the Ancillary Agreements and to consummate the transactions contemplated thereby. The execution and delivery of the Agreement and the Ancillary Agreements and the consummation of the transactions contemplated thereby have been duly and validly approved by all requisite corporate action on the part of Buyer, and no other corporate proceedings on the part of Buyer are necessary to approve the Agreement or the Ancillary Agreements or to consummate the transactions contemplated thereby. The Agreement and the Ancillary Agreements have been duly and validly executed and delivered by Buyer and (assuming the due authorization, execution and delivery of the Agreement and the Ancillary Agreements by Seller and the other parties thereto) constitute valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms, except as enforcement may be limited by general principles of equity, whether applied in a court of law or a court of equity, and by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights and remedies generally. FORM OF OPINION OF MAYER, BROWN & PLATT 1. Except for the applicable filings under the HSR Act and the filing of a notice pursuant to the Exon-Florio Amendment, no consents or approvals of or filings or registrations under New York law or the federal law of the United States are necessary in connection with (i) the execution and delivery by Buyer of the Agreement, and (ii) the consummation by Buyer of the transactions contemplated thereby, other than those filings, consents and approvals which have been obtained.
------------------------------------ CENTRAL SECRETARIAL CONTROL SHEET JOB #: - ------------------------------------------------------------------------------------------------------------------------------------ PLEASE COMPLETE THIS FORM IN ENTIRETY. WRITE OUT ALL SPECIAL INSTRUCTIONS TO ASSURE THAT YOUR WORK WILL BE COMPLETED. - ------------------------------------------------------------------------------------------------------------------------------------ ATTORNEY:RABINOWITZ ATTORNEY #: 5111 EXT.: 8029 - ------------------------------------------------------------------------------------------------------------------------------------ CLIENT:. CLIENT #: 19350 FLOOR: - -------------------------------------------------------------------------------------------------------============================= MATTER: MATTER #: 769 OVERTIME - ------------------------------------------------------------------------------------------------------- [_] Yes [_] No DOCUMENT TITLE: STOCK PURCHASE AGREEMENT ==================================================================================================================================== DATE/TIME DUE: RETURN INSTRUCTIONS ================================================================================================ SPECIAL INSTRUCTIONS: [_] 15-Minute Pickup [_] Call when Ready [_] Page when Ready [_] Interoffice (after 4:45P) [_] Hold in Center for Pickup [_] Other: ==================================================================================================================================== WORD PROCESSING / SECRETARIAL SERVICES - ------------------------------------------------------------------------------------------------------------------------------------ TREATMENT PROOFREADING SERVICES PROOFREADING [_] Input/Scan [_] Full Read (Word-for-word proofing of all text) [_] Revise [_] Verbatim (Keep errors that appear in original) [_] Cold Read (Read through for sense - no master) [_] Copy to New File Name and Revise [_] Revisions and Slugs (Full read riders) [_] Create New Version under Same File Name and Revise BLACKLINING [_] Pencil Changes (Caret and score all deletions/additions) [_] Proofread Only [_] Composite (Caret and score all differences from two or more [_] Print Only masters) [_] Tape Transcription [_] Print-to-Print (Full read final against master and mark all differences on final) - ------------------------------------------------------------------------------------------------------------------------------------ COMPARERITE Additions Deletions List Versions: --------- --------- ------------- [_] Bold/Double Underline [_] Strikethrough [_] Shade [_] Caret [_] Latest Two Versions [_] Other ________________ [_] Caret/Score [_] Deletions at End Old Version (Choose one from each column) [_] Other_______________ New Version =================================================================================================================================== TIME CLOCKED IN TIME CLOCKED OUT I [_] H [_] Left Message with ==================================================================================================================================== SYSTEM FILE NAME: Word Processing Operators N.B. --------------------------------------------- B3 305425.11 Originated:SHBLOND -- 8/18/97 at 8:10pm [_] Return to Spvr. when done --------------------------------------------- [_] See Spvr. for special instructions Modified: LWSTOCKE -- 9/10/97 at 7:38pm ====================================================================================================================================
EX-2.3 3 TAX ALLOCATION & INDEMNIFICATION AGREEMENT EXHIBIT 2.3 TAX ALLOCATION AND INDEMNIFICATION AGREEMENT This Tax Allocation and Indemnification Agreement ("Agreement"), dated as of September 18, 1997, is made and entered into by and among Xerox Financial Services, Inc., a Delaware corporation ("Parent"), Talegen Holdings, Inc., a Delaware corporation ("Seller"), Westchester Specialty Group, Inc., a Delaware corporation ("Company"), and ACE Limited, a Cayman Islands corporation ("Buyer"). A. Seller and Buyer are parties to a Stock Purchase Agreement dated as of September 18, 1997 ("Purchase Agreement"), pursuant to which Buyer or its assigns will purchase from Seller, and Seller will sell to Buyer or its assigns, all of the issued and outstanding capital stock of the Company. B. The parties hereto wish to provide for indemnification against certain liabilities for Taxes and for payments relating to certain Tax benefits, as set forth herein. The parties also desire to allocate responsibility for the preparation and filing of Tax Returns and the payment of Taxes, and provide for related matters. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and in the Purchase Agreement, the parties hereby agree as follows: 1. Definitions. When used herein, the following terms shall have the ----------- following meanings: "Additional Consideration " -- as defined in the Section (f)(ii)(C) hereof. ------------------------ "Affiliate " -- as defined in the Purchase Agreement. --------- "Allocated AMT Credit " -- as defined in Section 5(f)(ii)(B) hereof. -------------------- "Closing" -- as defined in the Purchase Agreement. ------- "Closing Date" -- as defined in the Purchase Agreement. ------------ "Code" -- the Internal Revenue Code of 1986, as amended. ---- "Company Federal Tax Settlement Payment Schedule" -- as defined in Section ----------------------------------------------- 3(d)(i) hereof. "Company GAAP Financial Statements" -- as defined in the Purchase --------------------------------- Agreement. "Company Group" -- Company and each other corporation that joins with ------------- Company in filing a consolidated federal Income Tax Return for the applicable Taxable Year, and every other corporation that is, at any time after the Closing Date, a direct or indirect United States Subsidiary of Buyer or any such includable corporation. "Company Pro Forma Alternative Minimum Taxable Income or Loss" -- Company ------------------------------------------------------------- Pro Forma Taxable Income or Loss modified as required under the provisions the Code to determine alternative minimum taxable income. "Company Pro Forma Taxable Income or Loss" -- as defined in Section 3(c)(i) ---------------------------------------- hereof. "Crostex/Camfex Leases" -- as defined in the Purchase Agreement. ----------------------- "Crostex/Camfex Purchase Money Documents" -- as defined in the Purchase ----------------------------------------- Agreement. "Federal Tax Settlement Payment" -- as defined in Section 3(b) hereof. ------------------------------ "Final Company Federal Tax Settlement Payment Schedule"-- as defined in ----------------------------------------------------- Section 3(d)(iii)(B) hereof. "Final Parent Federal Tax Settlement Payment Schedule" -- as defined in ---------------------------------------------------- Section 3(d)(iii)(B) hereof. "Final Determination" -- (i) a decision, judgment, decree or other order by ------------------- the United States Tax Court or any other court of competent jurisdiction, that has become final and unappealable, (ii) a closing agreement under Section 7121 of the Code or a comparable provision of any state, local or foreign Tax law that is binding against the Internal Revenue Service or other Taxing Authority, (iii) any other final settlement with the Internal Revenue Service or other Taxing Authority, or (iv) the expiration of an applicable statute of limitations. "Income Tax" -- with respect to any corporation or group of corporations, ---------- any and all Taxes based upon or measured by net income, including, but not limited to any alternative or add-on minimum taxes, and any "special estimated tax payment" made pursuant to Section 847 of the Code, imposed by the Internal Revenue Service or any other Taxing Authority, together with interest, penalties and other additions. "Income Tax Return" -- with respect to any corporation or group of ----------------- corporations, any Tax Return with respect to Income Tax. 2 "Independent Accounting Firm" -- means any "Big Six" accounting firm or its --------------------------- successor, except for the respective independent public accountants of Seller, Buyer or their respective Affiliates or Subsidiaries. "Information Return" -- with respect to any corporation or group of ------------------ corporations, any and all reports, returns, declarations or other filings (other than Tax Returns), including but not limited to federal and state wage reporting, employment, and unemployment Tax returns (e.g., IRS Forms 940, 941, ---- W-2, W-3 and their state and local equivalents) as well as reports of payments made (e.g., IRS Forms 1099 and 1042), that are required under applicable law to ---- be supplied to any Taxing Authority. "Insurance Subsidiaries" -- as defined in the Purchase Agreement. ---------------------- "1990 through 1994 Uncollectible Reinsurance Deductions" -- the net ------------------------------------------------------ incremental deductions to which Company and its Subsidiaries are entitled for uncollectible reinsurance recoverables for the 1990 through 1994 Taxable Years applying the method for writing off uncollectible reinsurance recoverables agreed to during the 1987 through 1989 Tax audit as set forth in Schedule 5(f) hereto, whether such incremental deductions or the benefits arising from the utilization thereof are secured or realized by the Company and its Subsidiaries during the 1990 through 1994 Taxable Years or in subsequent Taxable Years. "Overdue Rate" -- the prime rate of interest as reported in the "Money ------------ Rates" column of the Wall Street Journal (or the generally prevailing "prime rate" as charged by major New York banks, if a prime rate is not so published in the Wall Street Journal) on the first business day of the month for which interest is computed. "Parent Federal Tax Settlement Payment Schedule" -- as defined in Section ---------------------------------------------- 3(d)(ii) of this Agreement. "Post-1996 Straddle Period" -- the portion of a Straddle Period beginning ------------------------- on January 1, 1997. "Post-Closing Taxable Year" -- a Taxable Year that begins after the Closing ------------------------- Date. "Pre-1997 Straddle Period" -- the portion of a Straddle Period ending on ------------------------ and including December 31, 1996. "Pre-Closing Taxable Year" -- a Taxable Year that begins before the Closing ------------------------ Date. 3 "Pro Forma Adjustments" -- (i) the "additional deduction" allowable under --------------------- Section 847(1) of the Code; (ii) the amount includable in gross income under Section 847(5) of the Code; (iii) any income, deduction, gain, or loss attributable to (1) the transfer to or from the Company (or any of its Subsidiaries) of the Crostex/Camfex Leases and Crostex/Camfex Purchase Money Documents pursuant to Section 6.11 of the Purchase Agreement; (2) any deferred intercompany transaction (as determined under Reg. (S)(S) 1.1502-13 and -13T) occurring on or prior to Closing that is recognized as a result of the sale of Company stock under the Purchase Agreement, or (3) any excess loss account under Reg. (S) 1.1502-19 that is recognized as a result of the sale of Company stock under the Purchase Agreement; (iv) any employee compensation that Seller is required to pay under the Purchase Agreement; and (v) for the Taxable Year beginning on January 1, 1997, an amount of deductions equal to the excess of (1) the amount of "losses incurred" determined under section 832(b)(5) of the Code as of the end of such Taxable Year for the Company and its Subsidiaries over (2) the amount of "losses incurred" determined under section 832(b)(5) of the Code as of the end of such Taxable Year for the Company and its Subsidiaries without regard to losses in the amounts, and according to the lines of business and accident years, shown on Schedule 3(c) hereto. "Pro Forma Subsidiaries Consolidated Return" -- as defined in Section ------------------------------------------ 5(f)(ii)(C) hereof. "Purchase Agreement" -- as defined in Paragraph A of the Preamble to this ------------------ Agreement. "Reg. (S)" -- a provision of the Regulations promulgated under the Code. -------- "Reinsurance Deduction" -- as defined in Section 2(c)(iii) hereof. --------------------- "SAP Financial Statements" -- as defined in the Purchase Agreement. ------------------------ "Schedule" -- as defined in Section 5(f)(ii)(B) hereof. -------- "Straddle Period" -- any Taxable Year of Company or of any of its --------------- Subsidiaries that begins on or before, and ends after, December 31, 1996. "Subsidiary" -- as defined in the Purchase Agreement. ---------- "Stub Period" -- the Taxable Year of Company and its Subsidiaries beginning ----------- on January 1, 1997 and ending on and including the Closing Date. "Tax" -- all taxes, charges, fees, and levies based upon gross income, --- gross receipts, premiums, profits, sales, use, value added, transfer, employment or payroll, including, without limitation, any ad valorem, environmental, excise, license, occupation, property, severance, stamp, withholding, or windfall profit tax, any custom duty or other tax, and any Income Tax, 4 together with any interest credit or charge, penalty, addition to tax or additional amount imposed by any Taxing Authority. "Tax Return" -- with respect to any corporation or group of corporations, ---------- all reports, estimates, extension requests, information statements and returns (other than Information Returns) relating to, or required to be filed in connection with, any payment of any Tax. "Taxable Year" -- with respect to any Tax of any corporation, or any group ------------ of corporations filing a consolidated, combined or unitary return for federal, state, local or foreign Tax purposes, the period for which the Tax is computed. "Taxing Authority" -- the Internal Revenue Service and any other domestic ---------------- or foreign governmental authority responsible for the administration of any Tax. "Xerox Affiliated Group" -- Xerox Corporation and each corporation (an ----------------------- includable corporation) that joins with Parent in filing a consolidated federal Income Tax Return for the applicable Taxable Year. "Xerox Group" -- the Xerox Affiliated Group and every other corporation ----------- that is, at any time after the Closing Date, a direct or indirect Subsidiary of any member of the Xerox Affiliated Group. 2. Filing of Tax Returns; Payment of Taxes. --------------------------------------- (a) Filing of Tax Returns; Copies of Tax Returns. -------------------------------------------- (i) Federal Income Tax Returns. Parent shall cause to be prepared -------------------------- and filed on a timely basis a consolidated federal Income Tax Return for the Xerox Affiliated Group for the 1996 and 1997 Taxable Years and shall include therein the income, gain, loss, deduction, expense and credits of Company and its Subsidiaries, which items shall be determined, unless otherwise agreed by the parties, on the basis of an interim closing of the books for the portion of the 1997 Taxable Year during which the Company and its Subsidiaries were members of the Xerox Affiliated Group. The amount of the discount under Section 846 of the Code with respect to the unpaid losses, loss adjustment expenses, and salvage and subrogation of Company and its Subsidiaries, as of the Closing Date, shall be determined for the Stub Period according to the interpolation methodology set forth in Schedule 2(a) hereto and by allocating such unpaid losses, loss adjustment expenses, and salvage and subrogation to the lines of business and accident years in accordance with a Seller report provided to Buyer no later than 30 days prior to the filing of the Tax Return to which such report relates. In determining the amounts and information included in such report, Seller shall apply actuarial methods and assumptions which are consistent with those applied by the Insurance Subsidiaries to estimate their liability for loss and 5 loss adjustment expenses net of retrocessional recoveries and salvage and subrogation as of December 31, 1996 in the SAP Financial Statements, taking into account the loss experience and operations of the Insurance Subsidiaries through the Closing Date. (ii) Tax Returns Other Than Federal Income Tax Returns. Company ------------------------------------------------- shall prepare and, subject to Section 2(d)(ii) hereof, shall file (or caused to be filed) on a timely basis all federal, state, local, and foreign Tax Returns that (A) include Company or any of its Subsidiaries, or all of them, for all Pre-Closing Taxable Years but (B) exclude all other members of the Xerox Group. (iii) Parent Review of Tax Returns Prior to Filing. At least -------------------------------------------- fifteen (15) business days before each due date for the filing of Tax Returns required to be filed in respect of the Company or its Subsidiaries, or any of them, pursuant to Section 2(a)(ii) hereof, Company shall provide Parent a schedule listing all Tax Returns due as of such date (showing for each such Tax Return the taxpayer, type of Tax, the Taxing Authority, the total amount of Tax shown on the Tax Return, and the amount of Tax due or overpaid). The Company shall, within three (3) business days after Parent's request, provide to Parent a copy of any listed Tax Return. Within ten (10) business days after each due date for the filing of any Tax Return required to be filed pursuant to Section 2(a)(ii) hereof, Company shall provide to Parent a statement signed by Company's Chief Financial Officer affirming that, except as otherwise disclosed in detail in such affirmation statement -- (A) all Tax Returns required to be filed as of such date were included on the respective schedule of Tax Returns provided to Parent pursuant to this Section 2(a)(iii), (B) each Tax Return copy provided to Parent is an exact copy of the Tax Return as filed with the Taxing Authority, and (C) each Tax Return for which no copy was provided to Parent reported the same amounts of total Tax and Tax due or overpaid as shown on the schedule for such Tax Return. (b) Extensions Taken Into Account. For purposes of this Section 2, ----------------------------- any Tax Return shall be considered to have been filed on a timely basis if it is filed on or before the due date for such filing, and the due date for filing any Tax Return shall take into account all valid extensions. (c) Filing Information; Closing of Taxable Years. ------------------ (i) Filing Information. Pursuant to Section 9(a)(i) hereof, ------------------ Company shall (and shall cause its Subsidiaries, or any of them, to) submit to Parent in a timely fashion in accordance with past practice all filing information necessary for the preparation and filing of the Income Tax Returns that are the responsibility of Parent pursuant to Section 2(a)(i) hereof, provided that the filing information for the federal Income Tax Returns referred to in Section 2(a)(i) hereof shall be submitted to Parent no later than July 15, 1998 for Taxable Years that begin on or after January 1, 1997. 6 (ii) Closing of Taxable Years. Unless prohibited by applicable ------------------------ law, for state, local and foreign Income Tax purposes, the Taxable Year of Company and those of its Subsidiaries that (A) are members of the Xerox Affiliated Group or (B) are included in any state, local or foreign consolidated, combined or unitary Income Tax Return with one or more members of the Xerox Affiliated Group shall end on and include the Closing Date, and Company and its Subsidiaries shall begin a new Taxable Year on the day after the Closing Date. All Tax Returns referred to in Section 2(a) hereof shall be prepared and filed consistent with this Section 2(c)(ii). (iii) Reinsurance Expense. The parties recognize that the ------------------- reinsurance premium paid pursuant to section 6.17(f) of the Purchase Agreement is an expense that is properly allocable to the post-closing Tax period, and the parties intend that such expense be treated consistently for Tax purposes. To that end Buyer agrees that the deduction for such expense (the "Reinsurance Deduction") shall be claimed by the Company and its Subsidiaries in the Taxable Year that immediately follows the Closing, and Seller and Company agree that no such deduction shall be claimed in a Pre-Closing Taxable Year. (d) Consistent Preparation. ---------------------- (i) Preparation of Tax Returns. Company shall prepare (or cause -------------------------- to be prepared) all Tax Returns required to be prepared pursuant to Section 2(a)(ii) hereof and all information required to be submitted to Parent pursuant to Section 2(c)(i) hereof, using the methods used in reporting items of income, gain, loss, deduction, expense and credit of Company and its Subsidiaries, as reflected on Tax Returns filed prior to the date hereof, taking into account any adjustments resulting from any audit or other examination of such Tax Returns and applicable law. (ii) Disputes Over Treatment of Items. In the event that Parent -------------------------------- disputes any item shown on any Tax Return prepared (or caused to be prepared) by Company pursuant to Section 2(a)(ii) hereof, neither Company nor any of its Subsidiaries shall file such Tax Return except as in accordance with the provisions of this Section 2(d)(ii). If Parent and Company are unable to resolve such dispute between themselves no later than ten (10) business days before the due date of such Tax Return, then they shall jointly retain an Independent Accounting Firm to resolve such dispute, and they shall each take all reasonable and appropriate steps necessary to assist the Independent Accounting Firm in resolving such dispute prior to such due date; provided, however, that the filing of such Tax Return shall not be delayed beyond its due date. If for any reason such dispute is not resolved by the Tax Return due date, the Tax Return shall be filed as though the Parent prevailed in the dispute and shall be amended, if necessary, after the dispute is resolved by the Independent Accounting Firm. Notwithstanding anything to the contrary in the provisions of Section 5(e) hereof, Company shall be entitled to 7 retain, to the extent provided for by the Independent Accounting Firm in its resolution decree with respect to such dispute, a refund of Taxes arising out of the filing of an amended Tax Return associated with such dispute resolution. The fees of the Independent Accounting Firm shall be borne equally by the parties. The resolution of the Independent Accounting Firm under this Section 2(d)(ii) shall be binding on both Parent and Company. 3. Payment of Taxes and Federal Tax Settlement Payment. --------------------------------------------------- (a) Payment of Taxes. ---------------- (i) Parent shall pay (or cause to be paid) to the appropriate Taxing Authority all Income Taxes shown to be due and payable on Income Tax Returns that it is responsible for filing pursuant to Section 2(a)(i). (ii) Company shall pay (or cause to be paid) to the appropriate Taxing Authority all Taxes shown to be due on all state, local, foreign and other federal Tax Returns that it is responsible for filing pursuant to Section 2(a)(ii) hereof. (b) Liability for Federal Tax Settlement Payment. A Federal Tax -------------------------------------------- settlement payment shall be computed and made for the Stub Period (the "Federal Tax Settlement Payment") in accordance with the terms of this Agreement. There shall be no Tax settlement payments during and attributable to the 1996 Taxable Year and the Stub Period other than the Federal Tax Settlement Payment determined under this Agreement and any Tax settlement payments made prior to the date of this Agreement; provided, however, that if a Tax settlement payment must be made prior to the Closing Date under another agreement between the Company or any of its Subsidiaries, on the one hand, and Seller or any of its Subsidiaries (other than the Company and its Subsidiaries), on the other hand, then the required payment shall be made under such other agreement. Appropriate credit shall be given in making Federal Tax Settlement Payment hereunder for any Tax settlement payments, under any agreement other than this Agreement, made prior to the Closing Date relating to either the 1996 Taxable Year or the Stub Period (including repayments of any prior Tax settlement payments for the 1996 Taxable Year or the Stub Period in excess of the required Federal Tax Settlement Payments hereunder). (c) Amount of the Federal Tax Settlement Payment. -------------------------------------------- (i) Company Pro Forma Taxable Income or Loss. For purposes of ---------------------------------------- determining the amount of the Federal Tax Settlement Payment due under Section 3(b) for the Stub Period, the income or loss of Company and its Subsidiaries shall be adjusted by excluding therefrom the Pro Forma Adjustments and shall be determined on a pro forma basis as if Company and its eligible Subsidiaries filed a consolidated federal Income Tax Return separate from the Xerox Affiliated Group ("Company Pro Forma Taxable Income or Loss"). 8 (ii) Amount of Federal Tax Settlement Payment. ---------------------------------------- (A) Where the calculation of either Company Pro Forma Taxable Income or Loss or Company Pro Forma Alternative Minimum Taxable Income or Loss results in income for Company and its Subsidiaries for a Taxable Year, Company shall make a Federal Tax Settlement Payment to Parent, in accordance with Section 3(e), which is equal to the greater of (I) the amount determined by multiplying Company Pro Forma Taxable Income or Loss for such Taxable Year (if greater than zero) by the maximum corporate Income Tax rate applicable under the Code for such Taxable Year to ordinary income and capital gain, as the case may be, and (II) the amount determined by multiplying Company Pro Forma Alternative Minimum Taxable Income or Loss for such Taxable Year (if greater than zero) by the maximum alternative minimum Tax rate applicable under the Code for such Taxable Year. (B) Where the calculation of both Company Pro Forma Taxable Income or Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss result in losses for Company and its Subsidiaries for a Taxable Year, Parent shall make a Federal Tax Settlement Payment to Company, in accordance with Section 3(e), equal to the Tax benefit actually realized by the Xerox Affiliated Group from such loss. Such Tax benefit shall be calculated as the difference in Tax liability resulting when such loss is included in the calculation of the Xerox Affiliated Group Tax liability for the Taxable Year and excluded from the calculation of the Xerox Affiliated Group Tax liability for the Taxable Year. (C) Where the conditions of Section 3(c)(ii)(A) are satisfied for the Taxable Year that begins on January 1, 1997, the amount of the Company's Federal Tax Settlement Payment shall be reduced by an amount equal to 35% of the Pro Forma Adjustments Item (v) and the Company shall make such reduced payment to Parent in accordance with Section 3(e); provided, however, that if, as a result of such reduction, the Federal Tax Settlement Payment becomes a negative, the Parent shall make a Federal Tax Settlement Payment to the Company in accordance with Section 3(e) equal to the absolute value of such negative amount. Where the conditions of Section 3(c)(ii)(B) are satisfied for the Taxable Year that begins on January 1, 1997, the amount of the Parent's Federal Tax Settlement Payment shall be increased by an amount equal to 35% of the Pro Forma Adjustments Item (v) and the Parent shall make such increased payment to the Company in accordance with Section 3(e). (d) Federal Tax Settlement Payment Reporting ---------------------------------------- (i) Company Federal Tax Payment Schedule. Not later than sixty ------------------------------------ (60) days after the Closing Date, Company shall deliver to Parent a schedule showing the amount of Company Pro Forma Taxable Income or Loss and the amount of Company Pro Forma Alternative Minimum Taxable Income or Loss for the Stub Period and, if either amount is 9 positive, the Federal Tax Settlement Payment for the Stub Period. Such schedule (a "Company Federal Tax Settlement Payment Schedule") shall be based on the Tax Return filing information provided pursuant to Section 2(c)(i) (to the extent available) and shall include all supporting workpapers and a brief explanation of the basis on which Company Pro Forma Taxable Income or Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss were computed. Except as otherwise expressly provided in this Agreement, the amount of Company Pro Forma Taxable Income or Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss shall be determined, for all purposes of this Agreement, in conformity with the information provided in Section 2(c)(i) hereof. (ii) Parent Federal Tax Settlement Payment Schedule. Within ---------------------------------------------- thirty (30) days after Parent receives a Company Federal Tax Settlement Payment Schedule for a Taxable Year that reflects losses in the computations of both Company Pro Forma Taxable Income or Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss, Parent shall deliver to Company a revised schedule (a "Parent Federal Tax Settlement Payment Schedule") showing the amount of the Federal Tax Settlement Payment for the Taxable Year, taking into account any Tax benefit actually realized by the Xerox Affiliated Group from such losses. (iii) Preliminary and Final Federal Tax Settlement Payment ---------------------------------------------------- Schedules. - --------- (A) To the extent that any Federal Tax Settlement Payment cannot be determined with finality due to a lack of information and/or the fact that the Xerox Affiliated Group's consolidated federal Income Tax Return will not have been filed, Company or Parent, as the case may be, shall estimate the amount of the Federal Tax Settlement Payment as nearly as possible and shall timely deliver either the Company Federal Tax Settlement Payment Schedule or the Parent Federal Tax Settlement Payment Schedule, as the case may be, indicating the amount of the Federal Tax Settlement Payment estimated in accordance with this Section 3(d)(iii)(A). In the case of a Company estimate, Company shall cause its independent public accountant to confirm to the Parent that each such Company Federal Tax Settlement Payment Schedule provides a reasonable estimate of the amount of Company Pro Forma Taxable Income or Loss and the amount of Company Pro Forma Alternative Minimum Taxable Income or Loss for the applicable Taxable Year determined in conformity with Section 2(c) hereof. In the case of a Parent estimate, Parent shall cause its independent public accountant to confirm to Buyer that each such Parent Federal Tax Settlement Payment Schedule provides a reasonable estimate of the Federal Tax Settlement Payment. (B) If a Company Federal Tax Settlement Payment Schedule provided in accordance with Section 3(d)(i) is based on an estimate, the Company shall prepare and provide a final schedule (a "Final Company Federal Tax Settlement Payment Schedule") no later than July 15, 1998. If a Parent Federal Tax Settlement Payment Schedule provided in 10 accordance with Section 3(d)(ii) is based on an estimate, the Parent shall prepare and provide a final schedule (a "Final Parent Federal Tax Settlement Payment Schedule") no later than October 15, 1998. (iv) Disputes. Within fifteen (15) days after receiving a Company -------- Federal Tax Settlement Payment Schedule or a Final Company Federal Tax Settlement Payment Schedule, Parent will notify Company of any disagreement with any element of Company Pro Forma Taxable Income or Loss or Company Pro Forma Alternative Minimum Taxable Income or Loss, or both, reflected therein. Within fifteen (15) days after receiving a Parent Federal Tax Settlement Payment Schedule or a Final Parent Federal Tax Settlement Payment Schedule, Company will notify Parent of any disagreement with the Tax benefit calculation reflected thereon. Company and Parent will promptly attempt to resolve any such disagreement. If Company and Parent are unable to resolve any such disagreement within forty-five (45) days after receipt of such notice, then the issues remaining unresolved with respect to the amount of Company Pro Forma Taxable Income or Loss or Company Pro Forma Alternative Minimum Taxable Income or Loss, or both, or with respect to the Parent Federal Tax Settlement Payment Schedule or a Final Parent Federal Tax Settlement Payment Schedule, or both, shall be resolved as follows: (A) Company and Parent shall jointly retain an Independent Accounting Firm and, within fifteen (15) days following retention of the Independent Accounting Firm, Company and Parent shall present or cause to be presented to the Independent Accounting Firm the issue or issues that must be resolved. (B) Company and Parent shall encourage the Independent Accounting Firm to render its decision as soon as is reasonably practicable, including, without limitation, prompt compliance with all reasonable requests by the Independent Accounting Firm for information, papers, books, records and the like. All decisions of the Independent Accounting Firm with respect to the issues presented by the parties shall be final and binding on the parties hereto. (C) The fees of such Independent Accounting Firm shall be borne equally by the parties. (D) Within thirty (30) days after a disputed Federal Tax Settlement Payment is agreed to by Company and Parent or determined by the Independent Accounting Firm, Company or Parent, as the case may be, shall pay to Parent or Company, as the case may be, the amount of the Federal Tax Settlement Payment for the Taxable Year less any Federal Tax Settlement Payment amount previously paid in respect of such Taxable Year. 11 (e) Timing of Federal Tax Settlement Payments. ----------------------------------------- (i) Payment by Company. Any Federal Tax Settlement Payment due ------------------ from Company to Parent shall be due and payable to Parent as of the date the Company Federal Tax Settlement Payment Schedule or the Final Company Federal Tax Settlement Payment Schedule, as the case may be, is required to be delivered to the Parent in accordance with this Agreement, except to the extent that a dispute with respect to any such Company Federal Tax Settlement Payment Schedule or such Final Company Federal Tax Settlement Payment Schedule has occurred and is continuing under Section 3(d)(iv) hereof. If such a dispute has occurred, then the Federal Tax Settlement Payment shall become payable as provided in Section 3(d)(iv)(D) hereof. (ii) Payment by Parent. Any Federal Tax Settlement Payment due ----------------- from Parent to Company shall be due to Company as of the date the Parent Federal Tax Settlement Payment Schedule or the Final Parent Federal Tax Settlement Payment Schedule, as the case may be, is required to be delivered to Company in accordance with this Agreement, except to the extent that a dispute with respect to any such Parent Federal Tax Settlement Payment Schedule or such Final Parent Federal Tax Settlement Payment Schedule has occurred and is continuing under Section 3(d)(iv) hereof. If such a dispute has occurred, then the Federal Tax Settlement Payment shall become payable as provided in Section 3(d)(iv)(D) hereof. (iii) Interest on Additional Federal Tax Settlement Payments. Any ------------------------------------------------------ additional Federal Tax Settlement Payment arising from adjustments shown on a Company Federal Tax Settlement Payment Schedule, a Final Company Federal Tax Settlement Payment Schedule, a Parent Federal Tax Settlement Payment Schedule, or a Final Parent Federal Tax Settlement Payment Schedule, as the case may be, including adjustments arising from any dispute, shall include interest from the due date of the Company Federal Tax Settlement Payment Schedule as provided in Section 3(d)(i) hereof, or the due date of the Parent Federal Tax Settlement Payment Schedule as provided in Section 3(d)(ii), as the case may be, computed at the Overdue Rate. 4. Information Returns. ------------------- (a) Preparation of Information Returns. Parent shall prepare and file ---------------------------------- (or cause to be prepared and filed) all Information Returns which are required under applicable law to be filed by Parent or Seller in respect of the Company and its Subsidiaries, provided, however, that Company shall provide to Parent -------- ------- any and all information necessary or useful for the filing of such Information Returns in an accurate and timely manner. Company shall prepare and file (or cause to be prepared and filed), in a manner consistent with the prior practices of Company and its Subsidiaries, as applicable, all Information Returns required to be filed by Company and its Subsidiaries, or any of them for any period ending before or including the Closing Date. 12 (b) Extensions Taken Into Account. For purposes of this Section 4, ----------------------------- any Information Return shall be considered to have been filed on a timely basis if it is filed on or before the due date for such filing, and the due date for filing any Information Return shall take into account all valid extensions. (c) Payment of Charges and Fees; Indemnification. Any party required -------------------------------------------- to file any Information Return pursuant to this Section 4 shall pay any related fees or charges (including any such fees or charges that shall thereafter become due and payable with respect to such Information Returns due to a Final Determination) and shall indemnify and hold the other party harmless against any related interest and penalties, as well as any such fees or charges which are assessed against such party as the result of a failure by the party responsible for such filing to file any Information Return in a timely and accurate manner. 5. Indemnification Relating to Taxes; Payment of Refunds; Other Payments. --------------------------------------------------------------------- (a) Indemnification by Parent. Parent shall indemnify Buyer against, ------------------------- and hold it harmless (on an after-Tax basis) from: (i) all liability for Taxes with respect to Company and its Subsidiaries assessed after the Closing Date for all Pre-Closing Taxable Years ending on or before December 31, 1996 and any Pre-1997 Straddle Period, except (A) to the extent of an amount equal to the Taxes accrued as a current liability in the GAAP Financial Statements as of December 31, 1996 of the Company and its Subsidiaries (1) as reduced by an amount equal to any federal Income Taxes accrued in such financial statements up to the amount of any Federal Tax Settlement Payments that the Company ultimately is required to make in respect of the 1996 Taxable Year pursuant to Section 3(c)(ii)(A), and (2) as reduced by an amount equal to all Taxes other than federal Income Taxes accrued in such financial statements up to the amount of any Tax payments made with originally filed non-federal Tax Returns filed with respect to the 1996 Taxable year pursuant to Section 3(a)(ii); (B) to the extent that any such Tax is attributable to an adjustment that results in an increase in the taxable income of Company or its Subsidiaries for any Pre-Closing Taxable Years ending on or before December 31, 1996 or any Pre-1997 Straddle Period and a related decrease in the taxable income of Company or its Subsidiaries in a Post-Closing Taxable Year beginning on or after January 1, 1997 or any Post-1996 Straddle Period; and 13 (ii) all liability for Taxes of any other member of the Xerox Affiliated Group pursuant to any provision of joint and several liability including, without limitation, Reg (S) 1.1502-6 and any corresponding provisions of state, local or foreign law. Notwithstanding anything in the foregoing that might otherwise be read to the contrary, it is hereby understood and agreed that Parent shall have no liability to indemnify Buyer against, or hold it harmless from: any Federal Tax Settlement Payment the Company is required to make to Parent pursuant to Section 3(c)(ii)(A), or any Tax the Company is required to pay (or cause to be paid) pursuant to Section 3(a)(ii) hereof. (b) Obligation of the Buyer and Company to Indemnify. Buyer and ------------------------------------------------ Company shall indemnify (on an after Tax basis) the Parent and Seller against all liability for Taxes with respect to Company and its Subsidiaries for which the Parent is not required to indemnify the Buyer pursuant to Section 5(a) hereof. (c) Tax Obligations for Straddle Periods. Taxes relating to the ------------------------------------ Company and its Subsidiaries for any Straddle Period shall be the joint responsibility of Buyer and Company, on the one hand, and Parent and Seller, on the other hand, and shall be apportioned (based on an interim closing of the books) between the Pre-1997 Straddle Period and the Post-1996 Straddle Period in a fair and equitable manner consistent with past accounting practices as properly adjusted to reflect applicable Tax principles, or in the case of real, personal, and intangible property taxes or any similar Tax, in accordance with the principles of Section 164(d) of the Code. (d) Notice and Payment of Indemnified Amounts. ----------------------------------------- (i) Duty to Notify. Buyer shall notify Parent of any Taxes -------------- paid or incurred by Buyer, Company or its Subsidiaries which are subject to indemnification by Parent under Section 5(a) hereof. Parent shall notify Buyer of any Taxes paid or incurred by Parent or any other member of the Xerox Group which are subject to indemnification by Buyer and Company under Section 5(b) hereof. (ii) Explanation of Claim. Any notice contemplated by this -------------------- Section 5(d) shall include a detailed calculation (including, if applicable, separate allocations of such Taxes between Pre-1997 and Post-1996 Straddle Periods and supporting work papers) and a brief explanation of the basis for such indemnification. (iii) Time for Payment. Within twenty (20) days after the ---------------- receipt of a notice described in this Section 5(d), the notified party shall pay to the notifying party the amount requested in such notice, but only to the extent that the notified party agrees with such request. To the extent that the notified party disagrees with such request, it shall, within the 14 applicable twenty (20) day period, so notify the notifying party. If the parties are unable to settle such disagreement between themselves no later than fifteen (15) days after notice of the disagreement in accordance with this Section 5(d), then they shall jointly retain an Independent Accounting Firm to resolve such dispute. The fees of the Independent Accounting Firm shall be borne equally by the parties. The resolution of the Independent Accounting Firm under this Section 5(d)(iii) shall be binding on Parent on the one hand and Buyer and Company on the other hand. Within thirty (30) days after resolution of such dispute, Buyer or Company on the one hand or Parent on the other hand, as the case may be, shall pay to Parent on the one hand, or Buyer or Company on the other hand, as the case may be, the amount determined by such Independent Accounting Firm to be due pursuant to this Section 5 (d) together with interest at the Overdue Rate from the date the payment was originally due. (e) Parent's Right to Pursue and Retain Refunds. Parent and Seller ------------------------------------------- shall have the right to pursue and shall be entitled to retain, or to receive prompt payment from Buyer, Company or its Subsidiaries to the extent secured by any of them, any overpayment, refund or credit of Taxes (including, without limitation, refunds and credits arising by reason of Tax Returns as originally filed or amended Tax Returns) relating to Company and its Subsidiaries for any and all Pre-Closing Taxable Years ending on or before December 31, 1996 or any Pre-1997 Straddle Period, including without limitation any refunds in respect of the 1990 through 1994 Uncollectible Reinsurance Deductions. If Buyer (or any of its Subsidiaries) or Parent (or any of its Subsidiaries) receives a Tax refund to which the other party is entitled pursuant to this Agreement, the Buyer or Parent, as the case may be, shall pay or cause the recipient to pay the amount of such refund (including any interest received thereon) to such other party within ten (10) days after receipt thereof. Within ninety (90) days after the end of each Taxable Year following the Closing Date, Buyer shall have its Chief Financial Officer tender to Parent a statement showing the aggregate amount of all Tax refunds received to which Parent (or any of its Subsidiaries) is entitled. (f) Other Payments. -------------- (i) Uncollectible Reinsurance Deductions. Any Tax benefit ------------------------------------ realized by the Company Group (or any member thereof) for any Post-Closing Taxable Year with respect to the 1990 through 1994 Uncollectible Reinsurance Deductions shall be paid to the Parent in accordance with the terms hereof whether such Tax benefit results from (i) an originally filed or amended Tax Return of the Company Group (or any member thereof), (ii) an audit or other examination of, or claim for refund or amended Tax Return with respect to, any Tax Return of (or including) any member of the Xerox Group for any Pre-Closing Taxable Year or Pre-1997 Straddle Period, or (iii) otherwise. A deduction or deductions for the 1990 through 1994 Uncollectible Reinsurance Deductions not allowed as deductions for any Pre-Closing Taxable Year or Pre-1997 Straddle Period shall be claimed by the Company and its Subsidiaries in the federal Income Tax Return(s) for the first Taxable Year(s) in which such deduction(s) become allowable to Company or its Subsidiaries, and within twenty (20) days after the filing of a Tax 15 Return in which such deductions are claimed, Buyer shall pay (or cause to be paid) to Parent an amount equal to the Tax benefit attributable to such deductions. For purposes of this provision, the amount of such Tax benefit shall be equal to the excess of the amount of the federal Income Tax liability of the Company Group (or any member thereof, as the case may be) for all Taxable Years affected computed without regard to the 1990 through 1994 Uncollectible Reinsurance Deductions over the amount of the actual federal Income Tax liability of the Company Group (or any member thereof, as the case may be) for all Taxable Years affected after considering the 1990 through 1994 Uncollectible Reinsurance Deductions. If the deductions claimed pursuant to this paragraph are subsequently disallowed pursuant to a Final Determination, Parent shall pay to Buyer the amounts previously paid hereunder with respect to such disallowance (with interest at the Overdue Rate from the original date of payment until the date repaid to Buyer). (ii) Special Payments. ---------------- (A) At Closing, Seller shall make a payment of $13,200,000 to the Company. (B) Within 30 (thirty) business days after the filing of the consolidated federal Income Tax Return by the Xerox Affiliated Group for the 1997 Taxable Year that includes the Stub Period, Seller shall provide Buyer with a schedule (the "Schedule") that sets forth the portion of the consolidated alternative minimum tax credit of the Xerox Affiliated Group allocated to the Company and its Subsidiaries upon Closing (the "Allocated AMT Credit"). Within twenty (20) business days after the receipt of the Schedule, Buyer shall pay to Seller an amount equal to the Allocated AMT Credit shown in the Schedule. (C) Buyer shall pay to Seller an amount not to exceed the excess of (1) $10,200,000 over (2) amounts paid to Seller pursuant to Section 5(f)(ii)(B) hereof (the "Additional Consideration") based on the Reinsurance Deduction, as follows: Buyer shall pay to Seller 50 percent of the Tax benefit of the deduction for the Reinsurance Deduction by the Insurance Subsidiaries in excess of $22,500,000, calculated as if (1) the Insurance Subsidiaries file a consolidated federal Income Tax Return as an "affiliated group" (as that term is defined in Section 1504(a)(1) of the Code) (the "Pro Forma Subsidiaries Consolidated Return") and (2) the deduction for the Reinsurance Deduction is claimed on the Pro Forma Subsidiaries Consolidated Return in accordance with Section 2(c)(iii) hereof. For purposes of this provision, the Insurance Subsidiaries will be considered to receive a federal Income Tax benefit as a result of the deduction of the Reinsurance Deduction as and when the consolidated federal Income Tax liability that would be shown on the Pro Forma Subsidiaries Consolidated Return for any Taxable 16 Year calculated without the deduction for the Reinsurance Deduction exceeds the consolidated federal Income Tax liability that would be shown on the Pro Forma Subsidiaries Consolidated Return for the same Taxable Year calculated with the deduction for the Reinsurance Deduction in accordance with Section 2(c)(iii) hereof. Any amount payable by Buyer under the preceding paragraph shall be paid within twenty (20) business days after the filing of any consolidated federal Income Tax Return that includes the Insurance Subsidiaries for the Taxable Year in which the Insurance Subsidiaries would be considered under this provision to receive a federal Income Tax benefit as a result of the deduction of the Reinsurance Deduction in accordance with Section 2(c)(iii) hereof. Amounts paid pursuant to this provision shall be subject to subsequent adjustment as the parties may agree. Buyer agrees to provide Seller with an annual schedule showing the calculation of the Pro Forma Subsidiaries Consolidated Return showing the availability of payments under this provision (on a "with and without" basis pursuant to this provision). Such schedule, which shall be reviewed and confirmed as accurate by Buyer's independent public accountants, shall be due within twenty (20) business days after the filing each year of the consolidated federal Income Tax Return that includes the Insurance Subsidiaries. 6. Capital Loss, Net Operating Loss, and Credit Carrybacks. ------------------------------------------------------- (a) Payments With Respect to Refund Claims. -------------------------------------- (i) Filing of Claim for Refund; Payment of Tax Benefit. If -------------------------------------------------- Company or any of its Subsidiaries realizes a capital loss or a credit in a Post-Closing Taxable Year that is required, after application of paragraph (b), below, to be carried back to a Taxable Year of the Xerox Affiliated Group (or any member thereof), Parent shall promptly file (or shall cause promptly to be filed) a claim for refund and shall pay (or cause to be paid) to Company the full amount of any Tax benefit, net of any Tax due by the Xerox Affiliated Group on account of such refund, within twenty (20) days of the date such Tax benefit is realized. For purposes of this Section 6(a), the Tax benefit in any Taxable Year shall be equal to the excess of (A) the Tax liability of the Xerox Affiliated Group for such Taxable Year, computed without regard to the capital loss or credit referred to above, over (B) the actual Tax liability of the Xerox Affiliated Group for such Taxable Year after considering such capital loss or credit. (ii) Repayment of Tax Benefit. If Parent has paid an amount in ------------------------ respect of any refund pursuant to Section 6(a)(i) hereof, that amount shall be repaid to Parent (with 17 interest at the Overdue Rate from the original date of payment until the date repaid to Parent) within twenty (20) days after demand therefor by Parent (A) to the extent that the Xerox Affiliated Group subsequently realizes capital losses, credits, or net operating losses that could have been carried back but for the carryback of capital losses or credits of the Company Group (or its members) pursuant to this Section 6(a) or (B) to the extent that the Tax benefit to the Xerox Affiliated Group is subsequently reduced pursuant to a Final Determination. (b) Election to Forgo Carrybacks of Losses, Etc. Company and its ------------------------------------------- Subsidiaries shall elect, where permitted by law, to carry forward any net operating loss, net capital loss, credit or other item arising after the Closing Date that would, absent such election, be carried back to a Pre-Closing Taxable Year of Company or any of its Subsidiaries that file a consolidated, combined, or unitary Tax Return with any member of the Xerox Affiliated Group. If the Xerox Affiliated Group has a consolidated net operating loss or consolidated net capital loss for either the 1996 Taxable Year or 1997 Taxable Year, or both, then Xerox Corporation may elect, pursuant to Reg. (S) 1.1502-20(g), to reattribute to itself all or any portion of the net operating loss attributable to the Company and/or its Subsidiaries, as determined under Reg. (S) 1.1502- 79A(a)(3) for the 1996 Taxable Year and Reg. (S) 1.1502-21T(b)(2)(iv) for the 1997 Taxable Year, and all or any portion of the net capital loss attributable to the Company, as determined under Reg. (S) 1.1502-79A(b)(2) for the 1996 Taxable Year and Reg. (S) 1.1502-22T(b)(3) for the 1997 Taxable Year, and Buyer, Company and its Subsidiaries will execute the documents necessary for the Parent to so elect. 7. Payments. -------- (a) Time and Manner of Payments. All payments made pursuant to --------------------------- Sections 3, 4, 5 or 6 hereof shall be made in immediately available funds. Except as otherwise provided herein, any payment not made when due hereunder shall bear interest at the Overdue Rate from the due date until the date of actual payment. In the absence of a specified date, a payment shall be due twenty (20) days after the later of (i) the date on which the notifying party actually realizes the expense, by incurring an economic detriment, with respect to which such notice relates, or (ii) the date such notice is delivered. (b) Nature of Payments. Any payment owing to the Buyer pursuant to ------------------ this Agreement shall be made to Company and (other than interest on a payment) treated by all parties for all purposes as a payment to the Buyer made as a reduction of purchase price for Company's stock followed by a contribution to Company's capital by the Buyer. Any payment owing to the Parent (or any member of the Xerox Group) shall be made to Parent and (other than interest on a payment) treated by all parties for all purposes as a net adjustment to the purchase price for Company's stock. Any liability or obligation with respect to such payment shall be extinguished through payment to Company or Parent respectively. 18 (c) Deferral of Payments Until Closing. Notwithstanding anything else ---------------------------------- to the contrary in this Agreement, any payment otherwise due hereunder prior to the Closing Date shall become payable within thirty (30) days after the Closing Date, and any such deferred payments shall bear interest at the Overdue Rate from the date such payments would have been due under this Agreement absent the provisions of this Section 7(c) through the date of actual payment. 8. Audits and Other Contests. ------------------------- (a) Notice of Audits or Assessments. Buyer (and any member of the ------------------------------- Company Group) shall promptly notify Parent, and Parent shall promptly notify Buyer, in writing within ten (10) business days from the receipt of notice of any pending or threatened Tax audits or assessments of Company or its Subsidiaries for any Pre-Closing Taxable Year. (b) Federal Income Taxes. -------------------- (i) Parent shall have the sole right to represent the interests of Company and its Subsidiaries, and to employ counsel of its choice at its expense, in any audit or other examination or administrative or court proceeding relating to federal Income Taxes for any Pre-Closing Taxable Year, provided that -------- ---- Parent shall keep Buyer reasonably informed on an ongoing basis with respect to issues affecting the Company and its Subsidiaries. Subject to Parent's rights set forth in the preceding sentence, Buyer shall be entitled, at its expense, to participate in the conduct of any Tax audit or any judicial or administrative proceeding relating to any Tax audit described in the first sentence of this Section 8(b). (ii) Parent shall be entitled to settle any issue relating to Taxes in connection with the contests described in this Section 8(b), provided that Parent shall not settle any such issue or take any action that shall give rise to an increase in Taxes (or a decrease in Tax benefit) for any Post-Closing Taxable Year without informing Buyer, before finalization of such settlement or action. It is hereby understood and agreed that any settlement with respect to the 1990 through 1994 Uncollectible Reinsurance Deductions shall not be treated as giving rise to an increase in Taxes (or a decrease in a Tax benefit) for any Post-Closing Taxable Year. (iii) If Buyer disagrees with any proposed settlement about which Parent has informed Buyer in accordance with the preceding paragraph and proposes a basis for a different settlement, Parent shall nevertheless be entitled to settle the issue unless Buyer provides to Parent (1) an opinion from a "Big Six" accounting firm that the issue has a material ongoing effect and (2) an opinion of counsel from a law firm of national stature agreed upon by Parent and Buyer stating that it is more likely than not that Buyer's proposed settlement would be sustained upon a Final Determination, in which event Parent may pay Buyer an amount equal to the excess of the Taxes attributable to the settlement proposed by the Parent over the Taxes attributable to the settlement proposed by Buyer, and therefore be free to settle such issues in its sole discretion. 19 (c) Other Taxes. Parent shall have the sole right to represent the ----------- interests of Company and its Subsidiaries and settle all issues, and to employ counsel of its choice at its expense, in any audit or administrative or court proceeding relating to Taxes other than federal Income Taxes for any Pre-Closing Taxable Year ending on or before December 31, 1996. Notwithstanding the foregoing and subject to Parent's rights set forth in the preceding sentence, Buyer shall be entitled, at its expense, to participate in the conduct of any Tax audit and any judicial or administrative proceeding relating to any Tax audit described in this Section 8(c). (d) Straddle Periods. All audits or administrative or court ---------------- proceedings relating to any Straddle Period shall be controlled jointly by Parent and Buyer, each to employ counsel of its choice at its expense, provided, however, that settlement (at the administrative level or during the course of judicial proceedings) may only be entered into with the consents of both Parent and Buyer. In the event of an issue arising pursuant to any contest referred to in this Sections 8(d), if Parent or Buyer proposes to settle on terms acceptable to a Taxing Authority, but the other party, Parent or Buyer as the case may be, disagrees with the proposed settlement, then the party proposing to settle may pay the other party its share of the amount of Taxes attributable to the settlement proposed and, in that event, the other party shall have sole responsibility for the settlement of such issue. 9. Cooperation, Record Retention, and Confidentiality. -------------------------------------------------- (a) Cooperation. ----------- (i) Buyer, Company and Subsidiaries to Cooperate. Upon Parent's -------------------------------------------- request, Buyer shall promptly provide (and cause Company and its Subsidiaries, and the other members of the Company Group to promptly provide) Parent with such cooperation and assistance, documents and other information, without charge, as Seller may reasonably request in connection with (A) the preparation of any Tax Return or Information Return, (B) the conduct of any audit or other examination or any judicial or administrative or court proceeding referred to in Section 8 hereof relating to liability for, refunds of or adjustments with respect to (or any other matter relating to) Taxes or Tax Returns or Information Returns of the Xerox Group or any member of such Group, or (C) the verification of an amount payable or receivable hereunder. (ii) Parent and Seller to Cooperate. Likewise, upon Buyer's ------------------------------ request, Seller shall promptly provide (and cause its Subsidiaries to promptly provide) such cooperation and assistance, documents and other information referred to in the preceding sentence, as Buyer may reasonably request in the circumstances described in Section 9(a)(i) hereof. (iii) Cooperation Defined. For purposes of this Agreement, ------------------- cooperation and assistance shall include, without limitation: (A) providing all relevant 20 information that is available to Buyer, Company and its Subsidiaries, as the case may be, with respect to any audit or proceeding referred to in Section 8(a) hereof; (B) executing and delivering any power of attorney necessary or other documents or instruments to carry out the intent of this Agreement; (C) promptly and timely filing appropriate claims for any refund; preparation of responses to requests for information within the time frame given by the Taxing Authority for responding to such requests for information, and (D) making available to any party, during normal business hours (1) all books, records, returns of Company and its Subsidiaries, relevant extracts from revenue agent reports that are applicable to Company and its Subsidiaries, and (2) the services of officers and employees (without substantial interruption of employment), necessary or useful in connection with the matters referred to in this Section 9(a), provided that the foregoing shall be done in a manner so as not to interfere unreasonably with the conduct of the business of Buyer and Company and its Subsidiaries. (b) Record Retention. ---------------- (i) Records to Be Retained; Time Periods. Parent, Seller, ------------------------------------ and Buyer shall each retain or cause to be retained all Tax Returns and Information Returns and all books, records, schedules, workpapers, and other documents relating thereto, including, without limitation, documents described in the Record Retention Agreement (a copy of which is attached as Exhibit A), until the expiration of the later of (A) all applicable statutes of limitations (taking into account any waivers or extensions thereof), and (B) any retention period required by law or pursuant to any record retention agreement with any Taxing Authority. (ii) Prior Notices Required. Parent and Buyer shall notify each ---------------------- other in writing of (A) any waivers, extension or expirations of applicable statutes of limitations as referred to in Section 9(b)(i) hereof, and (B) of any intended destruction, at least thirty (30) days prior thereto, of any of the documents referred to in Section 9(b)(i) hereof. A party giving such a notice under this Section 9(b)(ii) shall nonetheless refrain from disposing of any of the materials referred to in Section 9(b)(i) hereof without first having offered to transfer possession thereof to the notified party. (c) Confidentiality. Except as required by law or with the prior --------------- express written consent of all other parties to this Agreement, all Tax Returns and Information Returns, documents, schedules, workpapers and other documents relating thereto, as well as all information contained therein, shall be kept confidential to the parties to this Agreement and their officers, employees, agents and representatives, shall not be disclosed to any other Person, and shall be used only for the purposes provided herein. 21 10. Subsequent Transferees. Except as provided in this Section 10, ---------------------- Buyer shall not sell, transfer, assign, or otherwise dispose of, whether directly or indirectly, either the stock of Company and/or its Subsidiaries or substantially all of Buyer's assets, or both, and Buyer shall prevent Company and its Subsidiaries (determined as of the Closing Date) from selling, transferring, assigning, or otherwise disposing of all or substantially all of their assets, unless the purchaser, transferee, or assignee thereof expressly assumes all of the obligations of the transferor under this Agreement or unless prior to any such transfer, the transferor has made such other provisions for the satisfaction of its obligations under this Agreement as shall be agreed to by the other parties to this Agreement in their reasonable discretion. Provided that the terms of this Section 10 are complied with, any transferee of all or substantially all of the stock of Company shall succeed to its transferor's rights under this Agreement. 11. Miscellaneous. ------------- (a) Effectiveness. This Agreement shall be effective from and after ------------- the date hereof, provided, however, that this Agreement shall terminate immediately upon a termination of the Purchase Agreement in accordance with its terms and thereafter this Agreement shall be of no further force and effect. (b) Entire Agreement. This Agreement and the Purchase Agreement ---------------- contain the entire agreement among the parties hereto with respect to the subject matter hereof. (c) Binding Effect; No Third Party Beneficiary. This Agreement shall ------------------------------------------ be binding upon and inure to the benefit of the parties and their respective successors, legal representatives and permitted assigns. Nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give any Person other than the Parent, Seller, Company, or the Buyer any rights or remedies or by reason of this Agreement or any transaction contemplated hereby. (d) Termination of Prior Agreements. With respect to Company and its ------------------------------- Subsidiaries, this Agreement terminates, as of the Closing Date, any and all other agreements with respect to Taxes (other than the Purchase Agreement) to which Company or any of its Subsidiaries, on the one hand, and Seller or any of its Subsidiaries (other than Company and its Subsidiaries), on the other hand, are or were parties at any time at or before the Closing Date. This Agreement also extinguishes, as of the Closing Date, any and all intercompany liabilities with respect to Taxes between Company or any of its Subsidiaries, on the one hand, and Seller or any of its Subsidiaries (other than Company and its Subsidiaries), on the other hand, that exist on the Closing Date. Subject to the provisions of Section 3(b) hereof, the parties to this Agreement intend (i) that there not be any payments by Parent or Seller to Company or any of its Subsidiaries after the date of this Agreement under any existing agreement with respect to Taxes 22 (other than the Purchase Agreement) and (ii) that payments with respect to Taxes hereafter be pursuant only to this Agreement. (e) No Double Recovery. Should it be necessary, equitable adjustments ------------------ will be made to prevent duplicate recovery for indemnification with respect to the same item. (f) Section 338(h)(10) Election. The parties hereto shall not make a --------------------------- joint election under Section 338(h)(10) of the Code unless Buyer and Seller agree otherwise. (g) Guarantee of Performance. Parent, Buyer and Company hereby ------------------------ guarantee the complete and prompt performance by the members of the Xerox Affiliated Group and the Company Group, respectively, of all of their obligations and undertakings pursuant to this Agreement. (h) Severability. In case any one or more of the provisions contained ------------ in this Agreement should be invalid, illegal or unenforceable, the enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. (i) Indulgences, etc. Neither the failure nor any delay on the part ----------------- of any party hereto to exercise any right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other further exercise of the same or any other right, nor shall any waiver of any right with respect to any occurrence be construed as a waiver of such right with respect to any other occurrence. (j) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF, EXCEPT WITH RESPECT TO MATTERS OF LAW CONCERNING THE INTERNAL CORPORATE AFFAIRS OF ANY CORPORATE ENTITY WHICH IS A PARTY TO OR SUBJECT OF THIS AGREEMENT, AND AS TO THOSE MATTERS THE LAW OF THE JURISDICTION UNDER WHICH THE RESPECTIVE ENTITY DERIVES ITS POWERS SHALL GOVERN. (k) Notices. All notices, requests, demands and other communications ------- required or permitted under this Agreement to be made to the Buyer or Company shall be made in the manner provided in Section 10.5 of the Purchase Agreement. All notices, requests, demands and other communications required or permitted under the Agreement to be made to the Parent or Seller shall be made to: 23 To Parent: Xerox Financial Services, Inc. 100 First Stamford Place Stamford, Connecticut 06904 Facsimile: (203) 325-6729 Attn: Mark Sheivachman Vice President, Taxes To Seller: Talegen Holdings, Inc. 1011 Western Avenue Suite 1000 Seattle, Washington 98104 Facsimile: (206) 654-2631 Attn: Richard N. Frasch, Esq. General Counsel With copies to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 1875 Connecticut Avenue, N.W. Washington, D.C. 20009-5728 Facsimile: (202) 986-8102 Attn: George R. Abramowitz To Buyer: ACE Limited The ACE Building 30 Woodbourne Avenue Hamilton, HM 08 Bermuda Facsimile: (441) 292-8620 Attn: Christopher Z. Marshall 24 With copies to: Mayer, Brown & Platt 190 S. LaSalle Street Chicago, Illinois 60603 Facsimile: (312) 701-7711 Attn: James R. Barry with a copy to the appropriate persons designated in Section 11.5 of the Purchase Agreement for receiving notice on behalf of Parent and Seller. (l) Waivers and Amendments; Non-Contractual Remedies; Preservation of ----------------------------------------------------------------- Remedies. This Agreement may be amended, superseded, canceled, renewed or - -------- extended, and the terms hereof may be waived, only by a written instrument executed and delivered by duly authorized officers of Buyer and Parent, or, in the case of waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any covenant contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach. (m) Survival of Obligations. The agreements, covenants and ----------------------- obligations contained in this Agreement shall survive the consummation of the transactions contemplated by the Purchase Agreement, and shall expire only when claims arising therefrom are barred by all applicable statutes of limitation (as may be extended from time to time). (n) Variations in Number and Gender. All terms used in this ------------------------------- Agreement, and any variations of such terms, refer to the masculine, feminine or neuter, singular or plural, as the context may require. (o) Counterparts. This Agreement may be executed in any number of ------------ counterparts, each such counterpart being deemed to be an original instrument, and all of such counterparts shall together constitute one and the same instrument. 25 (p) Headings. The Section and paragraph captions herein are for -------- convenience or reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. (q) Delayed Closing. This Agreement has been drafted on the --------------- assumption that Closing will occur in 1997. The parties hereto recognize that there may be circumstances which cause the Closing to occur in 1998. If Closing is in fact delayed until 1998, the parties hereto intend that, on a basis consistent with the spirit of this Agreement and, subject to the following sentence: (1) the provisions included in this Agreement with respect to the Stub Period shall be applied to the Taxable Year of the Company and its subsidiaries that begins on January 1, 1998 and ends on the Closing Date; (2) the provisions included in this Agreement with respect to the Straddle Period shall be interpreted as applying to the period that begins before, and ends after, December 31, 1997; and (3) the Company's 1997 Taxable Year shall be subject as nearly as practicable to the provisions herein that apply to the Stub Period. Notwithstanding anything to the contrary in the preceding sentence, it is understood that (1) the provisions of Section 3(c)(ii)(C) shall only be applicable to the Taxable Year that begins on January 1, 1997, and (2) the provisions of paragraphs (a), (b), (c) and (d) of Section 5 hereof shall be unchanged by any delay in the Closing Date to 1998. 26 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto on the date first hereinabove written. Xerox Financial Services, Inc. By:___________________________ Talegen Holdings, Inc. By:___________________________ Westchester Specialty Group, Inc. By:___________________________ ACE Limited By:___________________________ 27 Exhibit A RECORD RETENTION AGREEMENT -------------------------- 28 Schedule 2(a) INTERPOLATION METHODOLOGY PURSUANT TO SECTION 2(a)(1)(B) -------------------------------------------------------- For purposes of this Agreement, any discounting of unpaid losses (within the meaning of Section 846 of the Code) and of salvage and subrogation required for the Stub Period shall be done in accordance with the following interpolation method: The discount factor for AY + 0 shall be determined (with reference to the development of losses for the portion of 1997 up to and including the Closing Date) by adding to the industry discount factor (published by the IRS for 1997) for AY + 0, a percentage of the excess (whether positive or negative) of the industry factor for AY + 0 over the industry factor for AY + 1 equal to the number of full months in 1997 following the Closing Date divided by 12, provided that the resulting discount factor shall not be greater than one nor less than zero. The discount factor for AY + 1 shall be determined by subtracting from the industry discount factor for AY + 0, a percentage of the excess (whether positive or negative) of the industry factor for AY + 0 over the industry factor AY + 1 equal to 1 minus the percentage determined pursuant to the preceding sentence. Similar interpolative adjustments should be made for AY + 2, AY + 3, and each succeeding accident year, in turn, with the resulting factors applied to unpaid losses reflected in the books and records of the Company for each accident year. It is understood and agreed that the source of the above method of computing discount factors for unpaid losses is the letter submitted by the American Insurance Association on April 24, 1989 to the Internal Revenue Service, and that the method of computing part year discount factors for unpaid losses reflected in that letter is intended to be applied for purposes of this Agreement. 29 Schedule 3(c) WESTCHESTER SPECIALTY GROUP 1997 RESERVE ACTIONS -- BY LINE OF BUSINESS AND ACCIDENT YEAR
Westchester Other Liability Combined Fire WSLIC - --------------- ---------- ---- ----- 1987 & Prior 68,312,000 59,077,000 9,235,000 1988 2,107,000 1,004,000 1,103,000 1989 3,441,000 1,866,000 1,575,000 1990 4,581,000 2,493,000 2,088,000 1991 6,446,000 2,793,000 3,653,000 1992 6,670,000 2,641,000 4,029,000 1993 21,387,000 19,969,000 1,418,000 1994 22,657,000 21,158,000 1,499,000 1995 16,558,000 16,558,000 0 1996 12,040,000 12,040,000 0 ----------- ----------- ---------- Subtotal 164,199,000 139,599,000 24,600,000 =========== =========== ========== Uncollectible Reinsurance Reserves:* - ------------------------------------ 1987 & Prior 30,000,000 30,000,000 0 1988 1,000,000 500,000 500,000 1989 1,750,000 750,000 1,000,000 1990 1,750,000 750,000 1,000,000 1991 2,750,000 1,750,000 1,000,000 1992 1,750,000 750,000 1,000,000 1993 750,000 250,000 500,000 1994 750,000 750,000 0 1995 750,000 750,000 0 1996 750,000 750,000 0 ----------- ----------- ---------- Subtotal 42,000,000 37,000,000 5,000,000 =========== =========== ========== Special Property: - ----------------- 1992 (28,000) (28,000) 0 1993 (205,000) (95,000) (110,000) 1994 (4,343,000) (1,653,000) (2,690,000) 1995 (1,791,000) (l,750,000) (41,000) 1996 (6,832,000) (6,673,000) (159, 000) ----------- ----------- ---------- Subtotal (13,199,000) (10,199,000) (3,000,000) =========== =========== ========== Workers Comp. - ------------- 1987 & Prior 100,000 500,000 (400,000)
__________________________________ * Reserve additions for accident years through 1993 will be discounted using the 1997 discount factor applicable to the Other Liability line of business for the 1997 accident year. Reserve additions for the 1994 through 1996 accident years will actually appear as loss reserves under the Other Liability line of business for those accident years on Schedule P of the Annual Statement. 30
CMP - --- 1987 & Prior (90,000) (90,000) 0 1990 26,000 26,000 0 1991 120,000 120,000 0 1992 332,000 332,000 0 1993 510,000 510,000 0 1994 1,743,000 1,743,000 0 1995 2,993,000 2,993,000 0 1996 2,867,000 2,867,000 0 ----------- ----------- ---------- Subtotal 8,501,000 8,501,000 0 =========== =========== ========== Auto - ---- 1991 (966,000) (966,000) 0 1992 (604,000) (604,000) 0 ----------- ----------- ---------- GRAND TOTAL 200,031,000 173,831,000 26,200,000 - ----------- =========== =========== ==========
31 Schedule 5(f) 1990 through 1994 Uncollectible Reinsurance Deductions ------------------------------------------------------
- -------------------------------------------------------------------------------- INCOME/(DEDUCTION) ------------------ - -------------------------------------------------------------------------------- COMPANY 1990 1991 1992 1993 1994 TOTAL - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Westchester -4,135,320 297,972 -8,057,076 11,153,927 0 -740,497 - -------------------------------------------------------------------------------- WSLIC 0 0 0 -74,400 0 -74,400 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TOTAL -4,135,320 297,972 -8,057,076 11,079,527 0 -814,897 - --------------------------------------------------------------------------------
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----------------------------------- - -CENTRAL SECRETARIAL CONTROL SHEET- JOB #: - --------------------------------------------------------------------------------------------------------------------------- PLEASE COMPLETE THIS FORM IN ENTIRETY. WRITE OUT ALL SPECIAL INSTRUCTIONS TO ASSURE THAT YOUR WORK WILL BE COMPLETED. - --------------------------------------------------------------------------------------------------------------------------- ATTORNEY:HUSAIN ATTORNEY #:1515 EXT.: 8093 - --------------------------------------------------------------------------------------------------------------------------- CLIENT:TALEGEN CLIENT #: 19350 FLOOR: - ----------------------------------------------------------------------------------------=================================== MATTER:TAX PLANNING MATTER #: 769 OVERTIME - ---------------------------------------------------------------------------------------- DOCUMENT TITLE: WESTCHESTER TAX AGREEMENT [_] Yes [_] No =========================================================================================================================== DATE/TIME DUE: RETURN INSTRUCTIONS ======================================================================================== SPECIAL INSTRUCTIONS: [_] 15-Minute Pickup [_] Call when Ready [_] Page when Ready [_] Interoffice (after 4:45P) =========================================================================================================================== WORD PROCESSING / SECRETARIAL SERVICES - --------------------------------------------------------------------------------------------------------------------------- TREATMENT PROOFREADING SERVICES PROOFREADING [_] Input/Scan [_] Full Read (Word-for-word proofing of all text) [_] Revise [_] Verbatim (Keep errors that appear in original) [_] Copy to New File Name and Revise [_] Cold Read (Read through for sense - no [_] Create New Version master) under Same File Name and Revise [_] Revisions and Slugs (Full read riders) BLACKLINING [_] Proofread Only [_] Pencil Changes (Caret and score all [_] Print Only deletions/additions) [_] Tape Transcription [_] Composite (Caret and score all differences from two or more masters) [_] Print-to-Print (Full read final against master and mark all differences on final) - --------------------------------------------------------------------------------------------------------------------------- COMPARERITE Additions Deletions List Versions: --------- --------- ------------- [_] Bold/Double Underline [_] Strikethrough [_] Shade [_] Caret [_] Latest Two Versions [_] Other [_] Caret/Score [_] Deletions at End Old Version _______________ _________________ [_] Other _______________ (Choose one from each New Version ________________ column) ========================= ==============================================
=============================================================================================================== TIME CLOCKED IN TIME CLOCKED OUT I [_] H [_] Left Message with - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- SYSTEM FILE NAME: Word Processing Operators N.B. -------------------------------------------- DC3 16956.3 [_] Return to Spvr. when done Originated:YMARCUS -- 9/12/97 at 3:48pm -------------------------------------------- [_] See Spvr. for special Modified:YMARCUS -- 9/12/97 at 3:59pm instructions - ---------------------------------------------------------------------------------------------------------------
EX-10.30 4 364 DAY CREDIT AGREEMENT EXHIBIT 10.30 EXECUTION COPY $200,000,000 364-DAY CREDIT AGREEMENT dated as of December 11, 1997 among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Administrative Agent ______________ J.P. Morgan Securities Inc. and Mellon Bank N.A., Co-Syndication Agents Morgan Guaranty Trust Company of New York, Documentation Agent TABLE OF CONTENTS ___________
PAGE ---- ARTICLE 1 DEFINATIONS Section 1.01. Definitions................................................. 1 Section 1.02. Accounting Terms and Determinations......................... 11 Section 1.03. Types of Borrowings......................................... 12 Section 1.04. United States Dollars....................................... 12 ARTICLE 2 THE CREDITS Section 2.01. Commitments to Lend......................................... 12 Section 2.02. Notice of Committed Borrowing............................... 13 Section 2.03. Money Market Borrowings..................................... 13 Section 2.04. Notice of Banks; Funding of Loans........................... 17 Section 2.05. Notes....................................................... 18 Section 2.06. Maturity of Loans........................................... 19 Section 2.07. Interest Rates.............................................. 19 Section 2.08. Facility Fee................................................ 21 Section 2.09. Optional Termination or Reduction of Commitments............ 21 Section 2.10. Scheduled Termination of Commitments........................ 21 Section 2.11. Method of Electing Interest Rates........................... 21 Section 2.12. Optional Prepayments........................................ 23 Section 2.13. General Provisions as to Payments........................... 23 Section 2.14. Funding Losses.............................................. 24 Section 2.15. Computation of Interest and Fees............................ 25 Section 2.16. Regulation D Compensation................................... 25 ARTICLE 3 CONDITIONS Section 3.01. Closing..................................................... 25 Section 3.02. Borrowings.................................................. 27
PAGE ---- ARTICLE 4 REPRESENTATIONS AND WARRANTIES Section 4.01. Corporate Existence and Power............................... 27 Section 4.02. Corporate and Governmental Authorization; No Contravention......................................................... 27 Section 4.03. Binding Effect.............................................. 28 Section 4.04. Financial Information....................................... 28 Section 4.05. Litigation.................................................. 29 Section 4.06. ERISA....................................................... 30 Section 4.07. Taxes....................................................... 30 Section 4.08. Not an Investment Company................................... 30 Section 4.09. Full Disclosure............................................. 30 Section 4.10. Compliance with Laws........................................ 30 ARTICLE 5 COVENANTS Section 5.01. Information................................................. 31 Section 5.02. Payment of Obligations...................................... 33 Section 5.03. Maintenance of Property; Insurance.......................... 33 Section 5.04. Conduct of Business and Maintenance of Existence............ 33 Section 5.05. Compliance with Laws........................................ 33 Section 5.06. Inspection of Property, Book and Records.................... 34 Section 5.07. Leverage.................................................... 34 Section 5.08. Subsidiary Debt............................................. 34 Section 5.09. Minimum Tangible Net Worth.................................. 34 Section 5.10. Negative Pledge............................................. 35 Section 5.11. Consolidations, Mergers and Sales of Assets................. 36 Section 5.12. Use of Proceeds............................................. 36 Section 5.13. ERISA....................................................... 36 ARTICLE 6 DEFAULTS Section 6.01. Events of Default........................................... 37 Section 6.02. Notice of Default........................................... 40
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PAGE ---- ARTICLE 7 THE AGENTS Section 7.01. Appointment and Authorization............................... 40 Section 7.02. Administrative Agent and Affiliates......................... 40 Section 7.03. Action by Administrative Agent.............................. 40 Section 7.04. Consultation with Experts................................... 40 Section 7.05. Liability of Administrative Agent........................... 40 Section 7.06. Indemnification............................................. 41 Section 7.07. Credit Decision............................................. 41 Section 7.08. Successor Administrative Agent.............................. 41 Section 7.09. Administrative Agent's Fee.................................. 42 Section 7.10. Other Agents................................................ 42 ARTICLE 8 CHANGE IN CIRCUMSTANCES Section 8.01. Basis for Determination Interest Rate Inadequate or Unfair................................................................ 42 Section 8.02. Illegality.................................................. 43 Section 8.03. Increased Cost and Reduced Return........................... 43 Section 8.04. Taxes....................................................... 45 Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans... 47 Section 8.06. Substitution of Bank........................................ 47 ARTICLE 9 GUARANTY Section 9.01. The Guaranty................................................ 48 Section 9.02. Guaranty Unconditional...................................... 48 Section 9.03. Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances................................................. 49 Section 9.04. Waiver by Each of the Guarantors............................ 49 Section 9.05. Subrogation................................................. 50 Section 9.06. Stay of Acceleration........................................ 50 Section 9.07. Limit of Liability.......................................... 50
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PAGE ---- ARTICLE 10 MISCELLANEOUS Section 10.01. Notices.................................................... 50 Section 10.02. No Waivers................................................. 51 Section 10.03. Expenses; Indemnification.................................. 51 Section 10.04. Sharing; Set-Offs.......................................... 51 Section 10.05. Amendments and Waivers..................................... 52 Section 10.06. Successors and Assigns..................................... 53 Section 10.07. Collateral................................................. 54 Section 10.08. Governing Law.............................................. 54 Section 10.09. Counterparts; Integration; Effectiveness................... 54 Section 10.10. Judicial Proceedings....................................... 55 Section 10.11. Judgment Currency.......................................... 56 Section 10.12. WAIVER OF JURY TRIAL....................................... 57 Section 10.13. Existing Credit Agreement.................................. 57 Section 10.14. Confidentiality............................................ 57 EXHIBIT A - NOTE EXHIBIT B - FORM OF MONEY MARKET QUOTE REQUEST EXHIBIT C - FORM OF INVITATION FOR MONEY MARKET QUOTES EXHIBIT D - FORM OF MONEY MARKET QUOTE EXHIBIT E - FORM OF MAPLES AND CALDER OPINION EXHIBIT F - FORM OF CONYERS, DILL & PEARMAN OPINION EXHIBIT G - FORM OF MAYER, BROWN & PLATT OPINION EXHIBIT H - FORM OF DAVIS POLK & WARDWELL OPINION EXHIBIT I - ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT J - LETTER FROM CT CORPORATION SYSTEM
iv 364-DAY CREDIT AGREEMENT AGREEMENT dated as of December 11, 1997 among ACE LIMITED, A.C.E. INSURANCE COMPANY, LTD., CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. and TEMPEST REINSURANCE COMPANY LIMITED, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. WHEREAS, the Borrower desires to replace the existing Credit Agreement dated as of November 15, 1996 among the Borrower, certain of the Guarantors, certain banks and Morgan Guaranty Trust Company of New York, as agent, by entering into this Agreement; and WHEREAS, the Banks agree to do so. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.01. Definitions. The following terms, as used herein, have the following meanings: "ABSOLUTE RATE AUCTION" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "ACE INSURANCE" means A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, and its successors. "ACE US" means ACE US Holdings, Inc., a Delaware corporation, and its successors. "ADMINISTRATIVE AGENT" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under the Financing Documents, and its successors in such capacity. "AGENT" means each of the Administrative Agent, the Documentation Agent, the Syndication Agents, the Managing Agent and the Co-Agents, and "AGENTS" means any combination of them, as the context may require. "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "ASSIGNEE" has the meaning set forth in Section 10.06(c). "AUTHORIZED OFFICER" means any of (i) the Chairman, President and Chief Executive Officer of the Borrower, (ii) the General Counsel and Secretary of the Borrower, (iii) the President of ACE Insurance, (iv) the Chief Financial Officer of the Borrower, (v) the Chief Investment Officer of the Borrower, (vi) the Chairman of ACE UK Ltd., or (vii) any other Person designated in a notice given to the Administrative Agent by any two of the foregoing Persons, and "AUTHORIZED OFFICERS" means all of the foregoing Persons. "BANK" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 10.06(c), and their respective successors. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "BASE RATE LOAN" means a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the provisions of Section 2.11(a) or Article 8. "BERMUDA COMPANIES LAW" means The Companies Act 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "BERMUDA INSURANCE LAW" means The Insurance Act 1978 of Bermuda, as amended, and the regulations promulgated thereunder. 2 "BORROWER" means ACE Limited, a Cayman Islands company limited by shares, and its successors. "BORROWING" has the meaning set forth in Section 1.03. "CO-AGENT" means each Bank designated as a Co-Agent on the signature pages hereof, in its capacity as co-agent in respect of this Agreement. "CLOSING DATE" means the date on or after the Effective Date on which the Administrative Agent shall have received the documents specified in or pursuant to Section 3.01. "CODA" means Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company, and its successors. "COMMITMENT" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.09. "COMMITTED LOAN" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "COMMITTED LOAN" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "CONSOLIDATED DEBT" means at any date the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "CONSOLIDATED NET INCOME" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED TANGIBLE NET WORTH" means at any date the consolidated stockholders' equity of the Borrower and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date; provided that such determination for purposes of Sections 5.07, 5.09 and 5.10 shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial 3 Accounting Standards Board. For purposes of this definition "INTANGIBLE ASSETS" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to June 30, 1997 in the book value of any asset owned by the Borrower or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, solely for purposes of Section 5.10 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person, provided that the term "DEBT" shall not include obligations of an insurance company under insurance policies or surety bonds issued by it. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DOCUMENTATION AGENT" means Morgan Guaranty Trust Company of New York in its capacity as documentation agent in respect of this Agreement. 4 "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "EFFECTIVE DATE" means the date this Agreement becomes effective in accordance with Section 10.09. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means, with respect to any Person, such Person, any Subsidiary of such Person and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with such Person or any such Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "EURO-DOLLAR LOAN" means a Committed Loan which bears interest at a Euro- Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election. "EURO-DOLLAR MARGIN" has the meaning set forth in Section 2.07(b). "EURO-DOLLAR RATE" means a rate of interest determined pursuant to Section 2.07(b) on the basis of a London Interbank Offered Rate. 5 "EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "EUROCURRENCY LIABILITIES" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "FINANCING DOCUMENTS" means this Agreement and the Notes. "FIXED RATE LOANS" means Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "GROUP OF LOANS" means at any time a group of Committed Loans consisting of (i) all Base Rate Loans which are outstanding at such time or (ii) all Euro- Dollar Loans having the same Interest Period at such time; provided that, if a Committed Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct 6 or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "GUARANTEE" used as a verb has a corresponding meaning. "GUARANTORS" means ACE Insurance, CODA and Tempest. "INDEMNITEE" has the meaning set forth in Section 10.03(b). "INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro- Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro- Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.03; provided that: 7 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro- Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro- Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (3) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "LIBOR AUCTION" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. 8 "LOAN" means a Base Rate Loan or a Euro-Dollar Loan or a Money Market Loan and "LOANS" means Base Rate Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.07(b). "MANAGING AGENT" means Citibank, N.A. in its capacity as managing agent in respect of this Agreement. "MATERIAL DEBT" means Debt (other than the Notes) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $25,000,000. "MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt and/or current payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $25,000,000. "MONEY MARKET ABSOLUTE RATE" has the meaning set forth in Section 2.03(d). "MONEY MARKET ABSOLUTE RATE LOAN" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "MONEY MARKET LENDING OFFICE" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may from time to time by notice to the Borrower and the Administrative Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "MONEY MARKET LIBOR LOAN" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). "MONEY MARKET LOAN" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "MONEY MARKET MARGIN" has the meaning set forth in Section 2.03(d). 9 "MONEY MARKET QUOTE" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "NOTES" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "NOTE" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "NOTICE OF COMMITTED BORROWING" has the meaning set forth in Section . "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section elec.int.rates2.11. "OBLIGORS" means the Borrower and each of the Guarantors. "OTHER TAXES" has the meaning set forth in Section 8.04(b). "PARENT" means, with respect to any Bank, any Person controlling such Bank. "PARTICIPANT" has the meaning set forth in Section 10.06(b). "PERSON" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PRIME RATE" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "REFERENCE BANKS" means the principal London offices of Deutsche Bank AG, Mellon Bank N.A. and Morgan Guaranty Trust Company of New York. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "RELATED DOCUMENTS" means (i) the Financing Documents, (ii) the "Financing Documents" as defined in the Five-Year Credit Agreement of even 10 date herewith among the parties hereto, (iii) the "Financing Documents" as defined in the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among ACE Insurance, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as Issuing Bank and Administrative Agent for such Banks and (iv) the "Financing Documents" as defined in the Term Loan Agreement of even date herewith among ACE US, the Borrower, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as administrative agent for such Banks, in each case as the same may be amended and in effect from time to time. "REQUIRED BANKS" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "SUBSIDIARY" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "SUBSIDIARY" means a Subsidiary of the Borrower. "SYNDICATION AGENT" means either J.P. Morgan Securities Inc. or Mellon Bank N.A. in its capacity as a syndication agent in respect of this Agreement, and "SYNDICATION AGENTS" means both of them. "TAXES" has the meaning set forth in Section 8.04(a). "TEMPEST" means Tempest Reinsurance Company Limited, a Bermuda limited liability company, and its successors. "TERMINATION DATE" means December 10, 1998 or, if such day is not a Euro- Dollar Business Day, the next preceding Euro-Dollar Business Day. "WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. Section 1.02. 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 United States generally accepted accounting principles as in effect from time to time, 11 applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 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 Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower'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, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. Section 1.03. Types of Borrowings. The term "BORROWING" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "EURO-DOLLAR BORROWING" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "COMMITTED BORROWING" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "MONEY MARKET BORROWING" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). Section 1.04. United States Dollars. Each reference herein to "DOLLARS" or "$" shall refer to United States Dollars. ARTICLE 2 The Credits Section 2.01. Commitments to Lend. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time prior to the Termination Date in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(c)) and shall be made from the several Banks ratably in proportion to their respective 12 Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.12, prepay Loans and reborrow at any time prior to the Termination Date. Section 2.02. Notice of Committed Borrowing. The Borrower shall give the Administrative Agent notice (such notice to be signed by any two of the Authorized Officers and hereinafter referred to as a "NOTICE OF COMMITTED BORROWING") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks prior to the Termination Date to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market 13 Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro- Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Administrative Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Administrative Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 10.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be 14 effective); provided that Money Market Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "MONEY MARKET MARGIN") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "MONEY MARKET ABSOLUTE RATE") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: 15 (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Administrative Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (such notice to be signed by any two of the Authorized Officers and hereinafter referred to as a "NOTICE OF MONEY MARKET BORROWING") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: 16 (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $10,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Administrative Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. Section 2.04. Notice of Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 10.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the 17 Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. Section 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "NOTE" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(a), the Administrative Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of any Obligor hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. 18 Section 2.06. Maturity of Loans. (a) The Committed Loans shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date. (b) Each Money Market Loan included in any Money Market Borrowing shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the last day of the Interest Period applicable to such Money Market Borrowing. Section 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable at maturity, quarterly in arrears on the last day of each March, June, September and December prior to maturity, and with respect to the principal amount of any Base Rate Loan converted to a Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "EURO-DOLLAR MARGIN" means (i) 0.24% per annum, for each day on which the aggregate outstanding principal amount of the Loans is equal to or less than 50% of the aggregate amount of the Commitments, and (ii) 0.29% per annum, for any other day. The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. 19 (c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin plus the London Interbank Offered Rate applicable to such Loan at the date of such payment was due and (ii) the sum of 2% plus the Euro-Dollar Margin plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Reference Banks are offered to such Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (d) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(b) as if the related Money Market LIBOR Borrowing were a Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (e) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent 20 shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. Section 2.08. Facility Fee. The Borrower shall pay to the Administrative Agent for the account of the Banks ratably a facility fee at the rate of 0.06% per annum. Such facility fee shall accrue (i) from and including the Closing Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans shall be repaid in their entirety, on the daily aggregate outstanding principal amount of the Loans. Accrued fees under this Section shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). Section 2.09. Optional Termination or Reduction of Commitments. The Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $25,000,000 or any larger multiple of $5,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. Upon receipt of any notice pursuant to this Section 2.09, the Administrative Agent shall promptly notify the Banks of the contents of such notice. Section 2.10. Scheduled Termination of Commitments. The Commitments shall terminate on the Termination Date, and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. Section 2.11. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject to subsection (d) of this Section and the provisions of Article ), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and 21 (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, subject to Section 2.14 if any such conversion or continuation is effective on any day other than the last day of an Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "NOTICE OF INTEREST RATE ELECTION") to the Administrative Agent not later than 10:30 A.M. (New York City time) on the third Euro-Dollar Business Day before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each at least $10,000,000 or any larger amount in multiples of $1,000,000 (unless such portion is comprised of Base Rate Loans). If no such notice is timely received before the end of an Interest Period for any Group of Euro-Dollar Loans, the Borrower shall be deemed to have elected that such Group of Loans be converted to Base Rate Loans at the end of such Interest Period. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if the Loans resulting from such conversion are to be Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Promptly after receiving a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Administrative Agent shall notify 22 each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. (d) The Borrower shall not be entitled to elect to convert any Committed Loans to, or continue any Committed Loans for an additional Interest Period as, Euro-Dollar Loans if (i) the aggregate principal amounts of any Group of Euro- Dollar Loans created or continued as a result of such election would be less than $10,000,000 or (ii) a Default shall have occurred and be continuing when the Borrower delivers notice of such election to the Administrative Agent. Section 2.12. Optional Prepayments. (a) Subject in the case of any Euro- Dollar Loan to Section 2.14, the Borrower may, in the case of the Group of Base Rate Loans (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)), upon at least one Domestic Business Day's notice to the Administrative Agent, prepay such Group or Borrowing, or in the case of any Group of Euro-Dollar Loans, upon at least three Euro-Dollar Business Days' notice to the Administrative Agent, prepay such Group, in each case in whole at any time, or from time to time in part in amounts aggregating $10,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. (b) Except as provided in Section 2.12(a), the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 2:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City and in the lawful currency of the United States, to the Administrative Agent at its address referred to in Section 10.01. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or 23 interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro- Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. Section 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a different type of Loan (pursuant to Article 2, or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(c), or if the Borrower fails to borrow, prepay, convert or continue any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a), 2.11(c) or 2.12(c), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or, in the case of the failure of the Borrower to borrow any Fixed Rate Loans, prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment, conversion or continuation or failure to borrow, prepay, convert or continue, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense and setting forth the calculation thereof, which certificate shall be conclusive in the absence of manifest error. 24 Section 2.15. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and all facility fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.16. Regulation D Compensation. For so long as any Bank maintains reserves against "EUROCURRENCY LIABILITIES" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro- Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. ARTICLE 3 Conditions Section 3.01. Closing. The closing hereunder shall occur upon (x) termination of the Commitments (as defined in the Credit Agreement referred to below in this clause (x)) under the Credit Agreement dated as of November 15, 1996 among the Borrower, ACE Insurance, CODA, the banks listed therein and Morgan Guaranty Trust Company of New York, as administrative agent, and payment in full of all amounts owing thereunder to any of such banks or such 25 administrative agent and (y) receipt by the Administrative Agent of the following documents, each dated the Closing Date unless otherwise indicated: (a) a duly executed Note for the account of each Bank dated on or before the Closing Date complying with the provisions of Section 2.05; (b) an opinion of Maples and Calder, counsel for the Borrower, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (c) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Guarantors, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) an opinion of Mayer, Brown & Platt, New York counsel for the Borrower and the Guarantors, substantially in the form of Exhibit G hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (e) an opinion of Davis Polk & Wardwell, special United States counsel for the Agents, substantially in the form of Exhibit H hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) a letter from CT System in New York, New York, substantially in the form of Exhibit J hereto, evidencing CT System's agreement to act as agent for service of process for the Obligors pursuant to Section 10.10(b); and (g) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. Section 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: 26 (a) the fact that the Closing Date shall have occurred on or prior to December 31, 1997; (b) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (c) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (d) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (e) the fact that the representations and warranties of each Obligor contained in this Agreement shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Obligors on the date of such Borrowing as to the facts specified in clauses (c), (d) and (e) of this Section. ARTICLE 4 Representations and Warranties The Obligors jointly and severally represent and warrant that: Section 4.01. Corporate Existence and Power. The Borrower is a company limited by shares and each of the Guarantors is a limited liability company, in each case duly incorporated and validly existing under the laws of its jurisdiction of incorporation and the Borrower is in good standing under the laws of the Cayman Islands. Each of the Obligors has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its respective business as now conducted. Each of the Guarantors is a Wholly-Owned Consolidated Subsidiary of the Borrower. Section 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each Obligor of this Agreement and by the Borrower of the Notes are within its corporate powers, have been duly authorized by all necessary corporate action, require no action or consent by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Memorandum of Association, Articles of 27 Association or Bye-Laws (or any comparable document) of any Obligor or of any agreement, judgment, injunction, order, decree or other instrument binding upon any Obligor or any of their respective Subsidiaries or result in the creation or imposition of any Lien on any asset of any Obligor or any of their respective Subsidiaries. Section 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of each Obligor and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms. Section 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal year then ended, reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1997 and the related unaudited consolidated statements of operations and cash flows for the nine months then ended, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles (except for the absence of footnotes) applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine month period (subject to normal year-end adjustments). (c) Since June 30, 1997 there has been no material adverse change in the business, financial position, or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. (d) The consolidated balance sheet of ACE Insurance and its Consolidated Subsidiaries as of September 30, 1996 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of ACE Insurance and its Consolidated Subsidiaries as of such 28 date and their consolidated results of operations and retained earnings and cash flows for such fiscal year. (e) Since September 30, 1996 there has been no material adverse change in the business, financial position or results of operations of ACE Insurance and its Consolidated Subsidiaries, considered as a whole. (f) The balance sheet of CODA as of September 30, 1996 and the related statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the financial position of CODA as of such date and its results of operations and retained earnings and cash flows for such fiscal year. (g) Since September 30, 1996 there has been no material adverse change in the business, financial position or results of operations of CODA. (h) The balance sheet of Tempest as of November 30, 1996 and the related statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the financial position of Tempest as of such date and its results of operations and retained earnings and cash flows for such fiscal year. (i) Since November 30, 1996 there has been no material adverse change in the business, financial position or results of operations of Tempest. Section 4.05. Litigation. Except as disclosed in the notes to the financial statements referred to in Section 4.04(a), there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. Section 4.06. ERISA. Neither the Borrower, nor any Guarantor, nor any member of their respective ERISA Groups, maintains or contributes to, or has within the previous six years (whether or not while a member of such Person's current ERISA Group) maintained or contributed to, or been required to maintain 29 or been jointly and severally liable for contributions to, or liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. Section 4.07. Taxes. The Borrower and its Subsidiaries have filed all income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section 4.08. Not an Investment Company. No Obligor is an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of 1940, as amended. Section 4.09. Full Disclosure. All written information heretofore furnished by the Obligors to the Administrative Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Administrative Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Obligors can now reasonably foresee) the business, operations or financial condition of any Obligor and its Consolidated Subsidiaries, taken as a whole, or the ability of any Obligor to perform its obligations under this Agreement. Section 4.10. Compliance with Laws. The Borrower and each Subsidiary are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. 30 ARTICLE 5 Covenants The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: Section 5.01. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, shareholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission or otherwise reasonably acceptable to the Required Banks by Coopers & Lybrand LLP or other independent public accountants of nationally recognized standing; (b) 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 of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such statements of operations and cash flows in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.07 to 5.10, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) within five days after any executive officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth 31 the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (g) as soon as available and in any event within 20 days after submission, each statutory statement of the Guarantors (or any of them) in the form submitted to The Insurance Division of the Office of Registrar of Companies of Bermuda; (h) as soon as available and in any event within 120 days after the end of each fiscal year of each Guarantor, a consolidated balance sheet of each Guarantor and its Subsidiaries (if any) as of the end of such fiscal year and the related statements of income and changes in financial position for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by the independent public accountants which reported on the financial statements referred to in clause (a) above; (i) promptly after any executive officer of the Borrower obtains knowledge thereof, (i) a copy of any notice from the Minister of Finance or the Registrar of Companies 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 Guarantor under the Bermuda Insurance Law 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 Guarantor relating to an investigation conducted by the Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Law 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 either Guarantor; and (j) from time to time such additional information regarding the financial position, results of operations or business of the Borrower or any of its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request from time to time. 32 Section 5.02. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.03. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will maintain, and will cause each Subsidiary to maintain, physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense. The Borrower will deliver to the Banks upon request of any Bank through the Administrative Agent from time to time, full information as to the insurance carried. Section 5.04. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a Subsidiary (other than a Guarantor) into the Borrower or the merger or consolidation of a Subsidiary (other than a Guarantor) with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) any merger of an Obligor permitted by Section 5.11 or (iii) the termination of the corporate existence of any Subsidiary (other than a Guarantor) if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. Section 5.05. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally 33 accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 5.06. Inspection of Property, Book and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in accordance with generally accepted accounting principles in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. Section 5.07. Leverage. Consolidated Debt will at no time exceed 35% of Consolidated Tangible Net Worth. Section 5.08. Subsidiary Debt. The Borrower will not permit any of its Subsidiaries to create, assume or suffer to exist any Debt, except (i) Debt under the Related Documents, (ii) Debt owing to the Borrower or a Wholly-Owned Consolidated Subsidiary, (iii) Debt of Tripar Partnership, a Bermuda general partnership, owing to other Subsidiaries or Debt of such other Subsidiaries owing to Tripar Partnership, (iv) Debt in respect of letters of credit issued in the ordinary course of business, (v) Debt created by exercise of overdraft privileges on a basis not more frequent than once each calendar month for not more than five Euro-Dollar Business Days in an amount not to exceed $50,000,000 in the aggregate at any one time, (vi) subordinated Debt of ACE US owing to ACE Insurance, (vii) Debt in an amount not to exceed $70,000,000 incurred in connection with the development by the Borrower and/or any of its Subsidiaries of the "Bermudiana Site" in Hamilton, Bermuda, and (viii) Debt not permitted by the foregoing clauses of this Section in an aggregate principal amount not to exceed $20,000,000 at any time outstanding. Section 5.09. Minimum Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than (i) $1,400,000,000 plus (ii) 25% of Consolidated Net Income for each fiscal quarter of the Borrower ended after December 31, 1997 and on or prior to such date of determination and for which such Consolidated Net Income is positive (but with no deduction on account of any fiscal quarter for which Consolidated Net Income is negative) plus (iii) 50% 34 of the aggregate amount by which Consolidated Tangible Net Worth shall have been increased by reason of the issuance and sale after the Effective Date and on or prior to such date of determination of any capital stock or the conversion or exchange of any Debt of the Borrower into or with capital stock of the Borrower consummated after the Effective Date and on or prior to such date of determination. Section 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $25,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $25,000,000 and (iii) 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; 35 (h) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $25,000,000; (i) Liens securing obligations in respect of letters of credit issued pursuant to any of the Related Documents; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Tangible Net Worth. Section 5.11. Consolidations, Mergers and Sales of Assets. No Obligor will (i) consolidate with or merge into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of its assets to any other Person; provided that if both immediately before and after giving effect thereto no Default shall have occurred and be continuing, then (A) any Guarantor may merge or consolidate with any other Person so long as the surviving entity is the Guarantor or a Wholly-Owned Consolidated Subsidiary and, if such Guarantor is not the surviving entity, such surviving entity shall have assumed the obligations of such Guarantor hereunder pursuant to an instrument in form and substance reasonably satisfactory to the Required Banks and shall have delivered such opinions of counsel with respect thereto as the Administrative Agent may reasonably request and (B) the Borrower may merge with another Person so long as the Borrower is the surviving entity. Section 5.12. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for its general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "MARGIN STOCK" within the meaning of Regulation U. Section 5.13. ERISA. Neither the Borrower, nor any Guarantor, nor any member of their respective ERISA Groups will maintain or contribute to, or become obligated to maintain or become jointly and severally liable for contributions to, or have liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. 36 ARTICLE 6 Defaults Section 6.01. Events of Default. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within five Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder or any Guarantor shall fail to pay when due any such principal, interest, fees or other amount payable hereunder; provided that, for purposes of this Section 6.01(a), no such payment default by the Borrower shall be continuing if the Guarantors pay the amount thereof at the time and otherwise in the manner provided in Article 9; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.07 through 5.12, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by any Obligor in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; or, without limiting the foregoing, any "Event of Default" (as defined in any of the other Related Documents) shall occur; (g) (i) (x) a resolution or other similar action is passed authorizing the voluntary winding up of the Borrower or any other similar action with respect to the Borrower or a petition is filed for the winding up of the Borrower or the taking of any other similar action with respect to the Borrower in the Grand Court of the Cayman Islands or (y) any corporate action is taken authorizing the winding up, 37 the liquidation, any arrangement or the taking of any other similar action of or with respect to any Guarantor or authorizing any corporate action to be taken to facilitate any such winding up, liquidation, arrangement or other similar action or any petition shall be filed seeking the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to any Guarantor by the Registrar of Companies in Bermuda, one or more holders of insurance policies or reinsurance certificates issued by any Guarantor or by any other Person or Persons or any petition shall be presented for the winding up of any Guarantor to a court of Bermuda as provided under the Bermuda Companies Law and in either such case such petition shall remain undismissed and unstayed for a period of 60 days or any creditors' or members' voluntary winding up of any Guarantor as provided under the Bermuda Companies Law shall be commenced or any receiver shall be appointed by a creditor of any Guarantor or by a court of Bermuda on the application of a creditor of any Guarantor as provided under any instrument giving rights for the appointment of a receiver; (ii) a proceeding shall be commenced by any Person seeking the rehabilitation, liquidation, dissolution or conservation of the assets of any Guarantor or any substantial part thereof or any similar remedy and such proceedings shall remain undismissed and unstayed for a period of 60 days; (iii) the Borrower or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (iv) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Subsidiary under the United States federal bankruptcy laws as now or hereafter in effect; 38 (h) a judgment or order for the payment of money in excess of $25,000,000 shall be rendered against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 45 days; (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of voting stock of the Borrower; or, during any period of 12 consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower; or any Guarantor shall cease to be a Wholly-Owned Consolidated Subsidiary of the Borrower; (j) any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of any of the Financing Documents is invalid or unenforceable in any material respect, or any Obligor shall so assert in writing; or (k) the registration of any Guarantor as an insurer shall be revoked, suspended or otherwise have restrictions or conditions placed upon it unless, in the case of the placing of any such restrictions or conditions, such restrictions or conditions could not have a material adverse effect on the interests of the Administrative Agent and the Banks under the Financing Documents; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors; provided that in the case of any of the Events of Default specified in clause (g) above with respect to any Obligor, without any notice to any Obligor or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors. 39 Section 6.02. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 The Agents Section 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with all such powers as are reasonably incidental thereto. Section 7.02. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. Section 7.03. Action by Administrative Agent. The obligations of the Administrative Agent under this Agreement are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. Section 7.04. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for any Obligor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.05. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks (or such different number of Banks as any provision hereof expressly requires for such consent or request) or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible 40 for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any Obligor; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of any Financing Document or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Section 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Obligors) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in such capacity in connection with the Financing Documents or any action taken or omitted by such indemnitees hereunder or thereunder. Section 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each 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 any action under this Agreement. Section 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, which successor Administrative Agent shall be reasonably acceptable to the Borrower. 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 gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor 41 Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. Section 7.09. Administrative Agent's Fee. The Borrower shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. Section 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on either Syndication Agent, on the Documentation Agent, on the Managing Agent or on any Co-Agent in its capacity as such an Agent. ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determination Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the London interbank market for such Interest Period, or (b) in the case of a Euro-Dollar Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Administrative Agent that the London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their Euro- Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist (i) the obligations of the Banks to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any 42 Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Euro-Dollar Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. Section 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day. Section 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, 43 central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.16), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (including any determination by any such authority, central bank or comparable agency that, for purposes of capital adequacy requirements, the Commitments hereunder do not constitute commitments with an original maturity of one year or less), has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the 44 need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections and of this Section , the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 180 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which because of the retroactive application of such statute, regulation or other such basis, such Bank did not know in good faith that such amount would arise or accrue. Section 8.04. Taxes. (a) Any and all payments by any Obligor hereunder shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all penalties, interest, expenses and similar liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Administrative Agent, as the case may be, shall be organized or any political subdivision thereof, (ii) in the case of each Bank, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof or in which such Bank's principal executive office is located or any political subdivision thereof and (iii) any Taxes imposed as a result of a change of such Bank's Applicable Lending Office to the extent such Taxes would not have been imposed absent such change; provided however, that (x) a change in such Bank's Applicable Lending Office to which the Obligor has consented and (y) a change in such Bank's Applicable Lending Office as a result of legal or regulatory restrictions shall not constitute a change for the purposes of this Section 8.04 (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "TAXES"). Each Obligor agrees that, if any Obligor shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank or the Administrative Agent, (A) the sum payable to such Bank or the Administrative Agent shall be increased as may be necessary so that after making all required deductions for Taxes (including deductions applicable to additional sums payable under this Section 8.04), such Bank or the Administrative Agent, as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (B) such Obligor shall make such deductions and (C) such 45 Obligor shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law. (b) In addition, each Obligor agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which shall arise from any payment made under, or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any Note (all such taxes, charges or levies being hereinafter referred to as "OTHER TAXES"). (c) Each Obligor agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 8.04) paid by such Bank or the Administrative Agent or any penalties, interest, expenses and similar liabilities arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted provided that such Bank has acted in good faith with respect to such Taxes or Other Taxes and that such Bank reasonably cooperates with the Obligors in challenging such Taxes or Other Taxes. Each indemnification under this paragraph (c) shall be made within 30 days from the date such Bank or the Administrative Agent makes demand therefor. (d) Each Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) (x) to file any certificate or document or to furnish any information as reasonably requested by any Obligor pursuant to any applicable treaty, law, rule or regulation or (y) to designate a different Lending Office if the making of such a filing, the furnishing of such information or the designation of such other Lending Office would avoid the need for or reduce the amount of any additional amounts payable by any Obligor pursuant to this Section 8.04 and would not, in the reasonable judgment of such Bank, be disadvantageous to such Bank. Notwithstanding the foregoing, it is understood and agreed that nothing in this Section 8.04 shall interfere with the rights of any Bank to conduct its fiscal or tax affairs in such manner as it deems fit. (e) Within 90 days after the date of any payment of Taxes, the Obligors will furnish to the Administrative Agent notarized copies for each Bank of the original receipt evidencing payment thereof. If no Taxes shall be payable in respect of any payment under this Agreement, the Obligors will, upon the reasonable request of the Administrative Agent, furnish to the Administrative Agent a certificate in form reasonably acceptable to the Administrative Agent's counsel confirming that such payment is exempt from or not subject to Taxes. (f) For any period with respect to which a Bank has failed to provide the Obligors with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the 46 date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(a) or (b) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Obligors shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or to continue or convert outstanding Loans as or to Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) Euro-Dollar Loans shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro- Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid (or converted), all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. Section 8.06. Substitution of Bank. If (i) the obligation of any Bank to make or to convert or continue outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Banks) mutually satisfactory to the Borrower, the Administrative Agent (whose consent shall not be unreasonably withheld) and the issuing banks under the Related Documents to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto, the outstanding loans of such Bank and assume the commitment and letter 47 of credit liabilities of such Bank (and its affiliates) under each of the Related Documents, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding loans and funded letter of credit liabilities plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's commitments and letter of credit liabilities plus such amount, if any, as would be payable pursuant to the funding loss indemnities in the Related Documents if the outstanding loans of such Bank were prepaid in their entirety on the date of consummation of such assignment. ARTICLE 9 Guaranty Section 9.01. The Guaranty. Each Guarantor hereby unconditionally, jointly and severally, absolutely and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all amounts payable by the Borrower under the Financing Documents including, without limitation, the principal of and interest on each Note issued by the Borrower pursuant to this Agreement. Upon failure by the Borrower to pay punctually any such amount, each Guarantor shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement. Section 9.02. Guaranty Unconditional. The obligations of each Guarantor hereunder shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other Obligor under any of the Financing Documents, by operation of law or otherwise; (b) any modification or amendment of or supplement to any of the Financing Documents; (c) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any other Obligor under any of the Financing Documents; (d) any change in the corporate existence, structure or ownership of any Obligor, or any insolvency, bankruptcy, reorganization or other similar proceeding 48 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 Financing Documents; (e) 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 Financing Documents or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against any other Obligor for any reason of any of the Financing Documents, or any provision of applicable law or regulation purporting to prohibit the payment by any other Obligor of the principal of or interest on any Note or any other amount payable under any of the Financing Documents; or (g) 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 any Guarantor's obligations hereunder. Section 9.03. Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances. Each Guarantor's obligations hereunder shall remain in full force and effect until the Commitments shall have terminated and the principal of and interest on the Notes and all other amounts payable by the Borrower under the Financing Documents shall have been paid in full. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Borrower under the Financing Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, each Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. Section 9.04. Waiver by Each of the Guarantors. Each Guarantor 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 9.05. Subrogation. Upon the making by any Guarantor of any payment hereunder, such Guarantor shall be subrogated to the rights of the payee against the Borrower with respect to such payment; provided that such Guarantor 49 shall not enforce any right to receive any payment by way of subrogation until all amounts of principal of and interest on the Loans and all other amounts payable by the Borrower under this Agreement shall have been paid in full and the Commitments shall have terminated. Section 9.06. Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrower under any of the Financing Documents is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by each Guarantor hereunder forthwith on demand by the Administrative Agent made at the request of the requisite proportion of the Banks specified in Article 6. Section 9.07. Limit of Liability. The obligations of each Guarantor hereunder shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance under any applicable bankruptcy, insolvency or similar law. ARTICLE 10 Miscellaneous Section 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of any Obligor or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 10 days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. Section 10.02. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise 50 thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in the Financing Documents shall be cumulative and not exclusive of any rights or remedies provided by law. Section 10.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special counsel for the Agents, reasonably incurred in connection with the preparation of the Financing Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Administrative Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "INDEMNITEE") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be reasonably incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing Documents or any actual or proposed use of proceeds of Loans; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Section 10.04. Sharing; Set-Offs. (a) Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of any Obligor other than its indebtedness hereunder. Each Obligor 51 agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Obligor in the amount of such participation. (b) Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request specified by Section 6.01 to Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Bank and each of its 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 Bank or such affiliate to or for the credit or the account of any Obligor against any and all of the obligations of such Obligor to such Bank now or hereafter existing under the Financing Documents, irrespective of whether such Bank shall have made any demand for payment thereof and although such obligations may be unmatured. Each Bank agrees promptly to notify such Obligor after any such setoff and application; provided, however, that the -------- ------- failure to give such notice shall not affect the validity of such setoff and application. The rights of each Bank and its affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) that such Bank and its affiliates may have. Section 10.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Obligors and the Required Banks (and, if the rights or duties of the Administrative Agent are affected thereby, by the Administrative Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, (iv) release any Guarantor hereunder, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or (vi) amend this Section 10.05. Section 10.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Obligors may not assign or 52 otherwise transfer any of their rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "PARTICIPANT") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii), (iv) or (v) of Section 10.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement and subject to subsection (e) below, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part (equivalent to an initial participation in the Related Documents of not less than $15,000,000, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Administrative Agent which shall not be unreasonably withheld; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent of the Borrower or the Administrative Agent shall be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans; and provided further that, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank, the participation in the Related Documents of such transferor Bank after giving effect to such assignment (together with the participations of its affiliates) shall not be 53 less than $15,000,000; and provided further that such assignment shall be accompanied by a ratably equivalent assignment of the rights and obligations of the transferor Bank (and its affiliates) under each of the other Related Documents. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 10.07. Collateral. Each of the Banks represents to the Administrative Agent and each of the other Banks that it in good faith is not relying upon any "MARGIN STOCK" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 10.08. Governing Law. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. Section 10.09. Counterparts; Integration; Effectiveness. 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. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter 54 hereof. This Agreement shall become effective upon receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). Section 10.10. Judicial Proceedings. (a) Consent to Jurisdiction. Each Obligor irrevocably submits to the jurisdiction of any federal court sitting in New York City and, in the event that jurisdiction cannot be obtained or maintained in a federal court, to the jurisdiction of any New York State court sitting in New York City over any suit, action or proceeding arising out of or relating to any of the Financing Documents. Each Obligor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that any suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each Obligor agrees that a final judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding upon it and will be given effect in Bermuda or the Cayman Islands, as the case may be, to the fullest extent permitted by applicable law and may be enforced in any federal or New York State court sitting in New York City (or any other courts to the jurisdiction of which such Obligor is or may be subject) by a suit upon such judgment, provided that service of process is effected upon it in one of the manners specified herein or as otherwise permitted by law. (b) Appointment of Agent for Service of Process. Each Obligor hereby irrevocably designates and appoints CT Corporation System having an office on the date hereof at 1633 Broadway, New York, New York 10019 as its authorized agent, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City. Each Obligor represents and warrants that such agent has agreed in writing to accept such appointment and that a true copy of such designation and acceptance has been delivered to the Administrative Agent. Said designation and appointment shall be irrevocable until the Commitments shall have terminated and all principal and interest and all other amounts payable hereunder and under the Notes shall have been paid in full in accordance with the provisions hereof and thereof. If such agent shall cease so to act, each Obligor covenants and agrees to designate irrevocably and appoint without delay another such agent satisfactory to the Administrative Agent and to deliver promptly to the Administrative Agent evidence in writing of such other agent's acceptance of such appointment. 55 (c) Service of Process. Each Obligor hereby consents to process being served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City by service of process upon the agent of such Obligor for service of process in such jurisdiction appointed as provided in subsection (b) above; provided that, to the extent lawful and possible, notice of said service upon such agent shall be mailed by registered or certified air mail, postage prepaid, return receipt requested, to such Obligor at its address specified on the signature page hereof or to any other address of which such Obligor shall have given written notice to the Bank. Each Obligor irrevocably waives, to the fullest extent permitted by law, all claim of error by reason of any such service in such manner and agrees that such service shall be deemed in every respect effective service of process upon such Obligor in any such suit, action or proceeding and shall, to the fullest extent permitted by law, be taken and held to be valid and personal service upon and personal delivery to such Obligor. (d) No Limitation on Service or Suit. Nothing in this Section 10.10 shall affect the right of the Administrative Agent or any Bank to serve process in any other manner permitted by law or limit the right of the Administrative Agent or any Bank to bring proceedings against any Obligor in the courts of any jurisdiction or jurisdictions. Section 10.11. Judgment Currency. If, under any applicable law and whether pursuant to a judgment being made or registered against any Obligor or for any other reason, any payment under or in connection with any of the Financing Documents is made or satisfied in a currency (the "OTHER CURRENCY") other than that in which the relevant payment is due (the "REQUIRED CURRENCY") then, to the extent that the payment (when converted into the Required Currency at the rate of exchange on the date of payment or, if it is not practicable for the party entitled thereto (the "PAYEE") to purchase the Required Currency with the Other Currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for it to do so) actually received by the Payee falls short of the amount due under the terms of this Agreement and the Notes, each Obligor shall, to the extent permitted by law, as a separate and independent obligation, indemnify and hold harmless the Payee against the amount of such short-fall. For the purpose of this Section, "RATE OF EXCHANGE" means the rate at which the Payee is able on the relevant date to purchase the Required Currency with the Other Currency and shall take into account any premium and other costs of exchange. Section 10.12. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS 56 AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Section 10.13. Existing Credit Agreement. On the Closing Date and simultaneously with the closing the Borrower hereby gives notice to Morgan Guaranty Trust Company of New York, as agent, under Section 2.09 of the Credit Agreement referred to in clause (x) of Section 3.01 of the termination of the Commitments (as defined therein) and the Banks hereby waive the requirement that prior notice of such termination be given as therein provided. Section 10.14. Confidentiality. The Administrative Agent and each Bank agrees to keep any information delivered or made available by any Obligor pursuant to this Agreement confidential from anyone other than persons employed or retained by such Bank and its affiliates who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or to the Administrative Agent, (b) subject to provisions substantially similar to those contained in this Section 10.14, to any other Person if reasonably incidental to the administration of the credit facility contemplated hereby, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation relating to the Related Documents to which the Administrative Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Administrative Agent's legal counsel and independent auditors and (i) subject to provisions substantially similar to those contained in this Section 10.14, to any actual or proposed Participant or Assignee. Notwithstanding the foregoing, this Section 10.14 shall not apply to information that is or becomes publicly available, information that was available to a Bank on a non-confidential basis prior to its disclosure hereunder and information which becomes available to a Bank on a non-confidential basis from a source that is not, to such Bank's knowledge, subject to a confidentiality agreement with any Obligor. 57 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ACE LIMITED By________________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda number:3543ACEILBA Facsimile number: (441) 295-5221 The Common Seal of ACE Limited was hereunto affixed in the presence of: Director _________________________ Director/Secretary __________________________ 58 A.C.E. INSURANCE COMPANY, LTD., as Guarantor By______________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number:3543ACEILBA Facsimile number: (441)295-5221 The Common Seal of A.C.E. Insurance Company, Ltd. was hereunto affixed in the presence of: Director ________________________________ Director/Secretary ________________________________ 59 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD., as Guarantor By______________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) The Common Seal of Corporate Officers & Directors Assurance Ltd. was hereunto affixed in the presence of: Director __________________________________ Director/Secretary __________________________________ 60 TEMPEST REINSURANCE COMPANY LIMITED, as Guarantor By______________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number:3543ACEILBA Facsimile number: (441)295-5221 The Common Seal of Tempest Reinsurance Company Limited was hereunto affixed in the presence of: Director ________________________ Director/Secretary ________________________ Commitments - ----------- $18,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By_____________________________ Title: $18,000,000 MELLON BANK, N.A. By______________________________ Title: 61 Managing Agent $17,000,000 CITIBANK, N.A. By____________________________ Title: Co-Agents $14,000,000 THE BANK OF NEW YORK By____________________________ Title: $14,000,000 THE BANK OF TOKYO-MITSUBISHI, LTD. By____________________________ Title: $14,000,000 BARCLAYS BANK PLC By____________________________ Title: 62 $14,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By____________________________ Title: By:___________________________ Title: $14,000,000 FLEET NATIONAL BANK By____________________________ Title: $14,000,000 ING BANK, N.V. By____________________________ Title: By____________________________ Title: $14,000,000 ROYAL BANK OF CANADA By____________________________ Title: 63 Other Banks $7,000,000 THE BANK OF BERMUDA, LTD. By_____________________________ Title: $7,000,000 BANQUE NATIONALE DE PARIS By____________________________ Title: By____________________________ Title: $7,000,000 THE CHASE MANHATTAN BANK By____________________________ Title: $7,000,000 CREDIT LYONNAIS NEW YORK BRANCH By_____________________________ Title: 64 $7,000,000 DRESDNER BANK A.G., NEW YORK BRANCH AND GRAND CAYMAN BRANCH By____________________________ Title: By____________________________ Title: $7,000,000 THE FIRST NATIONAL BANK OF CHICAGO By____________________________ $7,000,000 STATE STREET BANK AND TRUST COMPANY By____________________________ Title: _______________ Total Commitments $200,000,000 =============== 65 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By____________________________ Title 60 Wall Street New York, New York 10260-0060 Attention: Glenda Irving Telex number: 177615 Facsimile number: 212-648-5249 66 EXHIBIT A NOTE New York, New York December 11, 1997 For value received, ACE Limited, a Cayman Islands company limited by shares (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the maturity date therefor specified in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of any Obligor hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of December 11, 1997 among the Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. Pursuant to the Credit Agreement payment of principal and interest on this Note is unconditionally guaranteed by the Guarantors named above. ACE LIMITED By_________________________________ Title: 2 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
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3 EXHIBIT B Form of Money Market Quote Request ---------------------------------- [Date] To: Morgan Guaranty Trust Company of New York (the "Administrative Agent") From: [Name of Borrower] Re: 364-Day Credit Agreement (as amended, the "Credit Agreement") dated as of December 11, 1997 among the Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks listed on the signature pages thereof and the Administrative Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount/*/ Interest Period/**/ - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate] ____________________ /*/ Amount must be $10,000,000 or a larger multiple of $1,000,000. /**/ Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Terms used herein have the meanings assigned to them in the Credit Agreement. ACE LIMITED By:___________________________ Title: 2 EXHIBIT C Form of Invitation for Money Market Quotes ------------------------------------------ To: [Name of Bank] Re: Invitation for Money Market Quotes to [Name of Borrower] (the "Borrower") Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as of December 11, 1997, as amended, among the Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks parties thereto and the undersigned, as Administrative Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate. ] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By:___________________________ Authorized Officer EXHIBIT D Form of Money Market Quote -------------------------- To: Morgan Guaranty Trust Company of New York, as Administrative Agent Re: Money Market Quote to [Name of Borrower] (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ________________________________ 2. Person to contact at Quoting Bank: _____________________________ 3. Date of Borrowing: ____________________/*/ 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates:
Principal Interest Money Market Amount/**/ Period/***/ [Margin/****/] [Absolute Rate/*****/] ---------- ----------- ------------------------------------- $
_______________________ /*/ As specified in the related Invitation. /**/ Principal amount bid for each Interest Period may not exceed principal amount requested. Specify limitation if the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. /***/ Not less than one month or not less than 7 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. /****/ Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". /*****/ Specify rate of interest per annum (to the nearest 1/10,000th of 1%). $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]/**/ We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the 364-Day Credit Agreement dated as of December 11, 1997 among the Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks listed on the signature pages thereof and yourselves, as Administrative Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated:________________ By____________________________ Authorized Officer 2 EXHIBIT H FORM OF DAVIS POLK & WARDWELL OPINION ------------------------------------- December 11, 1997 To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260-0060 Ladies and Gentlemen: We have participated in the preparation of the 364-Day Credit Agreement (the "Credit Agreement") dated as of December 11, 1997 among ACE Limited, a Cayman Islands company limited by shares, A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company, and Tempest Reinsurance Company Limited, a Bermuda limited liability company, as Guarantors, the Banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Administrative Agent, and have acted as special United States counsel for the Agents for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. To the Bank and the Agent 2 December 11, 1997 Referred to Below 2. The execution, delivery and performance by each Guarantor of the Credit Agreement are within such Guarantor's corporate powers and have been duly authorized by all necessary corporate action. 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. The Credit Agreement constitutes a valid and binding agreement of each Guarantor enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. In giving the foregoing opinion we have relied, with your consent and without independent investigation, as to all matters governed by the laws of (i) the Cayman Islands, upon the opinion of Maples and Calder dated the date hereof, a copy of which has been delivered by you pursuant to Section 3.01(b) of the Credit Agreement and (ii) Bermuda, upon the opinion of Conyers, Dill & Pearman dated the date hereof, a copy of which has been delivered to you pursuant to Section 3.01(c) of the Credit Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person without our prior written consent. Very truly yours, EXHIBIT I ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of __________ __, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), ACE Limited, ACE US Holdings, Inc. ("ACE US"), A.C.E. Insurance Company, Ltd ("ACE Insurance") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H - - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Assignment Agreement") relates to (i) the Five-Year Credit Agreement (as amended from time to time, the "Five Year Credit Agreement") and the 364-Day Credit Agreement (as amended from time to time, the "364-Day Credit Agreement") each dated as of December 11, 1997 among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent, (ii) the Term Loan Agreement (as amended from time to time, the "Term Loan Agreement") the dated as of December 11, 1997 among ACE US, as Borrower, ACE Limited, as Guarantor, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent and (iii) the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among ACE Insurance, the Assignor and the other Banks party thereto and the Administrative Agent (the "Reimbursement Agreement" and together with the Five- Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement, collectively, "the Facilities"); WHEREAS, under the Five-Year Credit Agreement, the Assignor has a Commitment to make Loans to ACE Limited and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to ACE Limited by the Assignor under the Five-Year Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; WHEREAS, Letters of Credit with a total amount available for drawing under the Five-Year Credit Agreement of $____________ are outstanding at the date hereof; WHEREAS, under the 364-Day Credit Agreement, the Assignor has a Commitment to make Loans to ACE Limited in an aggregate principal amount at any time outstanding not to exceed $_________; WHEREAS, Committed Loans made to ACE Limited by the Assignor under the 364- Day Credit Agreement in the aggregate principal amount of $_________ are outstanding at the date hereof; WHEREAS, under the Term Loan Agreement, the Assignor has [a Commitment to make][outstanding] Loans to ACE US in an aggregate principal amount of $_____________; WHEREAS, pursuant to the Reimbursement Agreement, the Assignor is a participant to the extent of _____% in up to (Pounds)153,683,466 of Letters of Credit outstanding thereunder; WHEREAS, the Assignor proposes to assign to the Assignee an aggregate interest in the Facilities of $__________, comprised as follows: (i) all of the rights of the Assignor under the Five-Year Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Five-Year Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans and Letter of Credit Liabilities thereunder, (ii) all of the rights of the Assignor under the 364-Day Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $_____________ (the "364-Day Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans thereunder, (iii) all of the rights of the Assignor under the Term Loan Agreement in respect of a portion of its [Commitment] [Loans] thereunder in an amount equal to $_______________ (the "Term Loan Assigned Amount" and, together with the Five-Year Assigned Amount and the 364- Day Assigned Amount, collectively the "Assigned Amounts"), and (iv) a portion of the rights and obligations of the Assignor under the Reimbursement Agreement equivalent to a Participation Percentage of ____% (the "Assigned Percentage"), 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: SECTION 1. Definitions. All capitalized terms not otherwise defined herein ----------- shall have the respective meanings set forth in the Five-Year Credit Agreement, the 364-Day Credit Agreement, the Term Loan Agreement and the Reimbursement Agreement, as applicable. SECTION 2. Assignment. The Assignor hereby assigns and sells to the ---------- Assignee all of the rights of the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement to the extent of the Five-Year Assigned Amount, the 364-Day Assigned Amount and the Term Loan Assigned Amount, respectively, and under the Reimbursement Agreement to the extent of the Assigned Percentage, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement to the extent of the Five-year Assigned Amount, the 364- Day Assigned Amount and the Term Loan Assigned Amount and under the Reimbursement Agreement to the extent of the Assigned Percentage, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor and Letter of Credit Liabilities of and the corresponding portion of the participating interests of the Assignor in the Letters of Credit under the Reimbursement Agreement, outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, ACE Limited, ACE US, ACE Insurance, the Issuing Bank(s) and the Administrative Agent 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 the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement with a Commitment in an amount equal to the Five-Year Assigned Amount, the 364-Day Assigned Amount and the Term Loan Assigned Amount, respectively and under the Reimbursement Agreement to the extent of the Assigned Percentage, and (ii) the Commitment of the Assignor under each of the Facilities and the Participation Percentage of the Assignor under the Reimbursement Agreement shall, as of the date hereof, be reduced by the corresponding amount and the Assignor released from its obligations under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement, the Term Loan Agreement and 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. SECTION 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 in Federal funds the amount heretofore agreed between them./******/ It is understood that ticking and/or facility fees accrued to the date hereof 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 any Related Document 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. SECTION 4. Consents. This Agreement is conditioned upon the consent of -------- the Administrative Agent and the Issuing Bank(s) and ACE Limited, ACE US and ACE Insurance, pursuant to Section 10.06(c) of each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement and Section 8.06(c) of the Reimbursement Agreement. The execution of this Agreement by such persons is evidence of such consents. Pursuant to Section 10.06(c) of each of the 364-Day Credit Agreement, the Five-Year Credit Agreement and the Term Loan Agreement, each of ACE Limited and ACE US, respectively, agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 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 any of ACE Limited and its subsidiaries or the validity and enforceability of the obligations of ACE Limited and its subsidiaries under the Related Documents. 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 ACE Limited and its subsidiaries. SECTION 6. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of New York. SECTION 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. _______________________ /******/ Amount should combine principal 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. 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: ACE US HOLDINGS, INC. By___________________________________________ Title: A.C.E. INSURANCE COMPANY, LTD. By___________________________________________ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and as Administrative Agent By___________________________________________ Title: EXHIBIT J [CT Corporation System] December 11, 1997 To the Persons Identified on on Schedule A Attached Hereto: We have reviewed (i) the Five-Year Credit Agreement dated as of December 11, 1997 (the "Five-Year Credit Agreement") and the 364-Day Credit Agreement (the "364-Day Credit Agreement") each among ACE LIMITED, as Borrower, A.C.E. INSURANCE COMPANY, LTD., CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. and TEMPEST REINSURANCE COMPANY LIMITED, as Guarantors, the Banks listed therein, and Morgan Guaranty Trust Company of New York, as Administrative Agent, (ii) the Term Loan Agreement (the "Term Loan Agreement") dated as of December 11, 1997 among ACE US HOLDINGS, INC., as Borrower, ACE LIMITED, as Guarantor, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Administrative Agent, (iii) the Subordinated Loan Agreement dated as of December 11, 1997 (the "Subordinated Loan Agreement") among ACE US HOLDINGS, INC., as Borrower, A.C.E. INSURANCE COMPANY, LTD., as Lender and Morgan Guaranty Trust Company of New York, as Administrative Agent and (iv) the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among A.C.E. INSURANCE COMPANY, LTD., as Account Party, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent (the "Amended and Restated Reimbursement Agreement" and together with the Five-Year Credit Agreement, the 364-Year Credit Agreement, the Term Loan Agreement and the Subordinated Loan Agreement, collectively, the "Agreements"), in each of which CT Corporation System is named as agent to receive service of process in the State of New York on behalf of (a) the Borrower and each Guarantor under each of the Five-Year Credit Agreement and the 364-Day Credit Agreement, (b) the Borrower and the Guarantor under the Term Loan Agreement, (c) the Borrower and the Lender under the Subordinated Loan Agreement and (d) the Account Party under the Amended and Restated Reimbursement Agreement, at the address of 1633 Broadway, New York, New York 10019. Upon review of our appointment outlined in Section 10.10(b) of each of the 364-Day Credit Agreement, the Five-Year Credit Agreement and the Term Loan Agreement, Section 8(c) of the Subordinated Loan Agreement and Section 8.10(b) of the Amended and Restated Reimbursement Agreement, we understand that our role as registered agent is confined to receiving service of process only. We also understand that the term of our appointment as registered agent under each such Agreements shall remain in effect until each of the Agreements shall have been terminated and all obligations thereunder of each Borrower, each Guarantor, the Lender and the Account Party shall have been paid in full, or until such time as we are instructed in writing by the Administrative Agent to discontinue our service. We accept and confirm our appointment as registered agent and we understand that any notice or process received by us in our capacity as registered agent shall be promptly sent by telephone, fax, telex, cable or any other means of instant communication, and thereafter by reputable overnight carrier to: On Behalf of the Borrower and each Guarantor under each of the 364-Day Credit Agreement and the Five-Year Credit Agreement and the Guarantor under the Term Loan Agreement: ACE Limited The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda (Fax 441-295-5221) with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) On behalf of the Borrower under the Term Loan Agreement and the Subordinated Loan Agreement ACE US Holdings, Inc. Six Concourse Parkway Suite, Suite 2700 Atlanta, GA 30374 with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) On behalf of the Account Party under the Amended and Restated Reimbursement Agreement and the Lender under the Subordinated Loan Agreement A.C.E. Insurance Company, Ltd. The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda (Fax 441-295-5221) with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) We appreciate this opportunity to be of service. Very truly yours, CT CORPORATION SYSTEM By:___________________________ Title: SCHEDULE A Morgan Guaranty Trust Company of New York, as Issuing Bank and as Administrative Agent Morgan Guaranty Trust Company of New York Mellon Bank, N.A. Citibank, N.A. The Bank of New York The Bank of Tokyo-Mitsubishi, Ltd. Barclays Bank PLC Deutsche Bank AG, New York and/or Cayman Islands Branch Fleet National Bank ING Bank, N.V. Royal Bank of Canada The Bank of Bermuda, Ltd. Banque Nationale de Paris The Chase Manhattan Bank Credit Lyonnais New York Branch Dresdner Bank A.G., New York Branch and Grand Cayman Branch The First National Bank of Chicago State Street Bank and Trust Company ACE Limited, as Borrower under the 364-Day Credit Agreement and the Five-Year Credit Agreement and as Guarantor under the Term Loan Agreement A.C.E. Insurance Company, Ltd., as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement, as Account Party under the Amended and Restated Reimbursement Agreement and as Lender under the Subordinated Loan Agreement Corporate Officers & Directors Assurance Ltd., as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement Tempest Reinsurance Company Limited, as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement ACE US Holdings, Inc., as Borrower under the Term Loan Agreement and as Borrower under the Subordinated Loan Agreement EX-10.31 5 FIVE YEAR CREDIT AGREEMENT EXHIBIT 10.31 EXECUTION COPY $200,000,000 FIVE-YEAR CREDIT AGREEMENT dated as of December 11, 1997 among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Administrative Agent _________________ J.P. Morgan Securities Inc. and Mellon Bank N.A., Co-Syndication Agents Morgan Guaranty Trust Company of New York, Documentation Agent TABLE OF CONTENTS _______________
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions................................................... 1 SECTION 1.02. Accounting Terms and Determinations........................... 12 SECTION 1.03. Types of Borrowings........................................... 13 SECTION 1.04. United States Dollars......................................... 13 ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend........................................... 13 SECTION 2.02. Notice of Committed Borrowing................................. 13 SECTION 2.03. Money Market Borrowings....................................... 14 SECTION 2.04. Notice of Banks; Funding of Loans............................. 18 SECTION 2.05. Notes......................................................... 19 SECTION 2.06. Maturity of Loans............................................. 19 SECTION 2.07. Interest Rates................................................ 20 SECTION 2.08. Fees.......................................................... 21 SECTION 2.09. Optional Termination or Reduction of Commitments.............. 22 SECTION 2.10. Scheduled Termination of Commitments.......................... 22 SECTION 2.11. Method of Electing Interest Rates............................. 22 SECTION 2.12. Optional Prepayments.......................................... 24 SECTION 2.13. General Provisions as to Payments............................. 24 SECTION 2.14. Funding Losses................................................ 25 SECTION 2.15. Computation of Interest and Fees.............................. 26 SECTION 2.16. Regulation D Compensation..................................... 26 SECTION 2.17. Letters of Credit............................................. 26 ARTICLE 3 CONDITIONS SECTION 3.01. Closing....................................................... 30 SECTION 3.02. Borrowings and Issuances of Letters of Credit................. 31
PAGE ---- ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power.................................. 32 SECTION 4.02. Corporate and Governmental Authorization; No Contravention.................................................. 32 SECTION 4.03. Binding Effect................................................. 32 SECTION 4.04. Financial Information.......................................... 32 SECTION 4.05. Litigation..................................................... 34 SECTION 4.06. ERISA.......................................................... 34 SECTION 4.07. Taxes.......................................................... 34 SECTION 4.08. Not an Investment Company...................................... 34 SECTION 4.09. Full Disclosure................................................ 34 SECTION 4.10. Compliance with Laws........................................... 35 ARTICLE 5 COVENANTS SECTION 5.01. Information.................................................... 35 SECTION 5.02. Payment of Obligations......................................... 37 SECTION 5.03. Maintenance of Property; Insurance............................. 37 SECTION 5.04. Conduct of Business and Maintenance of Existence............... 38 SECTION 5.05. Compliance with Laws........................................... 38 SECTION 5.06. Inspection of Property, Book and Records....................... 38 SECTION 5.07. Leverage....................................................... 38 SECTION 5.08. Subsidiary Debt................................................ 39 SECTION 5.09. Minimum Tangible Net Worth..................................... 39 SECTION 5.10. Negative Pledge................................................ 39 SECTION 5.11. Consolidations, Mergers and Sales of Assets.................... 40 SECTION 5.12. Use of Proceeds................................................ 41 SECTION 5.13. ERISA.......................................................... 41 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default.............................................. 41 SECTION 6.02. Notice of Default.............................................. 44 SECTION 6.03. Cash Cover..................................................... 44
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PAGE ---- ARTICLE 7 THE AGENTS SECTION 7.01. Appointment and Authorization.................................. 45 SECTION 7.02. Administrative Agent and Affiliates............................ 45 SECTION 7.03. Action by Administrative Agent................................. 45 SECTION 7.04. Consultation with Experts...................................... 45 SECTION 7.05. Liability of Administrative Agent.............................. 45 SECTION 7.06. Indemnification................................................ 46 SECTION 7.07. Credit Decision................................................ 46 SECTION 7.08. Successor Administrative Agent................................. 46 SECTION 7.09. Administrative Agent's Fee..................................... 47 SECTION 7.10. Other Agents................................................... 47 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determination Interest Rate Inadequate or Unfair......................................................... 47 SECTION 8.02. Illegality..................................................... 48 SECTION 8.03. Increased Cost and Reduced Return.............................. 48 SECTION 8.04. Taxes.......................................................... 50 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans...... 52 SECTION 8.06. Substitution of Bank........................................... 52 ARTICLE 9 GUARANTY SECTION 9.01. The Guaranty................................................... 53 SECTION 9.02. Guaranty Unconditional......................................... 53 SECTION 9.03. Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances.......................................... 54 SECTION 9.04. Waiver by Each of the Guarantors............................... 54 SECTION 9.05. Subrogation.................................................... 54 SECTION 9.06. Stay of Acceleration........................................... 55 SECTION 9.07. Limit of Liability............................................. 55
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PAGE ---- ARTICLE 10 MISCELLANEOUS SECTION 10.01. Notices....................................................... 55 SECTION 10.02. No Waivers.................................................... 55 SECTION 10.03. Expenses; Indemnification..................................... 56 SECTION 10.04. Sharing of Set-Offs........................................... 56 SECTION 10.05. Amendments and Waivers........................................ 57 SECTION 10.06. Successors and Assigns........................................ 58 SECTION 10.07. Collateral.................................................... 59 SECTION 10.08. Governing Law................................................. 59 SECTION 10.09. Counterparts; Integration; Effectiveness...................... 59 SECTION 10.10. Judicial Proceedings.......................................... 60 SECTION 10.11. Judgment Currency............................................. 61 SECTION 10.12. WAIVER OF JURY TRIAL.......................................... 62 SECTION 10.13. Existing Credit Agreement..................................... 62 SECTION 10.14. Confidentiality............................................... 62
PRICING SCHEDULE EXHIBIT A -- NOTE EXHIBIT B -- FORM OF MONEY MARKET QUOTE REQUEST EXHIBIT C -- FORM OF INVITATION FOR MONEY MARKET QUOTES EXHIBIT D -- FORM OF MONEY MARKET QUOTE EXHIBIT E -- FORM OF MAPLES AND CALDER OPINION EXHIBIT F -- FORM OF CONYERS, DILL & PEARMAN OPINION EXHIBIT G -- FORM OF MAYER, BROWN & PLATT OPINION EXHIBIT H -- FORM OF DAVIS POLK & WARDWELL OPINION EXHIBIT I -- ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT J -- LETTER FROM CT CORPORATION SYSTEM iv FIVE-YEAR CREDIT AGREEMENT AGREEMENT dated as of December 11, 1997 among ACE LIMITED, A.C.E. INSURANCE COMPANY, LTD., CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. and TEMPEST REINSURANCE COMPANY LIMITED, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. WHEREAS, the Borrower desires to replace the existing Credit Agreement dated as of November 15, 1996 among the Borrower, certain of the Guarantors, certain banks and Morgan Guaranty Trust Company of New York, as agent, by entering into this Agreement; and WHEREAS, the Banks agree to do so. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "ABSOLUTE RATE AUCTION" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "ACE INSURANCE" means A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, and its successors. "ACE US" means ACE US Holdings, Inc., a Delaware corporation, and its successors. "ADMINISTRATIVE AGENT" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under the Financing Documents, and its successors in such capacity. "AGENT" means each of the Administrative Agent, the Documentation Agent, the Syndication Agents, the Managing Agent and the Co-Agents, and "Agents" means any combination of them, as the context may require. "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "ASSIGNEE" has the meaning set forth in Section 10.06(c). "AUTHORIZED OFFICER" means any of (i) the Chairman, President and Chief Executive Officer of the Borrower, (ii) the General Counsel and Secretary of the Borrower, (iii) the President of ACE Insurance, (iv) the Chief Financial Officer of the Borrower, (v) the Chief Investment Officer of the Borrower, (vi) the Chairman of ACE UK Ltd., or (vii) any other Person designated in a notice given to the Administrative Agent by any two of the foregoing Persons, and "Authorized Officers" means all of the foregoing Persons. "BANK" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 10.06(c), and their respective successors. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "BASE RATE LOAN" means a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the provisions of Section 2.11(a) or Article 8. "BERMUDA COMPANIES LAW" means The Companies Act 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "BERMUDA INSURANCE LAW" means The Insurance Act 1978 of Bermuda, as amended, and the regulations promulgated thereunder. 2 "BORROWER" means ACE Limited, a Cayman Islands company limited by shares, and its successors. "BORROWING" has the meaning set forth in Section 1.03. "CO-AGENT" means each Bank designated as a Co-Agent on the signature pages hereof, in its capacity as co-agent in respect of this Agreement. "CLOSING DATE" means the date on or after the Effective Date on which the Administrative Agent shall have received the documents specified in or pursuant to Section 3.01. "CODA" means Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company, and its successors. "COMMITMENT" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.09. "COMMITTED LOAN" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "CONSOLIDATED DEBT" means at any date the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "CONSOLIDATED NET INCOME" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED TANGIBLE NET WORTH" means at any date the consolidated stockholders' equity of the Borrower and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date; provided that such determination for purposes of Sections 5.07, 5.09 and 5.10 shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial 3 Accounting Standards Board. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to June 30, 1997 in the book value of any asset owned by the Borrower or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, solely for purposes of Section 5.10 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person, provided that the term "Debt" shall not include obligations of an insurance company under insurance policies or surety bonds issued by it. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DOCUMENTATION AGENT" means Morgan Guaranty Trust Company of New York in its capacity as documentation agent in respect of this Agreement. 4 "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "EFFECTIVE DATE" means the date this Agreement becomes effective in accordance with Section 10.09. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means, with respect to any Person, such Person, any Subsidiary of such Person and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with such Person or any such Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "EURO-DOLLAR LOAN" means a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election. "EURO-DOLLAR MARGIN" means a rate per annum determined daily in accordance with the Pricing Schedule. "EURO-DOLLAR RATE" means a rate of interest determined pursuant to Section 2.07(b) on the basis of a London Interbank Offered Rate. 5 "EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "FACILITY FEE RATE" means a rate per annum determined daily in accordance with the Pricing Schedule. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "FINANCING DOCUMENTS" means this Agreement and the Notes. "FIXED RATE LOANS" means Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "GROUP OF LOANS" means at any time a group of Committed Loans consisting of (i) all Base Rate Loans which are outstanding at such time or (ii) all Euro-Dollar Loans having the same Interest Period at such time; provided that, if a Committed Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. 6 "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "GUARANTORS" means ACE Insurance, CODA and Tempest. "INDEMNITEE" has the meaning set forth in Section 10.03(b). "INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of 7 months thereafter as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (3) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "ISSUING BANK" means Morgan Guaranty Trust Company of New York and any other Bank that may agree with the Borrower in writing to issue letters of credit hereunder, in each case as issuer of a Letter of Credit hereunder. The Borrower shall promptly notify the Administrative Agent of any additional Issuing Banks. "LC FEE RATE" means a rate per annum equal to the Euro-Dollar Margin. 8 "LETTER OF CREDIT" means a letter of credit issued or to be issued hereunder by an Issuing Bank in accordance with Section 2.17. "LETTER OF CREDIT COMMITMENT" means the lesser of (x) $50,000,000 and (y) the aggregate amount of the Commitments. "LETTER OF CREDIT LIABILITIES" means, for any Bank and at any time, such Bank's ratable participation in the sum of (x) the amounts then owing by the Borrower in respect of amounts drawn under Letters of Credit and (y) the aggregate amount then available for drawing under all Letters of Credit. "LIBOR AUCTION" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "LOAN" means a Base Rate Loan or a Euro-Dollar Loan or a Money Market Loan and "Loans" means Base Rate Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.07(b). "MANAGING AGENT" means Citibank, N.A. in its capacity as managing agent in respect of this Agreement. "MATERIAL DEBT" means Debt (other than the Notes) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $25,000,000. "MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt and/or current payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $25,000,000. 9 "MONEY MARKET ABSOLUTE RATE" has the meaning set forth in Section 2.03(d). "MONEY MARKET ABSOLUTE RATE LOAN" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "MONEY MARKET LENDING OFFICE" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may from time to time by notice to the Borrower and the Administrative Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "MONEY MARKET LIBOR LOAN" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). "MONEY MARKET LOAN" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "MONEY MARKET MARGIN" has the meaning set forth in Section 2.03(d). "MONEY MARKET QUOTE" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "NOTES" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "NOTICE OF COMMITTED BORROWING" has the meaning set forth in Section 2.02. "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.11. "NOTICE OF ISSUANCE" has the meaning set forth in Section 2.17(b). 10 "OBLIGORS" means the Borrower and each of the Guarantors. "OTHER TAXES" has the meaning set forth in Section 8.04(b). "PARENT" MEANS, with respect to any Bank, any Person controlling such Bank. "PARTICIPANT" has the meaning set forth in Section 10.06(b). "PERSON" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PRICING SCHEDULE" means the Schedule hereto titled as such. "PRIME RATE" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "REFERENCE BANKS" means the principal London offices of Deutsche Bank AG, Mellon Bank N.A. and Morgan Guaranty Trust Company of New York. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "RELATED DOCUMENTS" means (i) the Financing Documents, (ii) the "Financing Documents" as defined in the 364-Day Credit Agreement of even date herewith among the parties hereto, (iii) the "Financing Documents" as defined in the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among ACE Insurance, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as Issuing Bank and Administrative Agent for such Banks and (iv) the "Financing Documents" as defined in the Term Loan Agreement of even date herewith among ACE US, the Borrower, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as administrative agent for such Banks, in each case as the same may be amended and in effect from time to time. "REQUIRED BANKS" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, having at least 66 2/3% of the sum of the aggregate unpaid principal amount of the Loans and the aggregate amount of Letter of Credit Liabilities. 11 "SUBSIDIARY" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "SUBSIDIARY" means a Subsidiary of the Borrower. "SYNDICATION AGENT" means either J.P. Morgan Securities Inc. or Mellon Bank N.A. in its capacity as a syndication agent in respect of this Agreement, and "Syndication Agents" means both of them. "TAXES" has the meaning set forth in Section 8.04(a). "TEMPEST" means Tempest Reinsurance Company Limited, a Bermuda limited liability company, and its successors. "TERMINATION DATE" means December 11, 2002 or, if such day is not a Euro- Dollar Business Day, the next preceding Euro-Dollar Business Day. "UCP" means the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, 1993 Revision (Publication No. 500). "WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. SECTION 1.02. 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 United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 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 Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower'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, until either such notice 12 is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. SECTION 1.03. Types of Borrowings. The term "BORROWING" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "EURO-DOLLAR BORROWING" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "COMMITTED BORROWING" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "MONEY MARKET BORROWING" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). SECTION 1.04. United States Dollars. Each reference herein to "DOLLARS" or "$" shall refer to United States Dollars. ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time prior to the Termination Date in amounts such that the sum of the aggregate principal amount of Committed Loans by such Bank at any one time outstanding plus the Letter of Credit Liabilities of such Bank at such time shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(c)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.12, prepay Loans and reborrow at any time prior to the Termination Date. SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give the Administrative Agent notice (such notice to be signed by any two of the Authorized Officers and hereinafter referred to as a "NOTICE OF COMMITTED BORROWING") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: 13 (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks prior to the Termination Date to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and 14 (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Administrative Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Administrative Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 10.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: 15 (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). 16 (e) Notice to Borrower. The Administrative Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (such notice to be signed by any two of the Authorized Officers and hereinafter referred to as a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $10,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and 17 (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Administrative Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. Notice of Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 10.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable thereto pursuant to Section 2.07 and 18 (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(a), the Administrative Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of any Obligor hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.06. Maturity of Loans. (a) The Committed Loans shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date. (b) Each Money Market Loan included in any Money Market Borrowing shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the last day of the Interest Period applicable to such Money Market Borrowing. SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such 19 day. Such interest shall be payable at maturity, quarterly in arrears on the last day of each March, June, September and December prior to maturity, and with respect to the principal amount of any Base Rate Loan converted to a Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin plus the London Interbank Offered Rate applicable to such Loan at the date of such payment was due and (ii) the sum of 2% plus the Euro-Dollar Margin plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Reference Banks are offered to such Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). 20 (d) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(b) as if the related Money Market LIBOR Borrowing were a Euro- Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (e) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. Fees. (a) The Borrower shall pay to the Administrative Agent for the account of the Banks ratably a facility fee at the Facility Fee Rate. Such facility fee shall accrue (i) from and including the Closing Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans and the Letter of Credit Liabilities shall be repaid in their entirety, on the sum of the daily aggregate outstanding principal amount of the Loans and the daily aggregate Letter of Credit Liabilities. 21 (b) The Borrower shall pay to the Agent (i) for the account of the Banks ratably a Letter of Credit fee accruing daily on the aggregate amount then available for drawing under all Letters of Credit at the LC Fee Rate and (ii) for the account of each Issuing Bank a Letter of Credit fronting fee accruing daily on the aggregate amount then available for drawing under all Letters of Credit issued by such Issuing Bank at a rate per annum as determined from time to time by the Borrower and such Issuing Bank. (c) Accrued fees under this Section shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans and Letter of Credit Liabilities shall be repaid in their entirety). SECTION 2.09. Optional Termination or Reduction of Commitments. The Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans or Letter of Credit Liabilities are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $25,000,000 or any larger multiple of $5,000,000, the aggregate amount of the Commitments in excess of the sum of the aggregate outstanding principal amount of the Loans and the aggregate Letter of Credit Liabilities. Upon receipt of any notice pursuant to this Section 2.09, the Administrative Agent shall promptly notify the Banks of the contents of such notice. SECTION 2.10. Scheduled Termination of Commitments. The Commitments shall terminate on the Termination Date, and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.11. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject to subsection (d) of this Section and the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, subject to Section 22 2.14 if any such conversion or continuation is effective on any day other than the last day of an Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "NOTICE OF INTEREST RATE ELECTION") to the Administrative Agent not later than 10:30 A.M. (New York City time) on the third Euro-Dollar Business Day before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each at least $10,000,000 or any larger amount in multiples of $1,000,000 (unless such portion is comprised of Base Rate Loans). If no such notice is timely received before the end of an Interest Period for any Group of Euro-Dollar Loans, the Borrower shall be deemed to have elected that such Group of Loans be converted to Base Rate Loans at the end of such Interest Period. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if the Loans resulting from such conversion are to be Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Promptly after receiving a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Administrative Agent shall notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. 23 (d) The Borrower shall not be entitled to elect to convert any Committed Loans to, or continue any Committed Loans for an additional Interest Period as, Euro-Dollar Loans if (i) the aggregate principal amounts of any Group of Euro- Dollar Loans created or continued as a result of such election would be less than $10,000,000 or (ii) a Default shall have occurred and be continuing when the Borrower delivers notice of such election to the Administrative Agent. SECTION 2.12. Optional Prepayments. (a) Subject in the case of any Euro-Dollar Loan to Section 2.14, the Borrower may, in the case of the Group of Base Rate Loans (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)), upon at least one Domestic Business Day's notice to the Administrative Agent, prepay such Group or Borrowing, or in the case of any Group of Euro-Dollar Loans, upon at least three Euro-Dollar Business Days' notice to the Administrative Agent, prepay such Group, in each case in whole at any time, or from time to time in part in amounts aggregating $10,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. (b) Except as provided in Section 2.12(a), the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans, of Letter of Credit Liabilities and of fees hereunder, not later than 2:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City and in the lawful currency of the United States, to the Administrative Agent at its address referred to in Section 10.01. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans, of Letter of Credit Liabilities or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro- Dollar Business Day, the date for payment thereof shall be extended to the 24 next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a different type of Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(c), or if the Borrower fails to borrow, prepay, convert or continue any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a), 2.11(c) or 2.12(c), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or, in the case of the failure of the Borrower to borrow any Fixed Rate Loans, prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment, conversion or continuation or failure to borrow, prepay, convert or continue, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense and setting forth the calculation thereof, which certificate shall be conclusive in the absence of manifest error. SECTION 2.15. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the 25 first day but excluding the last day). All other interest and all facility and Letter of Credit fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.16. Regulation D Compensation. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro- Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. SECTION 2.17. Letters of Credit. (a) Subject to the terms and conditions hereof, each Issuing Bank agrees to issue Letters of Credit hereunder from time to time before the tenth day before the Termination Date upon the request of the Borrower; provided that, immediately after each Letter of Credit is issued, (i) the aggregate amount of the Letter of Credit Liabilities shall not exceed the Letter of Credit Commitment and (ii) the aggregate amount of the Letter of Credit Liabilities plus the aggregate outstanding amount of all Loans shall not exceed the aggregate amount of the Commitments. Upon the date of issuance by an Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities in the proportion their respective Commitments bear to the aggregate Commitments. 26 (b) The Borrower shall give the Issuing Bank notice at least five Domestic Business Days prior to the requested issuance of a Letter of Credit specifying the date such Letter of Credit is to be issued, and describing the terms of such Letter of Credit and the nature of the transactions to be supported thereby (such notice, including any such notice given in connection with the extension of a Letter of Credit, a "Notice of Issuance"). Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify the Agent, and the Agent shall promptly notify each Bank of the contents thereof and of the amount of such Bank's participation in such Letter of Credit. The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article 3, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the Issuing Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. The Borrower shall also pay to the Issuing Bank for its own account issuance, drawing, amendment and extension charges in the amounts and at the times agreed between the Borrower and the Issuing Bank. The extension or renewal of any Letter of Credit shall be deemed to be an issuance of such Letter of Credit, and if any Letter of Credit contains a provision pursuant to which it is deemed to be extended unless notice of termination is given by the Issuing Bank, the Issuing Bank shall timely give such notice of termination unless it has theretofore timely received a Notice of Issuance and the other conditions to issuance of a Letter of Credit have also theretofore been met with respect to such extension. No Letter of Credit shall have a term extending or be so extendible beyond the fifth Domestic Business Day preceding the Termination Date. (c) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall notify the Agent and the Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid as a result of such demand or drawing and the payment date. The Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day. In addition, each Bank will pay to the Agent, for the account of the Issuing Bank, immediately upon the Issuing Bank's demand at any time during the period commencing after such drawing until reimbursement therefor in full by the Borrower, an amount equal to such Bank's ratable share of such drawing (in proportion to its participation therein), together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 12:00 Noon (New York City time) on 27 such date, from the next succeeding Domestic Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate. The Issuing Bank will pay to each Bank ratably all amounts received from the Borrower for application in payment of its reimbursement obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto. (d) The obligations of the Borrower and each Bank under subsection (c) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) any lack of validity or enforceability of this Agreement or any Letter of Credit or any document related hereto or thereto; (ii) any amendment, waiver of or any consent to departure from all or any of the provisions of this Agreement, any Letter of Credit or any document related hereto or thereto; (iii) the use which may be made of the Letter of Credit by, or any act or omission of, a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting); (iv) the existence of any claim, set-off, defense or other rights that the Borrower may have at any time against a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting), the Banks (including the Issuing Bank) or any other Person, whether in connection with this Agreement or the Letter of Credit or any document related hereto or thereto or any unrelated transaction; (v) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (vi) payment under a Letter of Credit to the beneficiary of such Letter of Credit against presentation to the Issuing Bank of a draft or certificate that does not comply with the terms of the Letter of Credit; or (vii) any other act or omission to act or delay of any kind by any Bank (including the Issuing Bank), the Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions 28 of this subsection (vii), constitute a legal or equitable discharge of the Borrower's or the Bank's obligations hereunder. (e) The Borrower hereby indemnifies and holds harmless each Bank (including each Issuing Bank) and the Agent from and against any and all claims, damages, losses, liabilities, costs or expenses which such Bank or the Agent may incur (including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to such Issuing Bank hereunder (but nothing herein contained shall affect any rights the Borrower may have against such defaulting Bank)), and none of the Banks (including an Issuing Bank) nor the Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in subsection (d) above, as well as (i) any error, omission, interruption or delay in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, (ii) any error in interpretation of technical terms, (iii) any loss or delay in the transmission of any document required in order to make a drawing under a Letter of Credit, (iv) any consequences arising from causes beyond the control of an Issuing Bank, including without limitation any government acts, or any other circumstances whatsoever in making or failing to make payment under such Letter of Credit; provided that the Borrower shall not be required to indemnify any Issuing Bank for any claims, damages, losses, liabilities, costs or expenses, and the Borrower shall have a claim for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the failure of such Issuing Bank to meet the standards prescribed by the UCP in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) such Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing in this subsection (e) is intended to limit the obligations of the Borrower under Section 2.17(c) of this Agreement. To the extent the Borrower is obligated to but does not indemnify an Issuing Bank as required by this subsection, the Banks agree to do so ratably in accordance with their Commitments. 29 ARTICLE 3 CONDITIONS SECTION 3.01. Closing. The closing hereunder shall occur upon (x) termination of the Commitments (as defined in the Credit Agreement referred to below in this clause (x)) under the Credit Agreement dated as of November 15, 1996 among the Borrower, ACE Insurance, CODA, the banks listed therein and Morgan Guaranty Trust Company of New York, as administrative agent, and payment in full of all amounts owing thereunder to any of such banks or such administrative agent and (y) receipt by the Administrative Agent of the following documents, each dated the Closing Date unless otherwise indicated: (a) a duly executed Note for the account of each Bank dated on or before the Closing Date complying with the provisions of Section 2.05; (b) an opinion of Maples and Calder, counsel for the Borrower, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (c) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Guarantors, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) an opinion of Mayer, Brown & Platt, New York counsel for the Borrower and the Guarantors, substantially in the form of Exhibit G hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (e) an opinion of Davis Polk & Wardwell, special United States counsel for the Agents, substantially in the form of Exhibit H hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) a letter from CT System in New York, New York, substantially in the form of Exhibit J hereto, evidencing CT System's agreement to act as agent for service of process for the Obligors pursuant to Section 10.10(b); and (g) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Agreement and the Notes, and any other 30 matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowings and Issuances of Letters of Credit. The obligation of any Bank to make a Loan on the occasion of any Borrowing and the obligation of an Issuing Bank to issue (or renew or extend the term of) any Letter of Credit is subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to December 31, 1997; (b) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03 or receipt by the Issuing Bank of a Notice of Issuance as required by Section 2.17(b), as the case may be; (c) the fact that, immediately after such Borrowing or issuance of a Letter of Credit, the sum of the aggregate outstanding principal amount of the Loans and the aggregate amount of Letter of Credit Liabilities will not exceed the aggregate amount of the Commitments; (d) the fact that, immediately before and after such Borrowing or issuance of a Letter of Credit, no Default shall have occurred and be continuing; (e) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of such Borrowing or issuance of a Letter of Credit; and (f) in the case of an issuance of a Letter of Credit, the fact that, immediately after such issuance of a Letter of Credit, the aggregate amount of the Letter of Credit Liabilities shall not exceed the Letter of Credit Commitment. Each Borrowing and issuance of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Obligors on the date of such Borrowing or issuance as to the facts specified in clauses (c), (d), (e) and (f) of this Section. 31 ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Obligors jointly and severally represent and warrant that: SECTION 4.01. Corporate Existence and Power. The Borrower is a company limited by shares and each of the Guarantors is a limited liability company, in each case duly incorporated and validly existing under the laws of its jurisdiction of incorporation and the Borrower is in good standing under the laws of the Cayman Islands. Each of the Obligors has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its respective business as now conducted. Each of the Guarantors is a Wholly-Owned Consolidated Subsidiary of the Borrower. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each Obligor of this Agreement and by the Borrower of the Notes are within its corporate powers, have been duly authorized by all necessary corporate action, require no action or consent by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Memorandum of Association, Articles of Association or Bye-Laws (or any comparable document) of any Obligor or of any agreement, judgment, injunction, order, decree or other instrument binding upon any Obligor or any of their respective Subsidiaries or result in the creation or imposition of any Lien on any asset of any Obligor or any of their respective Subsidiaries. SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of each Obligor and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal year then ended, reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. 32 (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1997 and the related unaudited consolidated statements of operations and cash flows for the nine months then ended, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles (except for the absence of footnotes) applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine month period (subject to normal year-end adjustments). (c) Since June 30, 1997 there has been no material adverse change in the business, financial position, or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. (d) The consolidated balance sheet of ACE Insurance and its Consolidated Subsidiaries as of September 30, 1996 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of ACE Insurance and its Consolidated Subsidiaries as of such date and their consolidated results of operations and retained earnings and cash flows for such fiscal year. (e) Since September 30, 1996 there has been no material adverse change in the business, financial position or results of operations of ACE Insurance and its Consolidated Subsidiaries, considered as a whole. (f) The balance sheet of CODA as of September 30, 1996 and the related statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the financial position of CODA as of such date and its results of operations and retained earnings and cash flows for such fiscal year. (g) Since September 30, 1996 there has been no material adverse change in the business, financial position or results of operations of CODA. (h) The balance sheet of Tempest as of November 30, 1996 and the related statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of 33 which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the financial position of Tempest as of such date and its results of operations and retained earnings and cash flows for such fiscal year. (i) Since November 30, 1996 there has been no material adverse change in the business, financial position or results of operations of Tempest. SECTION 4.05. Litigation. Except as disclosed in the notes to the financial statements referred to in Section 4.04(a), there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. SECTION 4.06. ERISA. Neither the Borrower, nor any Guarantor, nor any member of their respective ERISA Groups, maintains or contributes to, or has within the previous six years (whether or not while a member of such Person's current ERISA Group) maintained or contributed to, or been required to maintain or been jointly and severally liable for contributions to, or liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. SECTION 4.07. Taxes. The Borrower and its Subsidiaries have filed all income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. SECTION 4.08. Not an Investment Company. No Obligor is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.09. Full Disclosure. All written information heretofore furnished by the Obligors to the Administrative Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Administrative Agent or any Bank will be, true and accurate in all material 34 respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Obligors can now reasonably foresee) the business, operations or financial condition of any Obligor and its Consolidated Subsidiaries, taken as a whole, or the ability of any Obligor to perform its obligations under this Agreement. SECTION 4.10. Compliance with Laws. The Borrower and each Subsidiary are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any Letter of Credit Liability or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, shareholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission or otherwise reasonably acceptable to the Required Banks by Coopers & Lybrand LLP or other independent public accountants of nationally recognized standing; (b) 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 of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end 35 of such quarter, setting forth in the case of such statements of operations and cash flows in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.07 to 5.10, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) within five days after any executive officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (g) as soon as available and in any event within 20 days after submission, each statutory statement of the Guarantors (or any of them) in the form submitted to The Insurance Division of the Office of Registrar of Companies of Bermuda; (h) as soon as available and in any event within 120 days after the end of each fiscal year of each Guarantor, a consolidated balance sheet of each Guarantor and its Subsidiaries (if any) as of the end of such fiscal year and the related statements of income and changes in financial position for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by the independent public accountants which reported on the financial statements referred to in clause (a) above; 36 (i) promptly after any executive officer of the Borrower obtains knowledge thereof, (i) a copy of any notice from the Minister of Finance or the Registrar of Companies 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 Guarantor under the Bermuda Insurance Law 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 Guarantor relating to an investigation conducted by the Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Law 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 either Guarantor; and (j) from time to time such additional information regarding the financial position, results of operations or business of the Borrower or any of its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request from time to time. SECTION 5.02. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.03. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will maintain, and will cause each Subsidiary to maintain, physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense. The Borrower will deliver to the Banks upon request of any Bank through the Administrative Agent from time to time, full information as to the insurance carried. SECTION 5.04. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its 37 Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a Subsidiary (other than a Guarantor) into the Borrower or the merger or consolidation of a Subsidiary (other than a Guarantor) with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) any merger of an Obligor permitted by Section 5.11 or (iii) the termination of the corporate existence of any Subsidiary (other than a Guarantor) if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole.. SECTION 5.06. Inspection of Property, Book and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in accordance with generally accepted accounting principles in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.07. Leverage. Consolidated Debt will at no time exceed 35% of Consolidated Tangible Net Worth. SECTION 5.08. Subsidiary Debt. The Borrower will not permit any of its Subsidiaries to create, assume or suffer to exist any Debt, except (i) Debt under the Related Documents, (ii) Debt owing to the Borrower or a Wholly-Owned 38 Consolidated Subsidiary, (iii) Debt of Tripar Partnership, a Bermuda general partnership, owing to other Subsidiaries or Debt of such other Subsidiaries owing to Tripar Partnership, (iv) Debt in respect of letters of credit issued in the ordinary course of business, (v) Debt created by exercise of overdraft privileges on a basis not more frequent than once each calendar month for not more than five Euro- Dollar Business Days in an amount not to exceed $50,000,000 in the aggregate at any one time, (vi) subordinated Debt of ACE US owing to ACE Insurance, (vii) Debt in an amount not to exceed $70,000,000 incurred in connection with the development by the Borrower and/or any of its Subsidiaries of the "Bermudiana Site" in Hamilton, Bermuda and (viii) Debt not permitted by the foregoing clauses of this Section in an aggregate principal amount not to exceed $20,000,000 at any time outstanding. SECTION 5.09. Minimum Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than (i) $1,400,000,000 plus (ii) 25% of Consolidated Net Income for each fiscal quarter of the Borrower ended after December 31, 1997 and on or prior to such date of determination and for which such Consolidated Net Income is positive (but with no deduction on account of any fiscal quarter for which Consolidated Net Income is negative) plus (iii) 50% of the aggregate amount by which Consolidated Tangible Net Worth shall have been increased by reason of the issuance and sale after the Effective Date and on or prior to such date of determination of any capital stock or the conversion or exchange of any Debt of the Borrower into or with capital stock of the Borrower consummated after the Effective Date and on or prior to such date of determination. SECTION 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $25,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided 39 that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $25,000,000 and (iii) 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; (h) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $25,000,000; (i) Liens securing obligations in respect of letters of credit issued pursuant to any of the Related Documents; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Tangible Net Worth. Section 5.11. Consolidations, Mergers and Sales of Assets. No Obligor will (i) consolidate with or merge into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of its assets to any other Person; provided that if both immediately before and after giving effect thereto no Default shall have occurred and be continuing, then (A) any Guarantor may merge or consolidate with any other Person so long as the surviving entity is the Guarantor or a Wholly-Owned Consolidated Subsidiary and, if such Guarantor is not the surviving entity, such surviving entity shall have assumed the obligations of such Guarantor hereunder pursuant to an instrument in form and substance reasonably satisfactory to the Required Banks and shall have delivered such opinions of counsel with respect thereto as the Administrative Agent may 40 reasonably request and (B) the Borrower may merge with another Person so long as the Borrower is the surviving entity. Section 5.12. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for its general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. Section 5.13. ERISA. Neither the Borrower, nor any Guarantor, nor any member of their respective ERISA Groups will maintain or contribute to, or become obligated to maintain or become jointly and severally liable for contributions to, or have liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. ARTICLE 6 Defaults Section 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to reimburse any drawing under any Letter of Credit when required hereunder or to pay when due any principal of any Loan or shall fail to pay within five Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder or any Guarantor shall fail to pay when due any such principal, interest, fees or other amount payable hereunder; provided that, for purposes of this Section 6.01(a), no such payment default by the Borrower shall be continuing if the Guarantors pay the amount thereof at the time and otherwise in the manner provided in Article 9; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.07 through 5.12, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; 41 (d) any representation, warranty, certification or statement made by any Obligor in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; or, without limiting the foregoing, any "Event of Default" (as defined in any of the other Related Documents) shall occur; (g) (i)(x) a resolution or other similar action is passed authorizing the voluntary winding up of the Borrower or any other similar action with respect to the Borrower or a petition is filed for the winding up of the Borrower or the taking of any other similar action with respect to the Borrower in the Grand Court of the Cayman Islands or (y) any corporate action is taken authorizing the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to any Guarantor or authorizing any corporate action to be taken to facilitate any such winding up, liquidation, arrangement or other similar action or any petition shall be filed seeking the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to any Guarantor by the Registrar of Companies in Bermuda, one or more holders of insurance policies or reinsurance certificates issued by any Guarantor or by any other Person or Persons or any petition shall be presented for the winding up of any Guarantor to a court of Bermuda as provided under the Bermuda Companies Law and in either such case such petition shall remain undismissed and unstayed for a period of 60 days or any creditors' or members' voluntary winding up of any Guarantor as provided under the Bermuda Companies Law shall be commenced or any receiver shall be appointed by a creditor of any Guarantor or by a court of Bermuda on the application of a creditor of any Guarantor as provided under any instrument giving rights for the appointment of a receiver; (ii) a proceeding shall be commenced by any Person seeking the rehabilitation, liquidation, dissolution or conservation of the assets of any Guarantor or any substantial part thereof or any similar remedy and such proceedings shall remain undismissed and unstayed for a period of 60 days; 42 (iii) the Borrower or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (iv) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Subsidiary under the United States federal bankruptcy laws as now or hereafter in effect; (h) a judgment or order for the payment of money in excess of $25,000,000 shall be rendered against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 45 days; (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of voting stock of the Borrower; or, during any period of 12 consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower; or any Guarantor shall cease to be a Wholly-Owned Consolidated Subsidiary of the Borrower; (j) any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of any of the Financing Documents is invalid or unenforceable in any material respect, or any Obligor shall so assert in writing; or (k) the registration of any Guarantor as an insurer shall be revoked, suspended or otherwise have restrictions or conditions placed upon it unless, in the case of the placing of any such restrictions or conditions, such restrictions or 43 conditions could not have a material adverse effect on the interests of the Administrative Agent and the Banks under the Financing Documents; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors; provided that in the case of any of the Events of Default specified in clause (g) above with respect to any Obligor, without any notice to any Obligor or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors. Section 6.02. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. Section 6.03. Cash Cover. The Borrower agrees, in addition to the provisions of Section 6.01 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Administrative Agent upon the instruction of the Banks having more than 50% in the aggregate amount of the Commitments (or, if the Commitments shall have been terminated, holding more than 50% of the Letter of Credit Liabilities), forthwith pay to the Administrative Agent an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Administrative Agent) equal to the aggregate amount available for drawing under all Letters of Credit then outstanding at such time, provided that, upon the occurrence of any Event of Default specified in Section 6.01(g) with respect to the Borrower, the Borrower shall pay such amount forthwith without any notice or demand or any other act by the Administrative Agent or the Banks. 44 ARTICLE 7 The Agents Section 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with all such powers as are reasonably incidental thereto. Section 7.02. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. Section 7.03. Action by Administrative Agent. The obligations of the Administrative Agent under this Agreement are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. Section 7.04. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for any Obligor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.05. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks (or such different number of Banks as any provision hereof expressly requires for such consent or request) or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any Obligor; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative 45 Agent; or (iv) the validity, effectiveness or genuineness of any Financing Document or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Section 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Obligors) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in such capacity in connection with the Financing Documents or any action taken or omitted by such indemnitees hereunder or thereunder. Section 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each 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 any action under this Agreement. Section 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, which successor Administrative Agent shall be reasonably acceptable to the Borrower. 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 gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as 46 Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. Section 7.09. Administrative Agent's Fee. The Borrower shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. Section 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on either Syndication Agent, on the Documentation Agent, on the Managing Agent or on any Co-Agent in its capacity as such an Agent. ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determination Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the London interbank market for such Interest Period, or (b) in the case of a Euro-Dollar Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Administrative Agent that the London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their Euro- Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist (i) the obligations of the Banks to make Euro- Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Euro-Dollar Borrowing, such Borrowing shall instead be made as a Base Rate 47 Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. Section 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day. Section 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or Letter of Credit or any obligation to make Committed Loans or issue or participate in any Letter of Credit or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of 48 Governors of the Federal Reserve System, but excluding with respect to any Euro- Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.16), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans or its obligations hereunder in respect of Letters of Credit and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan or of issuing or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the 49 additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections 8.03(a) and 8.03(b) of this Section 8.03, the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 180 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which because of the retroactive application of such statute, regulation or other such basis, such Bank did not know in good faith that such amount would arise or accrue. Section 8.04. Taxes. (a) Any and all payments by any Obligor hereunder shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all penalties, interest, expenses and similar liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Administrative Agent, as the case may be, shall be organized or any political subdivision thereof, (ii) in the case of each Bank, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof or in which such Bank's principal executive office is located or any political subdivision thereof and (iii) any Taxes imposed as a result of a change of such Bank's Applicable Lending Office to the extent such Taxes would not have been imposed absent such change; provided however, that (x) a change in such Bank's Applicable Lending Office to which the Obligor has consented and (y) a change in such Bank's Applicable Lending Office as a result of legal or regulatory restrictions shall not constitute a change for the purposes of this Section 8.04 (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). Each Obligor agrees that, if any Obligor shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank or the Administrative Agent, (A) the sum payable to such Bank or the Administrative Agent shall be increased as may be necessary so that after making all required deductions for Taxes (including deductions applicable to additional sums payable under this Section 8.04), such Bank or the Administrative Agent, as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (B) such Obligor shall make such deductions and (C) such Obligor shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law. 50 (b) In addition, each Obligor agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which shall arise from any payment made under, or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any Note or Letter of Credit (all such taxes, charges or levies being hereinafter referred to as "Other Taxes"). (c) Each Obligor agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 8.04) paid by such Bank or the Administrative Agent or any penalties, interest, expenses and similar liabilities arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted provided that such Bank has acted in good faith with respect to such Taxes or Other Taxes and that such Bank reasonably cooperates with the Obligors in challenging such Taxes or Other Taxes. Each indemnification under this paragraph (c) shall be made within 30 days from the date such Bank or the Administrative Agent makes demand therefor. (d) Each Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) (x) to file any certificate or document or to furnish any information as reasonably requested by any Obligor pursuant to any applicable treaty, law, rule or regulation or (y) to designate a different Lending Office if the making of such a filing, the furnishing of such information or the designation of such other Lending Office would avoid the need for or reduce the amount of any additional amounts payable by any Obligor pursuant to this Section 8.04 and would not, in the reasonable judgment of such Bank, be disadvantageous to such Bank. Notwithstanding the foregoing, it is understood and agreed that nothing in this Section 8.04 shall interfere with the rights of any Bank to conduct its fiscal or tax affairs in such manner as it deems fit. (e) Within 90 days after the date of any payment of Taxes, the Obligors will furnish to the Administrative Agent notarized copies for each Bank of the original receipt evidencing payment thereof. If no Taxes shall be payable in respect of any payment under this Agreement, the Obligors will, upon the reasonable request of the Administrative Agent, furnish to the Administrative Agent a certificate in form reasonably acceptable to the Administrative Agent's counsel confirming that such payment is exempt from or not subject to Taxes. (f) For any period with respect to which a Bank has failed to provide the Obligors with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall 51 not be entitled to indemnification under Section 8.04(a) or (b) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Obligors shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or to continue or convert outstanding Loans as or to Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) Euro-Dollar Loans shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro- Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid (or converted), all payments of principal which would otherwise be applied to repay such Euro- Dollar Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. Section 8.06. Substitution of Bank. If (i) the obligation of any Bank to make or to convert or continue outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Banks) mutually satisfactory to the Borrower, the Administrative Agent (whose consent shall not be unreasonably withheld) and the issuing banks under the Related Documents to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto, the outstanding loans of such Bank and assume the commitment and letter of credit liabilities of such Bank (and its affiliates) under each of the Related 52 Documents, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding loans and funded letter of credit liabilities plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's commitments and letter of credit liabilities plus such amount, if any, as would be payable pursuant to the funding loss indemnities in the Related Documents if the outstanding loans of such Bank were prepaid in their entirety on the date of consummation of such assignment. ARTICLE 9 Guaranty Section 9.01. The Guaranty. Each Guarantor hereby unconditionally, jointly and severally, absolutely and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all amounts payable by the Borrower under the Financing Documents including, without limitation, the principal of and interest on each Note issued by the Borrower pursuant to this Agreement. Upon failure by the Borrower to pay punctually any such amount, each Guarantor shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement. Section 9.02. Guaranty Unconditional. The obligations of each Guarantor hereunder shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other Obligor under any of the Financing Documents, by operation of law or otherwise; (b) any modification or amendment of or supplement to any of the Financing Documents; (c) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any other Obligor under any of the Financing Documents; (d) 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 53 discharge of any obligation of any other Obligor contained in any of the Financing Documents; (e) 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 Financing Documents or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against any other Obligor for any reason of any of the Financing Documents, or any provision of applicable law or regulation purporting to prohibit the payment by any other Obligor of the principal of or interest on any Note or any other amount payable under any of the Financing Documents; or (g) 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 any Guarantor's obligations hereunder. Section 9.03. Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances. Each Guarantor's obligations hereunder shall remain in full force and effect until the Commitments shall have terminated and the principal of and interest on the Notes and all other amounts payable by the Borrower under the Financing Documents shall have been paid in full. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Borrower under the Financing Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, each Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. Section 9.04. Waiver by Each of the Guarantors. Each Guarantor 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 9.05. Subrogation. Upon the making by any Guarantor of any payment hereunder, such Guarantor shall be subrogated to the rights of the payee against the Borrower with respect to such payment; provided that such Guarantor 54 shall not enforce any right to receive any payment by way of subrogation until all amounts of principal of and interest on the Loans, all Letter of Credit Liabilities and all other amounts payable by the Borrower under this Agreement shall have been paid in full and the Commitments shall have terminated. Section 9.06. Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrower under any of the Financing Documents is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by each Guarantor hereunder forthwith on demand by the Administrative Agent made at the request of the requisite proportion of the Banks specified in Article 6. Section 9.07. Limit of Liability. The obligations of each Guarantor hereunder shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance under any applicable bankruptcy, insolvency or similar law. ARTICLE 10 Miscellaneous Section 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of any Obligor or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 10 days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent or the Issuing Bank under Article 2 or Article 8 shall not be effective until received. Section 10.02. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege under any 55 Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in the Financing Documents shall be cumulative and not exclusive of any rights or remedies provided by law. Section 10.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special counsel for the Agents, reasonably incurred in connection with the preparation of the Financing Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Administrative Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be reasonably incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing Documents or any actual or proposed use of proceeds of Loans; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Section 10.04. Sharing; Set-Offs. (a) Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to its Loans and Letter of Credit Liabilities which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to the Loans and Letter of Credit Liabilities of such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans and Letter of Credit Liabilities of the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal with respect to the Loans and Letter of Credit Liabilities shall be shared by the Banks pro rata; provided that nothing in this 56 Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of any Obligor other than its indebtedness hereunder. Each Obligor agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Loan or Letter of Credit Liability, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Obligor in the amount of such participation. (b) Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request specified by Section 6.01 to Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Bank and each of its 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 Bank or such affiliate to or for the credit or the account of any Obligor against any and all of the obligations of such Obligor to such Bank now or hereafter existing under the Financing Documents, irrespective of whether such Bank shall have made any demand for payment thereof and although such obligations may be unmatured. Each Bank agrees promptly to notify such Obligor after any such setoff and application; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Bank and its affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) that such Bank and its affiliates may have. Section 10.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Obligors and the Required Banks (and, if the rights or duties of the Administrative Agent or any Issuing Bank are affected thereby, by it); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or Letter of Credit Liabilities or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or the amount to be reimbursed in respect of any Letter of Credit or interest thereon or any fees hereunder or for any reduction or termination of any Commitments, (iv) release any Guarantor hereunder, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans and/or Letter of Credit Liabilities, or the number of Banks, which shall be required for 57 the Banks or any of them to take any action under this Section or any other provision of this Agreement or (vi) amend this Section 10.05. Section 10.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Obligors may not assign or otherwise transfer any of their rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower, the Issuing Banks and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii), (iv) or (v) of Section 10.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement and subject to subsection (e) below, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial participation in the Related Documents of not less than $15,000,000, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Administration Agent, which shall not be unreasonably withheld, and the Issuing Banks; provided that if an Assignee is an affiliate of such transferor Bank 58 or was a Bank immediately prior to such assignment, no such consent of the Borrower or the Administrative Agent shall be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans; and provided further that, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank, the participation in the Related Documents of such transferor Bank after giving effect to such assignment (together with the participations of its affiliates) shall not be less than $15,000,000; and provided further that such assignment shall be accompanied by a ratably equivalent assignment of the rights and obligations of the transferor Bank (and its affiliates) under each of the other Related Documents. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 10.07. Collateral. Each of the Banks represents to the Administrative Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 10.08. Governing Law. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. 59 Section 10.09. Counterparts; Integration; Effectiveness. 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. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). Section 10.10. Judicial Proceedings. (a) Consent to Jurisdiction. Each Obligor irrevocably submits to the jurisdiction of any federal court sitting in New York City and, in the event that jurisdiction cannot be obtained or maintained in a federal court, to the jurisdiction of any New York State court sitting in New York City over any suit, action or proceeding arising out of or relating to any of the Financing Documents. Each Obligor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that any suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each Obligor agrees that a final judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding upon it and will be given effect in Bermuda or the Cayman Islands, as the case may be, to the fullest extent permitted by applicable law and may be enforced in any federal or New York State court sitting in New York City (or any other courts to the jurisdiction of which such Obligor is or may be subject) by a suit upon such judgment, provided that service of process is effected upon it in one of the manners specified herein or as otherwise permitted by law. (b) Appointment of Agent for Service of Process. Each Obligor hereby irrevocably designates and appoints CT Corporation System having an office on the date hereof at 1633 Broadway, New York, New York 10019 as its authorized agent, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City. Each Obligor represents and warrants that such agent has agreed in writing to accept such appointment and that a true copy of such designation and acceptance has been delivered to the Administrative Agent. Said designation and appointment shall be irrevocable until the Commitments shall have terminated and all Letter of Credit Liabilities and all principal and interest and all other amounts payable hereunder and under the Notes shall have been paid in full in 60 accordance with the provisions hereof and thereof. If such agent shall cease so to act, each Obligor covenants and agrees to designate irrevocably and appoint without delay another such agent satisfactory to the Administrative Agent and to deliver promptly to the Administrative Agent evidence in writing of such other agent's acceptance of such appointment. (c) Service of Process. Each Obligor hereby consents to process being served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City by service of process upon the agent of such Obligor for service of process in such jurisdiction appointed as provided in subsection (b) above; provided that, to the extent lawful and possible, notice of said service upon such agent shall be mailed by registered or certified air mail, postage prepaid, return receipt requested, to such Obligor at its address specified on the signature page hereof or to any other address of which such Obligor shall have given written notice to the Bank. Each Obligor irrevocably waives, to the fullest extent permitted by law, all claim of error by reason of any such service in such manner and agrees that such service shall be deemed in every respect effective service of process upon such Obligor in any such suit, action or proceeding and shall, to the fullest extent permitted by law, be taken and held to be valid and personal service upon and personal delivery to such Obligor. (d) No Limitation on Service or Suit. Nothing in this Section 10.10 shall affect the right of the Administrative Agent or any Bank to serve process in any other manner permitted by law or limit the right of the Administrative Agent or any Bank to bring proceedings against any Obligor in the courts of any jurisdiction or jurisdictions. Section 10.11. Judgment Currency. If, under any applicable law and whether pursuant to a judgment being made or registered against any Obligor or for any other reason, any payment under or in connection with any of the Financing Documents is made or satisfied in a currency (the "Other Currency") other than that in which the relevant payment is due (the "Required Currency") then, to the extent that the payment (when converted into the Required Currency at the rate of exchange on the date of payment or, if it is not practicable for the party entitled thereto (the "Payee") to purchase the Required Currency with the Other Currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for it to do so) actually received by the Payee falls short of the amount due under the terms of this Agreement and the Notes, each Obligor shall, to the extent permitted by law, as a separate and independent obligation, indemnify and hold harmless the Payee against the amount of such short-fall. For the purpose of this Section, "rate of exchange" means the rate at which the Payee 61 is able on the relevant date to purchase the Required Currency with the Other Currency and shall take into account any premium and other costs of exchange. Section 10.12. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Section 10.13. Existing Credit Agreement. On the Closing Date and simultaneously with the closing the Borrower hereby gives notice to Morgan Guaranty Trust Company of New York, as agent, under Section 2.09 of the Credit Agreement referred to in clause (x) of Section 3.01 of the termination of the Commitments (as defined therein) and the Banks hereby waive the requirement that prior notice of such termination be given as therein provided. Section 10.14. Confidentiality. The Administrative Agent and each Bank agrees to keep any information delivered or made available by any Obligor pursuant to this Agreement confidential from anyone other than persons employed or retained by such Bank and its affiliates who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or to the Administrative Agent, (b) subject to provisions substantially similar to those contained in this Section 10.14, to any other Person if reasonably incidental to the administration of the credit facility contemplated hereby, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation relating to the Related Documents to which the Administrative Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Administrative Agent's legal counsel and independent auditors and (i) subject to provisions substantially similar to those contained in this Section 10.14, to any actual or proposed Participant or Assignee. Notwithstanding the foregoing, this Section 10.14 shall not apply to information that is or becomes publicly available, information that was available to a Bank on a non-confidential basis prior to its disclosure hereunder and information which becomes available to a Bank on a non-confidential basis from a source that is not, to such Bank's knowledge, subject to a confidentiality agreement with any Obligor. 62 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ACE LIMITED By_______________________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) 295-5221 The Common Seal of ACE Limited was hereunto affixed in the presence of: Director _____________________________ Director/Secretary _____________________________ 63 A.C.E. INSURANCE COMPANY, LTD., as Guarantor By_____________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) 295-5221 The Common Seal of A.C.E. Insurance Company, Ltd. was hereunto affixed in the presence of: Director - ----------------------------------------------- Director/Secretary - ----------------------------------------------- 64 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD., as Guarantor By_________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) 295-5221 The Common Seal of Corporate Officers & Directors Assurance Ltd. was hereunto affixed in the presence of: Director - ------------------------------ Director/Secretary - ------------------------------ 65 TEMPEST REINSURANCE COMPANY LIMITED, as Guarantor By_______________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) 295-5221 The Common Seal of Tempest Reinsurance Company Limited was hereunto affixed in the presence of: Director - --------------------------- Director/Secretary - --------------------------- Commitments - ----------- $18,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By_______________________________ Title: $18,000,000 MELLON BANK, N.A. By_______________________________ Title: 66 Managing Agent $17,000,000 CITIBANK, N.A. By_______________________________ Title: Co-Agents $14,000,000 THE BANK OF NEW YORK By_______________________________ Title: $14,000,000 THE BANK OF TOKYO-MITSUBISHI, LTD. By_______________________________ Title: $14,000,000 BARCLAYS BANK PLC By_______________________________ Title: 67 $14,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By_______________________________ Title: By:______________________________ Title: $14,000,000 FLEET NATIONAL BANK By_______________________________ Title: $14,000,000 ING BANK, N.V. By_______________________________ Title: By_______________________________ Title: $14,000,000 ROYAL BANK OF CANADA By_______________________________ Title: 68 Other Banks $7,000,000 THE BANK OF BERMUDA, LTD. By_______________________________ Title: $7,000,000 BANQUE NATIONALE DE PARIS By________________________________ Title: By_______________________________ Title: $7,000,000 THE CHASE MANHATTAN BANK By________________________________ Title: $7,000,000 CREDIT LYONNAIS NEW YORK BRANCH By_________________________________ Title: 69 $7,000,000 DRESDNER BANK A.G., NEW YORK BRANCH AND GRAND CAYMAN BRANCH By_______________________________ Title: By_______________________________ Title: $7,000,000 THE FIRST NATIONAL BANK OF CHICAGO By_______________________________ Title: $7,000,000 STATE STREET BANK AND TRUST COMPANY By_______________________________ Title: - ----------------- Total Commitments $200,000,000 ================= 70 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By_______________________________ Title 60 Wall Street New York, New York 10260-0060 Attention: Glenda Irving Telex number: 177615 Facsimile number: 212-648-5249 71 PRICING SCHEDULE Each of "Euro-Dollar Margin" and "Facility Fee Rate" means, for any date, the rates set forth below in the row opposite such term and in the column corresponding to the "Pricing Level" that applies at such date:
- -------------------------------------------------------------------------------------------------------------------------- Level I Level II Level III Level IV Level V - -------------------------------------------------------------------------------------------------------------------------- Euro-Dollar Margin Utilization (less than or equal) 50% 0.1750% 0.220% 0.275% 0.300% 0.325% Utilization (greater than) 50% 0.2250% 0.270% 0.325% 0.350% 0.450% - -------------------------------------------------------------------------------------------------------------------------- Facility Fee 0.075% 0.080% 0.100% 0.150% 0.200% Rate - --------------------------------------------------------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the following meanings: "Level I" applies at any date if, at such date, ACE Insurance's claims paying ability is rated AA- or higher by S&P and (if rated by Moody's) Aa3 or higher by Moody's. "Level II" applies at any date if, at such date, (i) ACE Insurance's claims paying ability is rated A+ or higher by S&P and (if rated by Moody's) A1 or higher by Moody's and (ii) Level I does not apply. "Level III" applies at any date if, at such date, (i) ACE Insurance's claims paying ability is rated A or higher by S&P and (if rated by Moody's) A2 or higher by Moody's and (ii) neither Level I nor Level II applies. "Level IV" applies at any date if, at such date, (i) ACE Insurance's claims paying ability is rated A- or higher by S&P and (if rated by Moody's) A3 or higher by Moody's and (ii) none of Level I, Level II or Level III applies. "Level V" applies at any date if, at such date, no other Pricing Level applies. "Moody's" means Moody's Investors Service, Inc., and any successor thereto. "Pricing Level" refers to the determination of which of Level I, Level II, Level III, Level IV or Level V applies at any date. "S&P" means Standard & Poor's Rating Services, a division of The McGraw- Hill Companies, Inc., and any successor thereto. "Utilization" means at any date the percentage equivalent of a fraction (i) the numerator of which is the sum of the aggregate outstanding principal amount of the Loans at such date and the aggregate amount of Letter of Credit Liabilities at such date, after giving effect to any borrowing, payment or issuance on such date, and (ii) the denominator of which is the aggregate amount of the Commitments at such date, after giving effect to any reduction of the Commitments on such date. For purposes of this Schedule, if for any reason any Loans or Letter of Credit Liabilities remain outstanding after termination of the Commitments, the Utilization for each date on or after the date of such termination shall be deemed to be greater than 50%. The credit ratings to be utilized for purposes of this Schedule are those ratings assigned to the claims paying ability of ACE Insurance and any rating assigned to any debt security of the Borrower or the claims paying ability of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. EXHIBIT A NOTE New York, New York December 11, 1997 For value received, ACE Limited, a Cayman Islands company limited by shares (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the maturity date therefor specified in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of any Obligor hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Five-Year Credit Agreement dated as of December 11, 1997 among the Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. Pursuant to the Credit Agreement payment of principal and interest on this Note is unconditionally guaranteed by the Guarantors named above. ACE LIMITED By -------------------------------------- Title: Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
- --------------------------------------------------------------------------------- Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
EXHIBIT B Form of Money Market Quote Request ---------------------------------- [Date] To: Morgan Guaranty Trust Company of New York (the "Administrative Agent") From: [Name of Borrower] Re: Five-Year Credit Agreement (as amended, the "Credit Agreement") dated as of December 11, 1997 among the Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks listed on the signature pages thereof and the Administrative Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount* Interest Period** - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] - ----------------------- *Amount must be $10,000,000 or a larger multiple of $1,000,000. **Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Terms used herein have the meanings assigned to them in the Credit Agreement. ACE LIMITED By: ---------------------------- Title: EXHIBIT C Form of Invitation for Money Market Quotes ------------------------------------------ To: [Name of Bank] Re: Invitation for Money Market Quotes to [Name of Borrower] (the "Borrower") Pursuant to Section 2.03 of the Five-Year Credit Agreement dated as of December 11, 1997, as amended, among the Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks parties thereto and the undersigned, as Administrative Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: ------------------- Principal Amount Interest Period - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ---------------------------- Authorized Officer EXHIBIT D Form of Money Market Quote -------------------------- To: Morgan Guaranty Trust Company of New York, as Administrative Agent Re: Money Market Quote to [Name of Borrower] (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: -------------------------------- 2. Person to contact at Quoting Bank: ---------------------------------- 3. Date of Borrowing: * -------------------- 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market Amount** Period*** [Margin****] [Absolute Rate*****] - --------- --------- --------------------------------- - ------------------------- *As specified in the related Invitation. **Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. ***Not less than one month or not less than 7 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. ****Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". *****Specify rate of interest per annum (to the nearest 1/10,000th of 1%). $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]** We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Five-Year Credit Agreement dated as of December 11, 1997 among the Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks listed on the signature pages thereof and yourselves, as Administrative Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated:____________________ By:_________________________________ Authorized Officer EXHIBIT H FORM OF DAVIS POLK & WARDWELL OPINION ------------------------------------- December 11, 1997 To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260-0060 Ladies and Gentlemen: We have participated in the preparation of the Five-Year Credit Agreement (the "Credit Agreement") dated as of December 11, 1997 among ACE Limited, a Cayman Islands company limited by shares, A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company, and Tempest Reinsurance Company Limited, a Bermuda limited liability company, as Guarantors, the Banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Administrative Agent, and have acted as special United States counsel for the Agents for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The execution, delivery and performance by each Guarantor of the Credit Agreement are within such Guarantor's corporate powers and have been duly authorized by all necessary corporate action. To the Banks and the Agent 2 December 11, 1997 Referred to Below 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. The Credit Agreement constitutes a valid and binding agreement of each Guarantor enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. In giving the foregoing opinion we have relied, with your consent and without independent investigation, as to all matters governed by the laws of (i) the Cayman Islands, upon the opinion of Maples and Calder dated the date hereof, a copy of which has been delivered by you pursuant to Section 3.01(b) of the Credit Agreement and (ii) Bermuda, upon the opinion of Conyers, Dill & Pearman dated the date hereof, a copy of which has been delivered to you pursuant to Section 3.01(c) of the Credit Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person without our prior written consent. Very truly yours, EXHIBIT I ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of __________ __, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), ACE Limited, ACE US Holdings, Inc. ("ACE US"), A.C.E. Insurance Company, Ltd ("ACE Insurance") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H - - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Assignment Agreement") relates to (i) the Five-Year Credit Agreement (as amended from time to time, the "Five Year Credit Agreement") and the 364-Day Credit Agreement (as amended from time to time, the "364-Day Credit Agreement") each dated as of December 11, 1997 among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent, (ii) the Term Loan Agreement (as amended from time to time, the "Term Loan Agreement") the dated as of December 11, 1997 among ACE US, as Borrower, ACE Limited, as Guarantor, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent and (iii) the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among ACE Insurance, the Assignor and the other Banks party thereto and the Administrative Agent (the "Reimbursement Agreement" and together with the Five- Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement, collectively, "the Facilities"); WHEREAS, under the Five-Year Credit Agreement, the Assignor has a Commitment to make Loans to ACE Limited and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to ACE Limited by the Assignor under the Five-Year Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; WHEREAS, Letters of Credit with a total amount available for drawing under the Five-Year Credit Agreement of $____________ are outstanding at the date hereof; WHEREAS, under the 364-Day Credit Agreement, the Assignor has a Commitment to make Loans to ACE Limited in an aggregate principal amount at any time outstanding not to exceed $_________; WHEREAS, Committed Loans made to ACE Limited by the Assignor under the 364- Day Credit Agreement in the aggregate principal amount of $_________ are outstanding at the date hereof; WHEREAS, under the Term Loan Agreement, the Assignor has [a Commitment to make][outstanding] Loans to ACE US in an aggregate principal amount of $_____________; WHEREAS, pursuant to the Reimbursement Agreement, the Assignor is a participant to the extent of _____% in up to (P)153,683,466 of Letters of Credit outstanding thereunder; WHEREAS, the Assignor proposes to assign to the Assignee an aggregate interest in the Facilities of $__________, comprised as follows: (i) all of the rights of the Assignor under the Five-Year Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Five-Year Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans and Letter of Credit Liabilities thereunder, (ii) all of the rights of the Assignor under the 364-Day Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $_____________ (the "364-Day Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans thereunder, (iii) all of the rights of the Assignor under the Term Loan Agreement in respect of a portion of its [Commitment] [Loans] thereunder in an amount equal to $_______________ (the "Term Loan Assigned Amount" and, together with the Five-Year Assigned Amount and the 364- Day Assigned Amount, collectively the "Assigned Amounts"), and (iv) a portion of the rights and obligations of the Assignor under the Reimbursement Agreement equivalent to a Participation Percentage of ____% (the "Assigned Percentage"), 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: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Five-Year Credit Agreement, the 364-Day Credit Agreement, the Term Loan Agreement and the Reimbursement Agreement, as applicable. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement to the extent of the Five-Year Assigned Amount, the 364-Day Assigned Amount and the Term Loan Assigned Amount, respectively, and under the Reimbursement Agreement to the extent of the Assigned Percentage, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement to the extent of the Five-year Assigned Amount, the 364- Day Assigned Amount and the Term Loan Assigned Amount and under the Reimbursement Agreement to the extent of 85 the Assigned Percentage, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor and Letter of Credit Liabilities of and the corresponding portion of the participating interests of the Assignor in the Letters of Credit under the Reimbursement Agreement, outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, ACE Limited, ACE US, ACE Insurance, the Issuing Bank(s) and the Administrative Agent 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 the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement with a Commitment in an amount equal to the Five-Year Assigned Amount, the 364-Day Assigned Amount and the Term Loan Assigned Amount, respectively and under the Reimbursement Agreement to the extent of the Assigned Percentage, and (ii) the Commitment of the Assignor under each of the Facilities and the Participation Percentage of the Assignor under the Reimbursement Agreement shall, as of the date hereof, be reduced by the corresponding amount and the Assignor released from its obligations under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement, the Term Loan Agreement and 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. SECTION 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 in Federal funds the amount heretofore agreed between them.****** It is understood that ticking and/or facility fees accrued to the date hereof 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 any Related Document 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. SECTION 4. Consents. This Agreement is conditioned upon the consent of the Administrative Agent and the Issuing Bank(s) and ACE Limited, ACE US and ACE Insurance, pursuant to Section 10.06(c) of each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement and Section 8.06(c) of the Reimbursement Agreement. The execution of this Agreement by such persons is evidence of such consents. Pursuant to Section 10.06(c) of each of the 364-Day Credit Agreement, the Five-Year Credit Agreement and the Term Loan Agreement, each of ACE Limited and ACE US, respectively, agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. - ---------------- ******Amount should combine principal 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. SECTION 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 any of ACE Limited and its subsidiaries or the validity and enforceability of the obligations of ACE Limited and its subsidiaries under the Related Documents. 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 ACE Limited and its subsidiaries. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 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. 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: ACE US HOLDINGS, INC. By ------------------------------ Title: A.C.E. INSURANCE COMPANY, LTD. By ------------------------------ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and as Administrative Agent By -------------------------------- Title: EXHIBIT J [CT Corporation System] December 11, 1997 To the Persons Identified on Schedule A Attached Hereto: We have reviewed (i) the Five-Year Credit Agreement dated as of December 11, 1997 (the "Five-Year Credit Agreement") and the 364-Day Credit Agreement (the "364-Day Credit Agreement") each among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks listed therein, and Morgan Guaranty Trust Company of New York, as Administrative Agent, (ii) the Term Loan Agreement (the "Term Loan Agreement") dated as of December 11, 1997 among ACE US Holdings, Inc., as Borrower, ACE Limited, as Guarantor, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Administrative Agent, (iii) the Subordinated Loan Agreement dated as of December 11, 1997 (the "Subordinated Loan Agreement") among ACE US Holdings, Inc., as Borrower, A.C.E. Insurance Company, Ltd., as Lender and Morgan Guaranty Trust Company of New York, as Administrative Agent and (iv) the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among A.C.E. Insurance Company, Ltd., as Account Party, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent (the "Amended and Restated Reimbursement Agreement" and together with the Five-Year Credit Agreement, the 364-Year Credit Agreement, the Term Loan Agreement and the Subordinated Loan Agreement, collectively, the "Agreements"), in each of which CT Corporation System is named as agent to receive service of process in the State of New York on behalf of (a) the Borrower and each Guarantor under each of the Five-Year Credit Agreement and the 364-Day Credit Agreement, (b) the Borrower and the Guarantor under the Term Loan Agreement, (c) the Borrower and the Lender under the Subordinated Loan Agreement and (d) the Account Party under the Amended and Restated Reimbursement Agreement, at the address of 1633 Broadway, New York, New York 10019. Upon review of our appointment outlined in Section 10.10(b) of each of the 364-Day Credit Agreement, the Five-Year Credit Agreement and the Term Loan Agreement, Section 8(c) of the Subordinated Loan Agreement and Section 8.10(b) of the Amended and Restated Reimbursement Agreement, we understand that our role as registered agent is confined to receiving service of process only. We also understand that the term of our appointment as registered agent under each such Agreements shall remain in effect until each of the Agreements shall have been terminated and all obligations thereunder of each Borrower, each Guarantor, the Lender and the Account Party shall have been paid in full, or until such time as we are instructed in writing by the Administrative Agent to discontinue our service. We accept and confirm our appointment as registered agent and we understand that any notice or process received by us in our capacity as registered agent shall be promptly sent by telephone, fax, telex, cable or any other means of instant communication, and thereafter by reputable overnight carrier to: On Behalf of the Borrower and each Guarantor under each of the 364-Day Credit Agreement and the Five-Year Credit Agreement and the Guarantor under the Term Loan Agreement: ACE Limited The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda (Fax 441-295-5221) with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) On behalf of the Borrower under the Term Loan Agreement and the Subordinated Loan Agreement ACE US Holdings, Inc. Six Concourse Parkway Suite, Suite 2700 Atlanta, GA 30374 with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) On behalf of the Account Party under the Amended and Restated Reimbursement Agreement and the Lender under the Subordinated Loan Agreement A.C.E. Insurance Company, Ltd. The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda (Fax 441-295-5221) with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) We appreciate this opportunity to be of service. Very truly yours, CT CORPORATION SYSTEM By: --------------------------- Title: SCHEDULE A Morgan Guaranty Trust Company of New York, as Issuing Bank and as Administrative Agent Morgan Guaranty Trust Company of New York Mellon Bank, N.A. Citibank, N.A. The Bank of New York The Bank of Tokyo-Mitsubishi Trust, Ltd. Barclays Bank PLC Deutsche Bank AG, New York and/or Cayman Islands Branch Fleet National Bank ING Bank, N.V. Royal Bank of Canada The Bank of Bermuda, Ltd. Banque Nationale de Paris The Chase Manhattan Bank Credit Lyonnais New York Branch Dresdner Bank A.G., New York Branch and Grand Cayman Branch The First National Bank of Chicago State Street Bank and Trust Company ACE Limited, as Borrower under the 364-Day Credit Agreement and the Five-Year Credit Agreement and as Guarantor under the Term Loan Agreement A.C.E. Insurance Company, Ltd., as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement, as Account Party under the Amended and Restated Reimbursement Agreement and as Lender under the Subordinated Loan Agreement Corporate Officers & Directors Assurance Ltd., as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement Tempest Reinsurance Company Limited, as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement ACE US Holdings, Inc., as Borrower under the Term Loan Agreement and as Borrower under the Subordinated Loan Agreement EX-10.32 6 AMENDED & RESTATED REIMBURSEMENT AGREEMENT EXHIBIT 10.32 EXECUTION COPY (pound)153,683,466 AMENDED AND RESTATED REIMBURSEMENT AGREEMENT dated as of December 11, 1997 among A.C.E. Insurance Company, Ltd., The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Administrative Agent ___________________________ J.P. Morgan Securities Inc. and Mellon Bank N.A., Co-Syndication Agents Morgan Guaranty Trust Company of New York, Documentation Agent
TABLE OF CONTENTS* ______________ PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions................................................ 1 SECTION 1.02. Accounting Terms and Determinations........................ 8 SECTION 1.03. United States Dollars and English Pounds................... 9 ARTICLE 2 THE LETTERS OF CREDIT SECTION 2.01. Letters of Credit.......................................... 9 SECTION 2.02. Notice of Extension........................................ 9 SECTION 2.03. Drawings under Letters of Credit; Reimbursement............ 10 SECTION 2.04. Obligations Absolute....................................... 13 SECTION 2.05. Indemnification............................................ 14 SECTION 2.06. Fees....................................................... 15 SECTION 2.07. Increased Costs; Reduced Return............................ 16 SECTION 2.08. Payments and Computations.................................. 17 ARTICLE 3 CONDITIONS SECTION 3.01. Conditions Precedent to Closing............................ 18 SECTION 3.02. Conditions Precedent to Extension of the Letters of Credit. 19 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power.............................. 20 SECTION 4.02. Corporate and Governmental Authorization; No Contravention............................................. 20 SECTION 4.03. Binding Effect............................................. 20 SECTION 4.04. Financial Information...................................... 20 SECTION 4.05. Litigation................................................. 21 SECTION 4.06. ERISA...................................................... 21 SECTION 4.07. Taxes...................................................... 21 SECTION 4.08. Not an Investment Company.................................. 22 SECTION 4.09. Full Disclosure............................................ 22
PAGE ---- SECTION 4.10. Compliance with Laws....................................... 22 SECTION 4.11. Lien....................................................... 22 ARTICLE 5 COVENANTS SECTION 5.01. Information................................................ 23 SECTION 5.02. Payment of Obligations..................................... 25 SECTION 5.03. Maintenance of Property; Insurance......................... 25 SECTION 5.04. Conduct of Business and Maintenance of Existence........... 25 SECTION 5.05. Compliance with Laws....................................... 25 SECTION 5.06. Inspection of Property, Books and Records.................. 26 SECTION 5.07. Leverage................................................... 26 SECTION 5.08. Subsidiary Debt............................................ 26 SECTION 5.09. Minimum Tangible Net Worth................................. 26 SECTION 5.10. Negative Pledge............................................ 27 SECTION 5.11. Consolidations, Mergers and Sales of Assets................ 28 SECTION 5.12. No Amendments.............................................. 28 SECTION 5.13. ERISA...................................................... 28 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default.......................................... 28 SECTION 6.02. Notice of Default.......................................... 31 ARTICLE 7 THE AGENTS SECTION 7.01. Appointment and Authorization.............................. 32 SECTION 7.02. Administrative Agent and Affiliates........................ 32 SECTION 7.03. Action by Administrative Agent............................. 32 SECTION 7.04. Consultation with Experts.................................. 32 SECTION 7.05. Liability of Administrative Agent.......................... 32 SECTION 7.06. Indemnification............................................ 33 SECTION 7.07. Credit Decision............................................ 33 SECTION 7.08. Successor Administrative Agent............................. 34 SECTION 7.09. Administrative Agent's Fee................................. 34 SECTION 7.10. Other Agents............................................... 34
ii
PAGE ---- ARTICLE 8 MISCELLANEOUS SECTION 8.01. Notices.................................................... 34 SECTION 8.02. No Waivers................................................. 35 SECTION 8.03. Expenses; Indemnification.................................. 35 SECTION 8.04. Sharing; Set-offs.......................................... 36 SECTION 8.05. Amendments and Waivers..................................... 37 SECTION 8.06. Successors and Assigns..................................... 37 SECTION 8.07. Collateral................................................. 39 SECTION 8.08. Governing Law.............................................. 39 SECTION 8.09. Counterparts; Integration.................................. 39 SECTION 8.10. Judicial Proceedings....................................... 39 SECTION 8.11. Judgment Currency.......................................... 40 SECTION 8.12. WAIVER OF JURY TRIAL....................................... 41 SECTION 8.13. Taxes...................................................... 41 SECTION 8.14. Confidential Information................................... 42 SECTION 8.15. References in Other Financing Documents.................... 43 SECTION 8.16. Amendment to Pledge Agreement.............................. 43 SECTION 8.17. Substitution of Bank....................................... 43
Schedule I - Participation of Banks Exhibit A - Letters of Credit Exhibit B - Opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Custodian Exhibit C - Opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Company Exhibit D - Opinion of Mayer, Brown & Platt, New York counsel for the Company Exhibit E - Opinion of Davis Polk & Wardwell, special United States counsel for the Issuing Bank and the Agents Exhibit F - Letter from CT Corporation System Exhibit G - Form of Letter of Credit Request Exhibit H - Form of Pledge Agreement Exhibit I - Form of Custodian Agreement ______________________ *The Table of Contents is not part of this Agreement. iii PAGE ---- iv AMENDED AND RESTATED REIMBURSEMENT AGREEMENT AMENDED AND RESTATED REIMBURSEMENT AGREEMENT dated as of December 11, 1997 among A.C.E. INSURANCE COMPANY, LTD., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and Administrative Agent. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the parties hereto have heretofore entered into a Reimbursement Agreement dated as of November 22, 1996 (as amended prior to the Restatement Date, the "Original Agreement"); and WHEREAS, the parties hereto wish to amend the Original Agreement to increase the Letter of Credit Commitment thereunder to (pound)153,683,466 and make certain other changes thereto, and to restate the Original Agreement as so amended; NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "ACE LIMITED" means ACE Limited, a Cayman Islands company limited by shares, and its successors. "ADMINISTRATIVE AGENT" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under the Financing Documents, and its successors in such capacity. "AGENT" means each of the Administrative Agent, the Documentation Agent, the Syndication Agents, the Managing Agent or the Co-Agents, and "Agents" means any combination of them, as the context may require. "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Company) duly completed by such Bank. "AGREEMENT" means the Original Agreement, as amended and restated by this Amended Agreement and as the same may be further amended from time to time in accordance with the terms hereof. "AMENDED AGREEMENT" means this Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among the parties listed on the signature pages hereof. "APPLICANT" means each of (i) ACE Capital Limited, a corporation incorporated under the laws of England and Wales, and its successors, (ii) ACE Staff Corporate Member Limited, a corporation incorporated under the laws of England and Wales, and its successors, (iii) ACE Capital II Limited, a corporation incorporated under the laws of England and Wales, and its successors, and (iv) ZIC Lloyd's Underwriting Limited, a corporation incorporated under the laws of England and Wales, and its successors. "ASSIGNEE" has the meaning set forth in Section 8.06(c). "BANK" means each bank listed on the signature pages hereof, each bank or other financial institution which becomes a Bank pursuant to Section 2.01(b)(iii) and each Assignee which becomes a Bank pursuant to Section 8.06(c), and their respective successors. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "BERMUDA COMPANIES LAW" means The Companies Act 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "BERMUDA INSURANCE LAW" means The Insurance Act 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City or London are authorized or required by law to close. "CO-AGENT" means each Bank designated as a Co-Agent on the signature pages hereof, in its capacity as co-agent in respect of this Amended Agreement. 2 "CODA" means Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company, and its successors. "COLLATERAL" has the meaning set forth in the Pledge Agreement. "COMPANY" means A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, and its successors. "CONFIRMATION AGREEMENT" means the Confirmation and Agreement of The Bank of Bermuda Limited dated November 22, 1996, as amended, between the Custodian and the Administrative Agent, substantially in the form of Exhibit B to the Pledge Agreement. "CONSOLIDATED DEBT" means at any date the Debt of the Company and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "CONSOLIDATED NET INCOME" means, for any period, the net income of the Company and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Company in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED TANGIBLE NET WORTH" means at any date the consolidated stockholder's equity of the Company and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date; provided that such determination for purposes of Sections 5.07, 5.09 and 5.10 shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial Accounting Standards Board. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholder's equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to June 30, 1997 in the book value of any asset owned by the Company or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. 3 "CUSTODIAN" means The Bank of Bermuda Limited in its capacity as Custodian under the Custodian Agreement. "CUSTODIAN AGREEMENT" means the Custodian Agreement dated November 19, 1996, as amended, between the Custodian and the Company. "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, solely for purposes of Section 5.10 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person, provided that the term "Debt" shall not include obligations of an insurance company under insurance policies or surety bonds issued by it. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DOCUMENTATION AGENT" means Morgan Guaranty Trust Company of New York in its capacity as documentation agent in respect of this Amended Agreement. "EFFECTIVE DATE" means the date the Original Agreement became effective in accordance with Section 8.09 thereof. 4 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means, with respect to any Person, such Person, any Subsidiary of such Person and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with such Person or any such Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "FINANCING DOCUMENTS" means this Agreement, the Letters of Credit, the Pledge Agreement, the Notice of Pledge, the Confirmation Agreement and the Custodian Agreement, and any agreement, instrument or document executed and delivered in connection with or relating to any Letter of Credit, in each case as the same may be amended and in effect from time to time. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. 5 "INDEMNITEE" has the meaning set forth in Section 8.03(b). "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "ISSUING BANK" means Morgan Guaranty Trust Company of New York as issuer of the Letters of Credit hereunder. "LETTERS OF CREDIT" means the standby letters of credit set forth in Exhibit A. "LETTER OF CREDIT COMMITMENT" means (pound)153,683,466. "LETTER OF CREDIT LIABILITIES" means, for any Bank and at any time, the sum of (x) the amounts then owing to such Bank (including in its capacity as the Issuing Bank) by the Company to reimburse it in respect of amounts drawn under the Letters of Credit, including in respect of participations purchased by such Bank pursuant to Section 2.02(a) and (y) such Bank's ratable participation in the aggregate amount then available for drawing under the Letters of Credit. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Company shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "MANAGING AGENT" means Citibank, N.A. in its capacity as managing agent in respect of this Amended Agreement. "MATERIAL DEBT" means Debt of the Company and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $25,000,000. "MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt and/or current payment obligations in respect of Derivatives Obligations of the Company and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $25,000,000. "MLA COST" has the meaning set forth in Section 2.03. "NOTICE OF EXTENSION" has the meaning set forth in Section 2.02. 6 "NOTICE OF PLEDGE" means the Notice of Pledge dated November 22, 1996, as amended, between the Company and the Custodian, substantially in the form of Exhibit A to the Pledge Agreement. "ORIGINAL AGREEMENT" has the meaning set forth in the recitals hereto. "OVERDUE RATE" has the meaning set forth in Section 2.03. "OVERNIGHT STERLING RATE" has the meaning set forth in Section 2.03. "PARENT" has the meaning set forth in Section 2.07(b). "PARTICIPATION PERCENTAGE" means, with respect to each Bank, the percentage of participation by such Bank in the Letters of Credit issued hereunder as set forth in Schedule I, as modified as a result of an assignment pursuant to Section 8.06. "PLEDGE AGREEMENT" means the Pledge Agreement dated as of November 22, 1996 between the Company and the Administrative Agent, substantially in the form of Exhibit H hereto, as executed and delivered and as the same may be amended and in effect from time to time. "PRIME RATE" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT OBLIGATION" has the meaning set forth in Section 2.03(a). "RELATED DOCUMENTS" means (i) the Financing Documents, (ii) the "Financing Documents" as defined in each of the Five-Year Credit Agreement and the 364-Day Credit Agreement, each dated as of December 11, 1997, among ACE Limited, as borrower, the guarantors including the Company party thereto, the Banks party thereto and Morgan Guaranty Trust Company of New York, as administrative agent for such Banks and (iii) the "Financing Documents" as defined in the Term Loan Agreement dated as of December 11, 1997 among ACE US Holdings, Inc., as borrower, ACE Limited, as guarantor, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as administrative agent for such Banks, in each case as the same may be amended and in effect from time to time. 7 "REQUIRED BANKS" means at any time Banks having at least 66 2/3% of the aggregate Letter of Credit Liabilities. "RESTATEMENT DATE" means the date this Amended Agreement becomes effective in accordance with Section 3.01 hereof. "SUBPARTICIPANT" has the meaning set forth in Section 8.06(b). "SUBSIDIARY" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Company. "SYNDICATION AGENT" means either J.P. Morgan Securities Inc. or Mellon Bank N.A. in its capacity as a syndication agent in respect of this Agreement, and "Syndication Agents" means both of them. "TERMINATION DATE" means, with respect to each Letter of Credit, the initial expiry date of such Letter of Credit or, if it is extended, the date to which such Letter of Credit is so extended. "UCP" means the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, 1993 Revision (Publication No. 500). "WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means, as to any Person, any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person; unless otherwise specified, "Wholly-Owned Consolidated Subsidiary" means a Wholly-Owned Consolidated Subsidiary of the Company. SECTION 1.02. 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 United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Company's independent public accountants) with the most recent audited consolidated financial statements of the Company and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Company notifies the Administrative Agent that the Company 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 8 covenant (or if the Administrative Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Company'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, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. SECTION 1.03. United States Dollars and English Pounds. Each reference herein to (i) "DOLLARS" or "$" or (ii) "STERLING" OR "(POUND)" shall refer to the respective lawful currencies of the United States of America and the United Kingdom. ARTICLE 2 THE LETTERS OF CREDIT SECTION 2.01. Letters of Credit. The Letters of Credit have heretofore been issued and will remain outstanding on the Restatement Date. On the Restatement Date, subject to satisfaction of the applicable conditions specified in Section 3.01, (i) the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in each Letter of Credit and the related Letter of Credit Liabilities ratably in accordance with its Participation Percentage and (ii) the participations heretofore granted by the Issuing Bank in certain of the Letters of Credit to certain of the parties hereto shall terminate. SECTION 2.02. Notice of Extension. (a) If it wishes to request extension of a Letter of Credit, the Applicant therefor and the Company shall give the Issuing Bank notice, by a Letter of Credit Extension Request in the form of Exhibit G hereto, by September 15 of each year, specifying the date to which the Termination Date of the applicable Letter of Credit is to be extended and the requested effective date of such extension (such notice, a "Notice of Extension"). (b) Upon receipt of a Notice of Extension, the Issuing Bank shall promptly notify each Bank of the contents thereof and of the amount of such Bank's participation in the applicable Letter of Credit. Each Bank party to this Agreement agrees that it will give notice to the Issuing Bank and the Company on or before October 15 as to whether it agrees to the requested extension of the Letters of Credit, provided that the failure of any Bank to give such notice or any delay in giving the same shall be deemed to be a notice from such Bank by 9 October 15 that it does not agree to such extension, and no such Bank shall incur any obligation or liability as a result of any such failure or delay. (c) If any Bank party to this Agreement gives (or is deemed to have given) notice that it does not agree to a requested extension as contemplated by subsection (b), then the Company may designate by October 31 of such year a bank or other financial institution which is willing to assume all of the rights and obligations of such Bank under this Agreement and the other Related Documents, such bank or other financial institution to be subject to the written consent of the Issuing Bank (such consent not to be unreasonably withheld by the Issuing Bank in its good faith business judgment). In that case such Bank agrees to assign such rights and obligations to such designated bank or other financial institution and enter into an agreement therefor with such other bank or financial institution pursuant to which such bank or other financial institution agrees to pay to such Bank all amounts then due and owing (and all fees accrued to but excluding the date of such agreement) to such Bank hereunder and under each other Financing Document, in which case such Bank shall no longer be a party hereto (except as to Sections 2.05, 2.07 and 8.03 for the period prior to the date of such agreement) and such bank or other financial institution shall become a Bank party hereto. (d) On or after November 10 and on or before November 25 of each year, the Issuing Bank shall give notice of non-extension of each Letter of Credit, unless (x) it has theretofore timely received Notice of Extension in respect of such Letter of Credit, (y) all of the other conditions contained in Section 3.02 are then satisfied and (z) each Bank party to this Agreement has theretofore agreed in writing to a requested extension in respect of such Letter of Credit, confirming the Participation Percentage of such Bank in such Letter of Credit; provided that no failure by the Issuing Bank to give any such notice of termination and no delay in giving any such notice shall affect the obligations of (i) the Company to reimburse the Issuing Bank for any drawing under any Letter of Credit or (ii) any Bank to pay to the Issuing Bank an amount in respect of such Bank's ratable share of any such drawing. (e) The extension by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article III, be subject to the conditions precedent that the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. SECTION 2.03. Drawings under Letters of Credit; Reimbursement. (a) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall promptly notify the Company and each other Bank as to the amount to be paid as a result of such 10 drawing and the payment date. The Company shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit (each, a "Reimbursement Obligation"), without presentment, demand, protest or other formalities of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by the Company shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Overdue Rate. "OVERDUE RATE" means a rate per annum equal to (i) with respect to payments due in dollars, the sum of the Base Rate plus 2% and (ii)with respect to payments due in Sterling, the sum of 2% plus the Overnight Sterling Rate plus the MLA Cost. For this purpose: The "OVERNIGHT STERLING RATE" applicable to any unpaid amount for each day until paid means a rate per annum equal to the rate per annum at which one day (or, if such amount due remains unpaid more than three Business Days, then for such other period of time not longer than three months as the Administrative Agent may select) deposits in Sterling in an amount approximately equal to such unpaid amount and for the applicable period determined as provided above are offered to the Administrative Agent in the London interbank market at approximately 11:00 A.M. (London time) on the first day of such period. The "MLA COST" for each day means a rate per annum calculated in accordance with the following formula: BY+L(Y-X) + S(Y-Z) % per annum = MLA Cost 100 - (B+S) where on the day of application of the formula: B is the percentage of the Administrative Agent's eligible liabilities (as such term is defined by the Bank of England on the date of such application) which the Bank of England requires the Administrative Agent to hold on non-interest-bearing deposit in accordance with its cash ratio requirements; Y the rate per annum at which deposits in Sterling, in an amount equal to the amount by reference to which the applicable Overnight Sterling Rate was calculated, for a period equal to the period in question, are offered to the Administrative Agent in the London interbank market at or about 11:00 A.M. (London time) on the day on which the rate is to be determined; 11 L is the percentage of eligible liabilities which the Bank of England requires the Administrative Agent to maintain as secured money with members of the London Discount Market Association and/or as secured call money with certain money brokers and gilt-edged primary market makers; X is the rate at which secured Sterling deposits may be placed by the Administrative Agent with members of the London Discount Market Association and/or as secured call money with certain money brokers and gilt-edged primary market makers at or about 11:00 A.M. (London time) on that day for the relevant period; S is the percentage of the Administrative Agent's eligible liabilities which the Bank of England requires the Administrative Agent to place as a special deposit (as such term is defined by the Bank of England on the date of such application); and Z is the interest rate per annum allowed by the Bank of England on special deposits. In the application of the formula, B, Y, L, X, S and Z are included in the formula as figures and not as percentages, e.g. if B=0.5% and Y=15%, BY is calculated as 0.5 x 15 and each rate calculated in accordance with the formula is, if necessary rounded upward to four decimal places. If the Administrative Agent determines that a change in circumstance has rendered, or will render, the formula inappropriate, the Administrative Agent shall notify the Company of the manner in which the MLA Cost will subsequently be calculated. The manner of calculation so notified by the Administrative Agent shall, in the absence of manifest error, be binding on the Company. The Overdue Rate applicable to any Sterling payment shall be adjusted automatically on and as of the effective date of any change in the MLA Cost. (b) In addition, each Bank will pay to the Issuing Bank immediately upon the Issuing Bank's demand at any time during the period commencing after such drawing until reimbursement therefor in full by the Company, an amount equal to such Bank's ratable share of such drawing (in proportion to its participation therein), together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 12:00 Noon (New York City time) on such date, from the next succeeding Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Overdue Rate. Each Bank shall also be liable for its pro rata share of any amounts paid by the Company that are subsequently 12 rescinded or avoided, or are otherwise restored or returned. Such liability shall be unconditional and without regard to the occurrence of any Default or the compliance by the Company with any of its obligations under this Agreement or any other Financing Document. The Issuing Bank will pay to each Bank ratably all amounts received from the Company for application in payment of its reimbursement obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto. SECTION 2.04. Obligations Absolute. The obligations of the Company and each Bank under Section 2.03 shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) any lack of validity or enforceability of this Agreement or any Letter of Credit or any other Financing Document; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of this Agreement or any Letter of Credit or any other Financing Document; (iii) the use which may be made of any Letter of Credit by, or any acts or omission of, a beneficiary of a Letter of Credit (or any Person for whom such beneficiary may be acting); (iv) the existence of any claim, set-off, defense or other rights that the Company may have at any time against a beneficiary of a Letter of Credit (or any Person for whom such beneficiary may be acting), the Banks (including the Issuing Bank) or any other Person, whether in connection with this Agreement or any Letter of Credit or any other Financing Document or any unrelated transaction; (v) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (vi) payment under a Letter of Credit against presentation to the Issuing Bank of a draft or certificate that does not comply with the terms of such Letter of Credit, provided that the Issuing Bank's determination that documents presented under such Letter of Credit comply with the terms thereof shall not have constituted gross negligence or willful misconduct of the Issuing Bank; or 13 (vii) any other act or omission to act or delay of any kind by any Bank (including, without limitation, the Issuing Bank), the Administrative Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this clause (vii), constitute a legal or equitable discharge of the Company's or the Bank's obligations hereunder. SECTION 2.05. Indemnification. (a) The Company hereby indemnifies and holds harmless each Bank (including the Issuing Bank) and the Administrative Agent from and against any and all claims, damages, losses, liabilities, costs or expenses which such Bank or the Administrative Agent may incur hereunder or under any other Financing Document or in connection with any transaction contemplated hereby or thereby (including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to the Issuing Bank hereunder (but nothing herein contained shall affect any rights the Company may have against such defaulting Bank)), and none of the Banks (including the Issuing Bank) nor the Administrative Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in Section 2.04, as well as (i) any error, omission, interruption or delay in transmission or delivery of any message, by mail, cable, telegraph, telex or otherwise, (ii) any loss or delay in the transmission of any document required in order to make a drawing under a Letter of Credit and (iii) any consequences arising from causes beyond the control of the Issuing Bank, including without limitation any government acts; provided that the Company shall not be required to indemnify the Issuing Bank for any claims, damages, losses, liabilities, costs or expenses, and the Company shall have a claim against the Issuing Bank for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the failure of the Issuing Bank to meet the standards prescribed by the UCP in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) the Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit except as a direct result of court orders prohibiting such payment; and provided further that the Company shall not be required to indemnify any Bank (other than the Issuing Bank the indemnification of which under this Section 2.05 is governed by the preceding proviso) or the Administrative Agent for any claims, damages, losses, liabilities, costs or expenses suffered by it to the extent found by a court of competent jurisdiction to have been caused by its willful misconduct or gross negligence. Nothing in this Section 2.05 is intended to limit the obligations of the 14 Company under Section 2.03 of this Agreement. To the extent the Company is obligated to but does not indemnify the Issuing Bank as required by this subsection, the Banks agree to do so ratably in accordance with their Participation Percentage. (b) The parties hereto agree that in making any payment under any Letter of Credit by the Issuing Bank none of the following shall constitute or be deemed to constitute the willful misconduct or gross negligence of the Issuing Bank: (i) the Issuing Bank's exclusive reliance on any document (including without limitation any draft) presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented thereunder, whether or not the amount due to the beneficiary thereof equals the amount of such draft, and whether or not any document presented thereunder proves to be inaccurate or otherwise insufficient in any respect, if such document on its face appears to be in order and whether or not such document or any statement contained therein proves to be forged or invalid or inaccurate or untrue in any respect whatsoever and (ii) any non- material, non-compliance by the documents (including without limitation any draft) presented under any Letter of Credit with the terms thereof. SECTION 2.06. Fees. (a) Ticking Fee. On January 1, 1998, the Company shall pay to the Administrative Agent, for the account of each Bank (including the Issuing Bank), a ticking fee on the amount set forth below, at a rate per annum equal to .06 of 1%, calculated on a 360-day basis. Such ticking fee shall accrue for each day from and including the Restatement Date to but excluding January 1, 1998, on such Bank's Participation Percentage of the excess of (i) the Letter of Credit Commitment over (ii) the daily average aggregate amount available to be drawn under the Letters of Credit then outstanding. (b) Letter of Credit Fee. The Company agrees to pay to the Administrative Agent, for the account of each Bank (including the Issuing Bank), a letter of credit fee with respect to each Letter of Credit, at a rate per annum equal to .15 of 1%, calculated on a 360-day basis, for the period from and including the Restatement Date to but excluding the Termination Date of such Letter of Credit, on such Bank's Participation Percentage of the daily average amount available at any time to be drawn under such Letter of Credit. The letter of credit fees shall be payable quarterly, with respect to each Letter of Credit, in arrears on the last Business Day of each March, June, September and December and on its Termination Date. (c) Fronting Fee. The Company agrees to pay to the Issuing Bank for its own account, as compensation for its services hereunder, a fronting fee for each 15 issuance of a Letter of Credit in the amounts and at the times agreed upon by the Company and the Issuing Bank. SECTION 2.07. Increased Costs; Reduced Return. (a) If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, (i) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System), special deposit, insurance assessment or similar requirement against letters of credit issued by, or assets of, or deposits with or for the account of, or credit extended by, any Bank or (ii) shall impose on any Bank any other condition regarding this Agreement or any Letter of Credit and the result of any of the foregoing is to increase the cost to such Bank of issuing or maintaining such Letter of Credit (or its participation therein), or funding any drawings thereunder, or reduce the amount of any sum received or receivable by such Bank under this Agreement, by an amount deemed by such Bank to be material, then, within 45 days after demand by such Bank (with a copy to the Administrative Agent), the Company shall pay to such Bank all additional amounts which are necessary to compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or any Person controlling such Bank (a "PARENT")) as a consequence of its obligations hereunder or under any Letter of Credit to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 45 days after demand by such Bank, the Company agrees to pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. 16 (c) Each Bank will promptly notify the Company of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 2.07. A certificate of any Bank claiming compensation under this Section 2.07 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections 2.07(a) and 2.07(b) of this Section 2.07, the Company shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 180 days prior to the date on which such Bank notifies the Administrative Agent and the Company that it proposes to demand such compensation and identifies to the Administrative Agent and the Company the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which because of the retroactive application of such statute, regulation or other such basis, such Bank did not know in good faith that such amount would arise or accrue. SECTION 2.08. Payments and Computations. (a) The Company shall make each payment of Reimbursement Obligations, fees, interest and other amounts payable hereunder to the Administrative Agent, as provided herein, not later than 2:00 P.M. (New York City time) on the day when due in English Pounds in the case of Reimbursement Obligations or in United States Dollars in the case of fees, interest or other amounts payable hereunder immediately available at an address of the Administrative Agent specified in writing to the Company by the Administrative Agent. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of such Bank. Each payment shall be made without any set-off, counterclaim or deduction. (b) Whenever any payment to be made hereunder shall be stated to be due on a day which is not 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 any computation of interest or fees. (c) In the event that any payment to the Administrative Agent hereunder is made after 2:00 P.M. (London or New York City time, as relevant) on a Business Day, such payment shall be deemed received on the immediately following Business Day, and such extension of time shall be included in any computation of interest or fees. 17 ARTICLE 3 CONDITIONS SECTION 3.01. Conditions Precedent to Closing. The Restatement Date hereunder shall occur upon satisfaction of the condition described in clause (h) below and receipt by the Administrative Agent of the following documents, each dated the Restatement Date unless otherwise indicated: (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) an executed consent of the Custodian to this Amended Agreement; (c) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Custodian, substantially in the form of Exhibit B hereto; (d) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Company, substantially in the form of Exhibit C hereto; (e) an opinion of Mayer, Brown & Platt, New York counsel for the Company, substantially in the form of Exhibit D hereto; (f) an opinion of Davis Polk & Wardwell, special United States counsel for the Issuing Bank and the Agents, substantially in the form of Exhibit E hereto; (g) a letter from CT System in New York, New York, substantially in the form of Exhibit F hereto, evidencing CT System's agreement to act as agent for service of process for the Company pursuant to Section 8.10(b); (h) receipt by the Agents and the Banks of all fees accrued or otherwise due to them on or prior to the Restatement Date; and (i) all documents the Administrative Agent may reasonably request prior to the Restatement Date relating to the existence of the Company, the corporate authority for and the validity of this Agreement and each other Financing Document, the existence, validity, enforceability and first priority of a Lien in the Collateral (assuming that the Collateral is delivered at the time, in the amount and as otherwise provided in the Pledge Agreement) and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. 18 On the Restatement Date the Original Agreement will be automatically amended and restated in its entirety to read as set forth herein. On and after the Restatement Date the rights and obligations of the parties hereto shall be governed by this Amended Agreement; provided the rights and obligations of the parties hereto with respect to the period prior to the Restatement Date (including, without limitation, entitlement to fees accrued prior to the Restatement Date) shall continue to be governed by the provisions of the Original Agreement. The Administrative Agent shall promptly notify the Company and the Banks of the Restatement Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Conditions Precedent to Extension of the Letters of Credit. The obligation of the Issuing Bank to extend any Letter of Credit is subject to the satisfaction of the following conditions (a) receipt by the Administrative Agent of a Notice of Extension as required by Section 2.02; (b) the fact that the aggregate amount of the Letter of Credit Liabilities immediately after such extension will not exceed the Letter of Credit Commitment; (c) the fact that, immediately before and after such extension, no Default shall have occurred and be continuing; (d) the fact that the representations and warranties of the Company contained in this Agreement and in each other Financing Document shall be true on and as of the date of such extension, except representations and warranties which expressly refer to an earlier date in which case the same shall be true on and as of such earlier date; and (e) the fact that such Letter of Credit is being extended solely as security to support the Applicant's underwriting business at the Society and Council of Lloyd's provided in accordance with the requirements of the Society and Council of Lloyd's. Such extension shall be deemed to be a representation and warranty by the Company on the date of such extension as to the facts specified in clauses (b) through (e), inclusive, of this Section. 19 ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Company represents and warrants on each day during the term of this Agreement that: SECTION 4.01. Corporate Existence and Power. The Company is a limited liability company, duly incorporated and validly existing under the laws of Bermuda. The Company has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Company is a Wholly-Owned Consolidated Subsidiary of ACE Limited. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and the other Financing Documents to which it is a party are, and each Notice of Extension given by it hereunder will at the time it is given be, within its corporate powers, have been duly authorized by all necessary corporate action, require no action or consent by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Memorandum of Association, Articles of Association or Bye-Laws (or any comparable document) of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 4.03. Binding Effect. Each of this Agreement and the other Financing Documents to which the Company is a party constitutes a valid and binding agreement of the Company enforceable in accordance with its terms. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Company and its Consolidated Subsidiaries as of September 30, 1996 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and retained earnings and cash flows for such fiscal year. 20 (b) Since September 30, 1996 there has been no material adverse change in the business, financial position or results of operations of the Company and its Consolidated Subsidiaries, considered as a whole. (c) The balance sheet of CODA as of September 30, 1996 and the related statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the financial position of CODA as of such date and its results of operations and retained earnings and cash flows for such fiscal year. (d) Since September 30, 1996 there has been no material adverse change in the business, financial position or results of operations of CODA. SECTION 4.05. Litigation. Except as disclosed in the notes to the financial statements referred to in Section 4.04(a), there is no action, suit or proceeding pending against, or to the knowledge of the Company threatened against or affecting, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Company and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity or enforceability of this Agreement or any other Financing Document. SECTION 4.06. ERISA. Neither the Company nor any member of its ERISA Group maintains or contributes to, or has within the previous six years (whether or not while a member of such Person's current ERISA Group) maintained or contributed to, or been required to maintain or been jointly and severally liable for contributions to, or has liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. SECTION 4.07. Taxes. The Company and its Subsidiaries have filed all income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any Subsidiary. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Company, adequate. 21 SECTION 4.08. Not an Investment Company. The Company is not an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.09. Full Disclosure. All written information heretofore furnished by the Company or on behalf of the Company by ACE Limited to the Administrative Agent or any Bank for purposes of or in connection with this Agreement or any of the other Financing Documents or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by the Company or on behalf of the Company by ACE Limited to the Administrative Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Company has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Company can now reasonably foresee) the business, operations or financial condition of the Company and its Consolidated Subsidiaries, taken as a whole, or the ability of the Company to perform its obligations under this Agreement or any of the other Financing Documents. SECTION 4.10. Compliance with Laws. The Company and each Subsidiary are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Company and its Consolidated Subsidiaries, considered as a whole. SECTION 4.11. Lien. (a) Upon delivery of the Collateral to the Custodian as provided in the Pledge Agreement, the Company will have good and marketable title in and to the Collateral free and clear of all Liens (except the Lien created under the Financing Documents) and will hold such title and all of the Collateral in its own name and not in the name of any nominee or other Person, except that the Collateral described in clause (i) of the definition of "Eligible Securities" contained in Section 2(a) of the Pledge Agreement shall be held in the name of Citibank, N.A. for the account of the Company. (b) Upon delivery of the Collateral to the Custodian as provided in the Pledge Agreement, the Pledge Agreement will create in favor of the Administrative Agent for the benefit of the Banks a valid and enforceable first priority Lien on all of the Collateral, subject to the interest of the Custodian under the Financing Documents. 22 (c) Upon delivery of the Collateral to the Custodian as provided in the Pledge Agreement, the Company will not have outstanding, nor will it be contractually bound to create, any Lien on or with respect to any of the Collateral, subject to the interest of the Custodian under the Financing Documents. (d) The Company is not subject to any agreement, judgment, injunction, order, decree or other instrument or any law or regulation which would prevent or otherwise interfere with the Company's obligations to deliver Collateral in the amounts, at the times and as otherwise provided in the Pledge Agreement, subject to the interest of the Custodian under the Financing Documents. ARTICLE 5 COVENANTS The Company agrees that, so long as any Letter of Credit is in effect or any Letter of Credit Liability remains unpaid: SECTION 5.01. Information. The Company will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Required Banks by Coopers & Lybrand LLP or other independent public accountants of nationally recognized standing; (b) 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 of ACE Limited, a consolidated balance sheet of ACE Limited and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations and cash flows for such quarter and for the portion of ACE Limited's fiscal year ended at the end of such quarter, setting forth in the case of such statements of operations and cash flows in comparative form the figures for the corresponding quarter and the corresponding portion of ACE Limited's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of ACE Limited; 23 (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Company was in compliance with the requirements of Sections 5.07 to 5.10, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (d) within five days after any executive officer of the Company obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (e) as soon as available and in any event within 20 days after submission, each statutory statement of the Company in the form submitted to The Insurance Division of the Office of Registrar of Companies of Bermuda. (f) promptly after any executive officer of the Company obtains knowledge thereof, (i) a copy of any notice from the Minister of Finance or the Registrar of Companies or any other Person of the revocation, the suspension or the placing of any restriction or condition on the registration as an insurer of the Company under the Bermuda Insurance Law 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 the Company relating to an investigation conducted by the Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Law 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 the Company; and (g) from time to time such additional information regarding the financial position, results of operations or business of the Company or any of its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request from time to time. SECTION 5.02. Payment of Obligations. The Company will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to 24 maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.03. Maintenance of Property; Insurance. (a) The Company will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Company will maintain, and will cause each Subsidiary to maintain, physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense. The Company will deliver to the Banks upon request of any Bank through the Administrative Agent from time to time, full information as to the insurance carried. SECTION 5.04. Conduct of Business and Maintenance of Existence. The Company will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Company and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a Subsidiary into the Company or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing or (ii) the termination of the existence of any Subsidiary if the Company in good faith determines that such termination is in the best interest of the Company and is not materially disadvantageous to the Banks. SECTION 5.05. Compliance with Laws. The Company will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Company and its Consolidated Subsidiaries, considered as a whole. 25 SECTION 5.06. Inspection of Property, Books and Records. The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in accordance with generally accepted accounting principles in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.07. Leverage. Consolidated Debt will at no time exceed 35% of Consolidated Tangible Net Worth. SECTION 5.08. Subsidiary Debt. The Company will not permit any of its Subsidiaries to create, assume or suffer to exist any Debt, except (i) Debt under the Related Documents, (ii) Debt owing to the Company or a Wholly-Owned Consolidated Subsidiary, (iii) Debt of Tripar Partnership, a Bermuda general partnership, owing to other Subsidiaries or Debt of such other Subsidiaries owing to Tripar Partnership, (iv) Debt in respect of letters of credit issued in the ordinary course of business, (v) Debt created by exercise of overdraft privileges on a basis not more frequent than once each calendar month for not more than five Business Days in an amount not to exceed $50,000,000 in the aggregate at any one time, (vi) Debt in an amount not to exceed $70,000,000 incurred in connection with the development by the Company and/or any of its Subsidiaries of the "Bermudiana Site" in Hamilton, Bermuda and (vii) Debt not permitted by the foregoing clauses of this Section in an aggregate principal amount not to exceed $20,000,000 at any time outstanding. SECTION 5.09. Minimum Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than (i) $1,000,000,000 plus (ii) 25% of Consolidated Net Income for each fiscal year of the Company ended after December 31, 1997 and on or prior to such date of determination and for which such Consolidated Net Income is positive (but with no deduction on account of any fiscal year for which Consolidated Net Income is negative) plus (iii) 50% of the aggregate amount by which Consolidated Tangible Net Worth shall have been increased by reason of the issuance and sale after the Restatement Date and on or prior to such date of determination of any capital stock or the conversion or exchange of any Debt of the Company into or with capital stock of the Company consummated after the Restatement Date and on or prior to such date of determination. 26 SECTION 5.10. Negative Pledge. Neither the Company nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $25,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Company or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Company or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $25,000,000 and (iii) 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; (h) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $25,000,000; (i) Liens securing obligations in respect of letters of credit issued pursuant to any of the Related Documents; and 27 (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Tangible Net Worth. SECTION 5.11. Consolidations, Mergers and Sales of Assets. The Company will not (i) consolidate with or merge into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of its assets to any other Person; provided; that if both immediately before and after giving effect thereto no Default shall have occurred and be continuing, then the Company may merge with another Person so long as the Company is the surviving entity. SECTION 5.12. No Amendments. The Company shall not amend or waive, or utilize or rely on any waiver of, any provision of the Pledge Agreement, the Custodian Agreement or the Notice of Pledge without the written consent of the Administrative Agent and the Required Banks. SECTION 5.13. ERISA. Neither the Company nor any member of its ERISA Group will maintain or contribute to, or become obligated to maintain or become jointly and severally liable for contributions to, or have liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) the Company shall fail (i) to pay when due any Reimbursement Obligation or (ii) to pay within five Business Days of the due date thereof any interest or fees or other amounts payable hereunder; (b) the Company shall fail to observe or perform any covenant (i) contained in Sections 5.07 through 5.12, inclusive, or (ii) relating to the delivery of the Collateral and the perfection of the first priority charge and security interest created therein contained in any other Financing Document; (c) the Company shall fail to observe or perform any covenant or agreement contained in this Agreement or in any other Financing Document 28 (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Company by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Company in this Agreement or any other Financing Document or in any certificate, financial statement or other document delivered pursuant to this Agreement or any other Financing Document shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Company or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period or an Event of Default (as defined in any of the Related Documents) shall have occurred and be continuing; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; or, without limiting the foregoing, any "Event of Default" (as defined in any of the other Related Documents) shall occur; (g) (i) any corporate action is taken authorizing the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to the Company or authorizing any corporate action to be taken to facilitate any such winding up, liquidation, arrangement or other similar action or any petition shall be filed seeking the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to the Company by the Registrar of Companies in Bermuda, one or more holders of insurance policies or reinsurance certificates issued by the Company or by any other Person or Persons or any petition shall be presented for the winding up of the Company to a court of Bermuda as provided under the Bermuda Companies Law and in either such case such petition shall remain undismissed and unstayed for a period of 60 days or any creditors' or members' voluntary winding up of the Company as provided under the Bermuda Companies Law shall be commenced or any receiver shall be appointed by a creditor of the Company or by a court of Bermuda on the application of a creditor of the Company as provided under any instrument giving rights for the appointment of a receiver; (ii) a proceeding shall be commenced by any Person seeking the rehabilitation, liquidation, dissolution or conservation of the assets of the Company or any substantial part thereof or any similar remedy and such proceedings shall remain undismissed and unstayed for a period of 60 days; 29 (iii) the Company or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (iv) an involuntary case or other proceeding shall be commenced against the Company or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Company or any Subsidiary under the United States federal bankruptcy laws as now or hereafter in effect; (h) a judgment or order for the payment of money in excess of $25,000,000 shall be rendered against the Company or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 45 days; (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of voting stock of ACE Limited; or, during any period of 12 consecutive calendar months, individuals who were directors of ACE Limited on the first day of such period shall cease to constitute a majority of the board of directors of ACE Limited; or the Company shall cease to be a Wholly-Owned Consolidated Subsidiary of ACE Limited; (j) any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of any of the Financing Documents is invalid or unenforceable in any material respect, or the Company shall so assert in writing; (k) the registration of the Company as an insurer shall be revoked, suspended or otherwise have restrictions or conditions placed upon it unless, in 30 the case of the placing of any such restrictions or conditions, such restrictions or conditions could not have a material adverse effect on the interests of the Issuing Bank or the Administrative Agent or the Banks under the Financing Documents; (l) the Company shall fail to deliver Collateral at the times, in the amounts or as otherwise specified in the Financing Documents or the Lien created pursuant thereto on the Collateral shall at any time or for any reason cease to be a valid, enforceable or first priority Lien on any of the Collateral; or (m) the Company shall terminate, amend or waive, or utilize or rely on any waiver of, any provision of the Custodian Agreement or the Notice of Pledge without the written consent of the Administrative Agent and the Required Banks; then, and in every such event, the Administrative Agent may, and in the case of clauses (i), (ii) and (iv) below shall if requested by Banks having more than 50% of the aggregate amount of Letter of Credit Liabilities, (i) by notice to the Company terminate the Letter of Credit Commitment and it shall thereupon terminate, (ii) by notice to the Company declare, to the extent permitted by law, the Letter of Credit Liabilities to be and the same shall thereupon become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, (iii) take all other actions at law or in equity permitted to be taken by it and (iv) by notice to the Company, require that the Company specifically perform, and the Company shall specifically perform, its obligations to deliver Collateral under the Pledge Agreement and its other obligations under the Financing Documents. SECTION 6.02. Notice of Default. The Administrative Agent shall give notice to the Company under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE AGENTS SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under this Agreement and the other Financing Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with all such powers as are reasonably incidental thereto. 31 SECTION 7.02. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement and each other Financing Document as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Company or any affiliate of the Company as if it were not the Administrative Agent hereunder or thereunder. SECTION 7.03. Action by Administrative Agent. The obligations of the Administrative Agent under this Agreement and each other Financing Document are only those expressly set forth herein or therein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Event of Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Company or the Custodian or both), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith or with any other Financing Document (i) with the consent or at the request of the Required Banks (or such different number of Banks as any provision hereof expressly requires for such consent or request) or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made hereunder or under any other Financing Document or in connection herewith or therewith including, without limitation, the authenticity or accuracy of any draft, certificate, statement or other item presented under a Letter of Credit, (ii) the performance or observance of any of the covenants or agreements of the Company, (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Administrative Agent, (iv) the validity, effectiveness or genuineness of this Agreement or any other Financing Document or any other instrument or other writing furnished in connection herewith or therewith or (v) the existence, validity, enforceability or priority of the Lien on the Collateral. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing 32 (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. (a) Each Bank shall, ratably in accordance with its Participation Percentage, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Company) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from any indemnitee's gross negligence or willful misconduct) that such indemnitees may suffer or incur in such capacity in connection with this Agreement or any other Financing Document or any action taken or omitted by such indemnitees hereunder or thereunder. (b) Without limiting the generality of the foregoing, each Bank shall, ratably and in accordance with its Participation Percentage, indemnify the Issuing Bank and its directors, officers, agents and employees (to the extent not reimbursed by the Company) against any costs, expense (including counsel fees and disbursements), claim, demand, action, loss or liability that each such indemnitee may suffer or incur and which results from any failure on the part of such Bank to pay to the Issuing Bank such Bank's ratable share of any drawing under any Letter of Credit in accordance with Section 2.03(b). SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each 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 any action under this Agreement. SECTION 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, which successor Administrative Agent shall be reasonably acceptable to the Company. 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 gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative 33 Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. SECTION 7.09. Administrative Agent's Fee. The Company shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Company and the Administrative Agent. SECTION 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on either Syndication Agent, on the Documentation Agent, on the Managing Agent or on any Co-Agent in its capacity as such an Agent. ARTICLE 8 MISCELLANEOUS SECTION 8.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Company or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Company. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number referred to in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number referred to in this Section and confirmation of receipt is received, (iii) if given by mail, 10 days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article II shall not be effective until received. SECTION 8.02. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege under this 34 Agreement or any other Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement and the other Financing Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 8.03. Expenses; Indemnification. (a) The Company shall pay (i) all out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special United States counsel for the Issuing Bank and the Agents and any special Bermuda counsel to the Administrative Agent or the Custodian, reasonably incurred in connection with the preparation of this Agreement and the other Financing Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Company agrees to indemnify the Administrative Agent and each Bank (including the Issuing Bank), their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be reasonably incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing Documents or any actual or proposed use of proceeds of any draft drawn under any Letter of Credit; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 8.04. Sharing; Set-offs. (a) Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of any Reimbursement Obligation owing to it which is greater than the proportion received by any other Bank in respect of the amount of any Reimbursement Obligation owing to such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Reimbursement Obligations owing to the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to such Reimbursement Obligation owing to the Banks shall be shared by 35 the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Company other than its indebtedness hereunder. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Reimbursement Obligation, whether or not acquired pursuant to the foregoing arrangements or the arrangements set forth in Section 2.02(a) or otherwise, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Company in the amount of such participation. (b) Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request specified by Section 6.01 to the Administrative Agent to exercise remedies pursuant to the provisions of Section 6.01, each Bank and each of its 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 Bank or such affiliate to or for the credit or the account of the Company against any and all of the obligations of the Company to such Bank now or hereafter existing under the Financing Documents, irrespective of whether such Bank shall have made any demand for payment thereof and although such obligations may be unmatured. Each Bank agrees promptly to notify the Company, after any such setoff and application; provided, however, that the failure to give notice shall not affect the validity of such setoff and application. The rights of each Bank and its affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) that such Bank and its affiliates may have. SECTION 8.05. Amendments and Waivers. Any provision of this Agreement or the Letters of Credit or any provision of the other Financing Documents requiring the consent of the Administrative Agent and the Required Banks may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and the Required Banks (and (x) if the rights or duties of the Administrative Agent are affected thereby, by the Administrative Agent and (y) if any Letter of Credit is being amended or waived, by the beneficiary thereof); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Letter of Credit Commitment or subject any Bank to any additional obligation, (ii) reduce the amount of any Reimbursement Obligation or the default rate of interest payable thereon or the amount of any fees or other amounts payable hereunder, (iii) postpone the date fixed for any payment of any Reimbursement Obligation or of any interest or fees or other amounts payable hereunder or postpone the Termination Date of any Letter of Credit, (iv) release any Collateral furnished 36 pursuant to the Pledge Agreement or otherwise, except as contemplated by the other Financing Documents, (v) change the definition of Eligible Securities or Minimum Collateral Amount specified in the Pledge Agreement, (vi) change the Participation Percentage, or the percentage of the aggregate unpaid principal amount of the Letter of Credit Liabilities, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or any other Financing Document or (vii) amend this Section 8.05. SECTION 8.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "SUBPARTICIPANT") subparticipating interests in its rights and obligations under this Agreement. In the event of any such grant by a Bank of a subparticipating interest to a Subparticipant, whether or not upon notice to the Company and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Company and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a subparticipating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Company hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such subparticipation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii), (iv) or (v) of Section 8.05 without the consent of the Subparticipant. The Company agrees that each Subparticipant shall, to the extent provided in its subparticipation agreement and subject to subsection (e) below, be entitled to the benefits of Section 2.07 with respect to its subparticipating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a subparticipating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial participation in the Related Documents of not less than $15,000,000, unless the Company shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank) of all, of its rights and obligations under 37 Agreement and the other Financing Documents, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit J hereto executed by such Assignee and such transferee Bank, with (and subject to) the subscribed consent of the Company, which shall not be unreasonably withheld, and the Issuing Bank, which may consent or not in its sole discretion; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent of the Company shall be required; and provided further that, unless the Company shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank, the participation in the Related Documents of such transferor Bank after giving effect to such assignment (together with the participations of its affiliates) shall not be less than $15,000,000; and provided further that such assignment shall be accompanied by a ratably equivalent assignment of the rights and obligations of the transferor Bank (and its affiliates) under each of the other Related Documents. Upon the consummation of any assignment pursuant to this subsection (c) and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank as set forth in any instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and the other Financing Documents to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Sections 2.07 and 8.13 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company's prior written consent or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 8.07. Collateral. Each of the Banks represents to the Administrative Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. 38 SECTION 8.08. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 8.09. Counterparts; Integration. 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. This Agreement, together with the other Financing Documents, constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 8.10. Judicial Proceedings. (a) Consent to Jurisdiction. The Company irrevocably submits to the jurisdiction of any federal court sitting in New York City, and in the event that jurisdiction cannot be obtained or maintained in a federal court, to the jurisdiction of any New York State court sitting in New York City over any suit, action or proceeding arising out of or relating to this Agreement or any other Financing Document. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that any suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Company agrees that a final judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding upon it and will be given effect in Bermuda to the fullest extent permitted by applicable law and may be enforced in any federal or New York State court sitting in New York City (or any other court to the jurisdiction of which the Company is or may be subject) by a suit upon such judgment, provided that service of process is effected upon it in one of the manners specified herein or as otherwise permitted by law. (b) Appointment of Agent for Service of Process. The Company hereby irrevocably designates and appoints CT Corporation System having an office on the date hereof at 1633 Broadway, New York, New York 10019 as its authorized agent, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City. The Company represents and warrants that such agent has agreed in writing to accept such appointment and that a true copy of such designation and acceptance has been delivered to the Administrative Agent. Said designation and appointment shall be irrevocable until each Reimbursement Obligation and each other amount payable hereunder shall have been paid in full in accordance with the provisions hereof. If such agent shall cease so to act, the Company covenants and agrees to designate irrevocably and appoint without delay another such agent satisfactory to the Administrative Agent and to deliver promptly to the 39 Administrative Agent evidence in writing of such other agent's acceptance of such appointment. (c) Service of Process. The Company hereby consents to process being served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City by service of process upon the agent of the Company for service of process appointed as provided in subsection (b) above; provided that, to the extent lawful and possible, notice of said service upon such agent shall be mailed by registered or certified air mail, postage prepaid, return receipt requested, to the Company at its address specified on the signature page hereof or to any other address of which the Company shall have given written notice to the Administrative Agent. The Company irrevocably waives, to the fullest extent permitted by law, all claims of error by reason of any such service in such manner and agrees that such service shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding and shall, to the fullest extent permitted by law, be taken and held to be valid and personal service upon and personal delivery to the Company. (d) No Limitation on Service or Suit. Nothing in this Section 8.10 shall affect the right of the Administrative Agent or any Bank to serve process in any other manner permitted by law or limit the right of the Administrative Agent or any Bank to bring proceedings against the Company in the courts of any jurisdiction or jurisdictions. SECTION 8.11. Judgment Currency. If, under any applicable law and whether pursuant to a judgment being made or registered against the Company or for any other reason, any payment under or in connection with this Agreement or any other Financing Document is made or satisfied in a currency (the "Other Currency") other than that in which the relevant payment is due (the "Required Currency"), then, to the extent that the payment (when converted into the Required Currency at the rate of exchange on the date of payment or, if it is not practicable for the party entitled thereto (the "Payee") to purchase the Required Currency with the Other Currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for it to do so) actually received by the Payee falls short of the amount due under the terms of this Agreement, the Company shall, to the extent permitted by law, as a separate and independent obligation, indemnify and hold harmless the Payee against the amount of such short-fall. For the purpose of this Section, "rate of exchange" means the rate at which the Payee is able on the relevant date to purchase the Required Currency with the Other Currency and shall take into account any premium and other costs of exchange. 40 SECTION 8.12. WAIVER OF JURY TRIAL. THE COMPANY, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 8.13. Taxes. (a) For purposes of this Section 8.13, the following terms have the following meanings: "TAXES" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings of any nature with respect to any payment by the Company pursuant to this Agreement or under any Financing Documents, and all liabilities with respect thereto, excluding in the case of each Bank and the Administrative Agent, taxes imposed on its net income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located (all such excluded taxes being hereinafter referred to as "DOMESTIC TAXES"). "OTHER TAXES" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Financing Documents or from the execution, delivery, registration or enforcement of, or otherwise with respect to, this Agreement or any Financing Documents. (b) Any and all payments by the Company to or for the account of any Bank or the Administrative Agent hereunder or under any Financing Documents shall be made without deduction for any Taxes or Other Taxes; provided that, if the Company shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions or withholdings applicable to additional sums payable under this Section 8.13) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions or withholdings, (iii) the Company shall pay the full amount deducted or withheld to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Company shall furnish to the Administrative Agent, at its address referred to in Section 8.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Company agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, 41 any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.13), whether or not legally or correctly imposed, paid by such Bank or the Administrative Agent (as the case may be) in good faith and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. In addition, the Company agrees to indemnify each Bank and the Administrative Agent for all Domestic Taxes (calculated based on a hypothetical basis at the maximum marginal rate for a corporation) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto to the extent such Domestic Taxes result from the payment of or indemnification for Taxes, Other Taxes or Domestic Taxes pursuant to this Section 8.13. This indemnification shall be paid within 15 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank and the Administrative Agent shall, at the request of the Company, use reasonable efforts (consistent with applicable legal and regulatory restrictions) to file any certificate or document requested by the Company if the making of such a filing would avoid the need for or reduce the amounts payable to or for the account of such Bank or the Administrative Agent (as the case may be) pursuant to this Section 8.13 which may thereafter accrue and would not, in the sole judgment of such Bank or the Administrative Agent, require such Bank or the Administrative Agent to disclose any confidential or proprietary information or be otherwise disadvantageous to such Bank or the Administrative Agent. (e) Notwithstanding the foregoing, nothing in this Section 8.13 shall interfere with the rights of any Bank or the Administrative Agent, as the case may be, to conduct its fiscal or tax affairs in such manner as it deems fit. SECTION 8.14. Confidential Information. The Administrative Agent and each Bank agrees to keep any information delivered or made available by the Company pursuant to this Agreement confidential from anyone other than persons employed or retained by such Bank and its affiliates who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or the Administrative Agent, (b) subject to provisions substantially similar to those contained in this Section 8.14, to any other Person if reasonably incidental to the administration of the credit facility contemplated hereby, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation relating to the Related Documents to which the Administrative Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Administrative Agent's legal counsel and independent auditors and (i) subject to 42 provisions substantially similar to those contained in this Section 8.14, to any actual or proposed Participant or Assignee. Notwithstanding the foregoing, this Section 8.14 shall not apply to information that is or becomes publicly available, information that was available to a Bank on a non-confidential basis prior to its disclosure hereunder and information which becomes available to a Bank on a non-confidential basis from a source that is not, to such Bank's knowledge, subject to a confidentiality agreement with the Company. SECTION 8.15. References in Other Financing Documents. The parties hereto, comprising all parties to each of the other Financing Documents, agree that from and after the Restatement Date, all references in the other Financing Documents to the Original Agreement shall be deemed to refer to this Amended Agreement, as the same may be further amended from time to time in accordance with the provisions hereof and thereof, and all references therein to the Financing Documents (or any of them) shall be to the Financing Documents as defined herein. SECTION 8.16. Amendment to Pledge Agreement. The parties hereto, comprising all parties to the Pledge Agreement, agree that the Pledge Agreement is amended by deleting Section 21 thereof. SECTION 8.17. Substitution of Bank. If any Bank has demanded compensation under Section 2.07 or 8.13, the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Banks) mutually satisfactory to the Borrower, the Administrative Agent (whose consent shall not be unreasonably withheld) and the issuing banks under the Related Documents to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto, the outstanding loans of such Bank and assume the commitment and letter of credit liabilities of such Bank (and its affiliates) under each of the Related Documents, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding loans and funded letter of credit liabilities plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's commitments and letter of credit liabilities plus such amount, if any, as would be payable pursuant to the funding loss indemnities in the Related Documents if the outstanding loans of such Bank were prepaid in their entirety on the date of consummation of such assignment. SECTION 8.18. Amendment to Custodian Agreement. The parties hereto, comprising all parties to the Custodian Agreement, agree that Section 27 of the Custodian Agreement is amended to read in its entirety as follows: This Agreement shall be governed by and construed in accordance with the laws of Bermuda and each of the parties hereto submit to the non- exclusive jurisdiction of the Bermuda courts; 43 provided that matters relating to the perfection of a security interest in the Pledge Account and any assets held therein, the effect of perfection or non-perfection of such a security interest and the priority of such a security interest shall be governed by the substantive laws of the State of New York (not including conflict-of -law rules). 44 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. A.C.E. INSURANCE COMPANY, LTD. By____________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) 295-5221 The Common Seal of A.C.E. Insurance Company, Ltd. was hereunto affixed in the presence of: Director _______________________________ Director/Secretary _______________________________ 45 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By_________________________ Title: MELLON BANK, N.A. By_________________________ Title: Managing Agent CITIBANK, N.A. By_________________________ Title: Co-Agents THE BANK OF NEW YORK By_________________________ Title: THE BANK OF TOKYO-MITSUBISHI, LTD. By_________________________ Title: BARCLAYS BANK PLC By_________________________ Title: 46 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By_________________________ Title: By_________________________ Title: FLEET NATIONAL BANK By_________________________ Title: ING BANK, N.V. By_________________________ Title: By_________________________ Title: ROYAL BANK OF CANADA By_________________________ Title: Other Banks THE BANK OF BERMUDA, LTD. By_________________________ Title: 47 BANQUE NATIONALE DE PARIS By_________________________________ Title: By:________________________________ Title: THE CHASE MANHATTAN BANK By_________________________________ Title: CREDIT LYONNAIS NEW YORK BRANCH By_________________________________ Title: DRESDNER BANK A.G., NEW YORK BRANCH AND CAYMAN ISLANDS BRANCH By_________________________________ Title: By:________________________________ Title: THE FIRST NATIONAL BANK OF CHICAGO By_________________________________ Title: 48 STATE STREET BANK AND TRUST COMPANY By_________________________________ Title: 49 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and Administrative Agent By_________________________________ Title 60 Wall Street New York, New York 10260-0060 Attention: Glenda Irving Telex number: 177615 Facsimile number: 212-648-5249 50 SCHEDULE I PARTICIPATION OF BANKS Banks Participation % - ----- --------------- Morgan Guaranty Trust Company of New York .096153846 Mellon Bank, N.A. .096153846 Managing Agent Citibank, N.A. .080769231 Co-Agents The Bank of New York .073076923 The Bank of Tokyo-Mitsubishi, Ltd. .073076923 Barclays Bank PLC .073076923 Deutsche Bank AG, New York and/or Cayman Islands Branch .073076923 Fleet National Bank .073076923 ING Bank, N.V. .073076923 Royal Bank of Canada .073076923 Other Banks The Bank of Bermuda, Ltd. .030769231 Banque Nationale de Paris .030769231 The Chase Manhattan Bank .030769231 Credit Lyonnais New York Branch .030769231 Dresdner Bank A.G., New York and Cayman Islands Branch .030769231 The First National Bank of Chicago .030769231 State Street Bank and Trust Company .030769231 ---------- 100% ---------- 51 EXHIBIT A LETTERS OF CREDIT
- ------------------------------------------------------------------------------------------------------------------------------------ Amount Termination Date Beneficiary Applicant - ------------------------------------------------------------------------------------------------------------------------------------ (pound)70,300,000 31 December 2002 Society and Council of Lloyd's ACE Capital Limited (pound)149,300,000* c/o Corporate Membership Unit - ------------------------------------------------------------------------------------------------------------------------------------ (pound)371,875 31 December 2002 Society and Council of Lloyd's ACE Staff Corporate Member (pound)522,250* c/o Corporate Membership Unit Limited - ------------------------------------------------------------------------------------------------------------------------------------ (pound)455,000** 31 December 2002 Society and Council of Lloyd's ACE Capital II Limited - ------------------------------------------------------------------------------------------------------------------------------------ (pound)3,406,216 31 December 2002 Council of Lloyd's ZIC Lloyd's Underwriting Limited - ------------------------------------------------------------------------------------------------------------------------------------
* Increased amount effective January 1, 1998. ** Letter of Credit effective January 1, 1998. 52 EXHIBIT E FORM OF OPINION OF DAVIS POLK & WARDWELL December 11, 1997 To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260-0060 Ladies and Gentlemen: We have participated in the preparation of (i) the Amended and Restated Reimbursement Agreement (the "Reimbursement Agreement") dated as of December 11, 1997 among A.C.E. Insurance Company, Ltd., a Bermuda limited liability company (the "Company"), the Banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Issuing Bank and as Administrative Agent (the "Administrative Agent") and (ii) the Pledge Agreement (the "Pledge Agreement") dated as of November 22, 1996 between the Company and the Administrative Agent, and have acted as special United States counsel for the Administrative Agent for the purpose of rendering this opinion pursuant to Section 3.01(f) of the Reimbursement Agreement. Terms defined in the Reimbursement Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing and subject to the qualifications set forth below, we are of the opinion that: 53 1. The execution, delivery and performance by the Company of the Reimbursement Agreement and the Pledge Agreement are within the Company's corporate powers and have been duly authorized by all necessary corporate action. 2. The Reimbursement Agreement and the Pledge Agreement constitute valid and binding agreements of the Company, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. The foregoing opinion is qualified to the extent that certain of the remedies provided in the Reimbursement Agreement and the Pledge Agreement may be limited or rendered unenforceable under applicable law and judicial decisions, but such law and judicial decisions do not, we believe, make the remedies provided for therein inadequate for the practical realization of the benefits intended thereby. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the federal laws of the United States of America. In giving the foregoing opinion we have relied, with your consent and without independent investigation, as to all matters governed by the laws of Bermuda, upon the opinion of Conyers, Dill & Pearman, special legal counsel to the Company, dated the date hereof, a copy of which has been delivered to you pursuant to Section 3.01(d) of the Reimbursement Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person without our prior written consent. Very truly yours, 2 EXHIBIT G FORM OF LETTER OF CREDIT EXTENSION REQUEST ------------------------------------------ ___________, ____ Morgan Guaranty Trust Company of New York, as Issuing Bank c/o J. P. Morgan Services Inc. P.O. Box 6071 Newark, DE 19714-9857 Attention: International Trade Services Re: Amended and Restated Reimbursement Agreement dated as of December 11, 1997, as amended from time to time (the "Agreement"), among A.C.E. Insurance Company, Ltd. (the "Company"), the Banks listed therein and Morgan Guaranty Trust Company of New York, as Administrative Agent and Issuing Bank. Capitalized terms used herein that are defined in the Agreement shall have the meanings therein defined. 1. Pursuant to Section 2.02 of the Agreement, ___________________ (the "Applicant") hereby requests that the Issuing Bank extend a Letter of Credit in accordance with the information annexed hereto as Annex A hereto. 2. The Company hereby certifies that on the date hereof and on the date of extension set forth in Annex A, in each case both before and after giving effect to the extension requested hereby: (a) no Default has occurred and is continuing; (b) each of the representations and warranties of the Company contained in the Agreement and each other Financing Document is true on the date hereof, except representations and warranties which expressly refer to an earlier date in which case the same shall be true on and as of such earlier date; (c) after giving effect to the extension requested hereby, the aggregate amount of the Letter of Credit Liabilities will not exceed the Letter of Credit Commitment; and (d) the Letter of Credit requested hereby is being extended solely as security to support the Applicant's underwriting business at the Society and Corporation of Lloyd's provided in accordance with the requirements of the Society and Corporation of Lloyd's. IN WITNESS WHEREOF, the Applicant has caused this Certificate to be executed by its duly authorized officer as of the date and year first written above. [APPLICANT] By:___________________________ Name:_________________________ Title:________________________ A.C.E. INSURANCE COMPANY, LTD. By:_____________________________ Name: Title: 2 Annex A LETTER OF CREDIT INFORMATION 1. Name of Beneficiary: ________________________________________________________________ 2. Letter of Credit Number: ________________________________________________________________ ________________________________________________________________ 3. Maximum amount available under Letter of Credit: $___________. 4. Effective Date of Extension: January 1, _____. 5. Extended Termination Date: December 31, _____. 3 EX-10.33 7 TERM LOAN AGREEMENT EXHIBIT 10.33 EXECUTION COPY $250,000,000 TERM LOAN AGREEMENT dated as of December 11, 1997 among ACE US Holdings, Inc., as Borrower, ACE Limited, as Guarantor, The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Administrative Agent ________________ J.P. Morgan Securities Inc. and Mellon Bank N.A., Co-Syndication Agents Morgan Guaranty Trust Company of New York, Documentation Agent TABLE OF CONTENTS _____________
Page ---- ARTICLE 1 Definitions Section 1.01. Definitions................................................................. 1 Section 1.02. Accounting Terms and Determinations......................................... 12 Section 1.03. Types of Borrowings......................................................... 13 Section 1.04. United States Dollars....................................................... 13 ARTICLE 2 The Loans Section 2.01. Commitments to Lend......................................................... 13 Section 2.02. Notice of Borrowing......................................................... 13 Section 2.03. Notice of Banks; Funding of Loans........................................... 14 Section 2.04. Notes....................................................................... 14 Section 2.05. Amortization of Loans....................................................... 15 Section 2.06. Interest Rates.............................................................. 15 Section 2.07. Fees........................................................................ 17 Section 2.08. Mandatory Termination of Commitments........................................ 17 Section 2.09. Method of Electing Interest Rates........................................... 17 Section 2.10. Optional Prepayments........................................................ 19 Section 2.11. General Provisions as to Payments........................................... 19 Section 2.12. Funding Losses.............................................................. 20 Section 2.13. Computation of Interest and Fees............................................ 20 Section 2.14. Regulation D Compensation................................................... 20 ARTICLE 3 Conditions Section 3.01. Closing..................................................................... 21 Section 3.02. Borrowing................................................................... 22 ARTICLE 4 Representations and Warranties Section 4.01. Corporate Existence and Power............................................... 24 Section 4.02. Corporate and Governmental Authorization; No Contravention............................................................................ 24
PAGE ---- Section 4.03. Binding Effect.............................................................. 24 Section 4.04. Financial Information....................................................... 24 Section 4.05. Litigation.................................................................. 26 Section 4.06. ERISA....................................................................... 26 Section 4.07. Taxes....................................................................... 27 Section 4.08. Not an Investment Company................................................... 27 Section 4.09. Full Disclosure............................................................. 27 Section 4.10. Compliance with Laws........................................................ 27 ARTICLE 5 Covenants Section 5.01. Information................................................................. 28 Section 5.02. Payment of Obligations...................................................... 29 Section 5.03. Maintenance of Property; Insurance.......................................... 30 Section 5.04. Conduct of Business and Maintenance of Existence............................ 30 Section 5.05. Compliance with Laws........................................................ 30 Section 5.06. Inspection of Property, Book and Records.................................... 31 Section 5.07. Leverage.................................................................... 31 Section 5.08. Debt........................................................................ 31 Section 5.09. Minimum Tangible Net Worth.................................................. 32 Section 5.10. Negative Pledge............................................................. 32 Section 5.11. Consolidations, Mergers and Sales of Assets................................. 33 Section 5.12. Use of Proceeds............................................................. 33 Section 5.13. ERISA....................................................................... 33 Section 5.14. Restricted Payments......................................................... 34 Section 5.15. Investments; Acquisitions................................................... 34 Section 5.16. Transactions with Affiliates................................................ 34 Section 5.17. No Modification of Documents Without Consent................................ 34 Section 5.18. Debt Service Coverage Ratio................................................. 35 ARTICLE 6 Defaults Section 6.01. Events of Default........................................................... 35 Section 6.02. Notice of Default........................................................... 39
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PAGE ---- ARTICLE 7 The Agents Section 7.01. Appointment and Authorization..................................................... 39 Section 7.02. Administrative Agent and Affiliates............................................... 39 Section 7.03. Action by Administrative Agent.................................................... 39 Section 7.04. Consultation with Experts......................................................... 39 Section 7.05. Liability of Administrative Agent................................................. 39 Section 7.06. Indemnification................................................................... 40 Section 7.07. Credit Decision................................................................... 40 Section 7.08. Successor Administrative Agent.................................................... 40 Section 7.09. Administrative Agent's Fee........................................................ 41 Section 7.10. Other Agents...................................................................... 41 ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determination Interest Rate Inadequate or Unfair................................................................................... 41 Section 8.02. Illegality........................................................................ 42 Section 8.03. Increased Cost and Reduced Return................................................. 42 Section 8.04. Taxes............................................................................. 44 Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans......................... 46 Section 8.06. Substitution of Bank.............................................................. 47 ARTICLE 9 Guaranty Section 9.01. The Guaranty...................................................................... 47 Section 9.02. Guaranty Unconditional............................................................ 47 Section 9.03. Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances.................................................................... 48 Section 9.04. Waiver by the Guarantor........................................................... 49 Section 9.05. Subrogation....................................................................... 49 Section 9.06. Stay of Acceleration.............................................................. 49
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PAGE ---- ARTICLE 10 Miscellaneous Section 10.01. Notices................................................. 49 Section 10.02. No Waivers.............................................. 50 Section 10.03. Expenses; Indemnification............................... 50 Section 10.04. Sharing; Set-Offs....................................... 50 Section 10.05. Amendments and Waivers.................................. 51 Section 10.06. Successors and Assigns.................................. 52 Section 10.07. Collateral.............................................. 53 Section 10.08. Governing Law........................................... 53 Section 10.09. Counterparts; Integration; Effectiveness................ 54 Section 10.10. Judicial Proceedings.................................... 54 Section 10.11. Judgment Currency....................................... 55 Section 10.12. WAIVER OF JURY TRIAL.................................... 56 Section 10.13. Confidentiality......................................... 56
EXHIBIT A - NOTE EXHIBIT B - FORM OF PLEDGE AGREEMENT EXHIBIT C - FORM OF SUBORDINATED LOAN AGREEMENT EXHIBIT D - FORM OF MAPLES AND CALDER OPINION EXHIBIT E - FORM OF CONYERS, DILL & PEARMAN OPINION EXHIBIT F - FORM OF MAYER, BROWN & PLATT OPINION EXHIBIT G - FORM OF DAVIS POLK & WARDWELL OPINION EXHIBIT H - ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT I - LETTER FROM CT CORPORATION SYSTEM iv TERM LOAN AGREEMENT AGREEMENT dated as of December 11, 1997 among ACE US HOLDINGS, INC., ACE LIMITED, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. The parties hereto agree as follows: ARTICLE 1 Definitions Section 1.01. Definitions. The following terms, as used herein, have the following meanings: "ACE INSURANCE" means A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, and its successors. "ACQUISITION" means an acquisition by the Borrower or any of its Subsidiaries of a company, a division, a location or a line of business or of all or substantially all of the assets of any of the foregoing. "ADMINISTRATIVE AGENT" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under the Financing Documents, and its successors in such capacity. "AFFILIATE" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "CONTROLLING PERSON") or (ii) any Person (other than the Borrower or a Subsidiary of the Borrower) which is controlled by or is under common control with a Controlling Person; provided that no Relevant Party shall be an Affiliate for purposes hereof. As used herein, the term "CONTROL" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether though the ownership of voting securities, by contract or otherwise. "AGENT" means each of the Administrative Agent, the Documentation Agent, the Syndication Agents, the Managing Agent and the Co-Agents, and "AGENTS" means any combination of them, as the context may require. "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "ASSIGNEE" has the meaning set forth in Section 10.06. "BANK" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 10.06, and their respective successors. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "BASE RATE LOAN" means a Loan which bears interest at the Base Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or the provisions of Section 2.09 or Article 8. "BENEFIT ARRANGEMENT" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the Borrower's ERISA Group. "BERMUDA COMPANIES LAW" means The Companies Act 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "BORROWER" means ACE US Holdings, Inc., a Delaware corporation, and its successors. "BORROWING" has the meaning set forth in Section 1.03. "BORROWING DATE" means the date of the Borrowing hereunder. "CASH AVAILABLE" means, for any period, the sum (without duplication) of (i) the excess over $3,000,000 of the cash and cash equivalents held by the Borrower on the first day of such period, (ii) cash dividends, cash interest payments, and other cash income received by the Borrower during such period, (iii) the cash proceeds to the Borrower of loans made under the Subordinated 2 Loan Agreement during such period and (iv) the unused amount of the "Commitment" (as defined in the Subordinated Loan Agreement) at the end of such period. "CLOSING DATE" means the date on or after the Effective Date and on or before the Borrowing Date on which the Administrative Agent shall have received the documents specified in or pursuant to Section 3.01. "CO-AGENT" means each Bank designated as a Co-Agent on the signature pages hereof, in its capacity as co-agent in respect of this Agreement. "COMMITMENT" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof. "CONSOLIDATED DEBT" means at any date the Debt of the Guarantor and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "CONSOLIDATED NET INCOME" means, for any period, the net income of the Guarantor and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "CONSOLIDATED SUBSIDIARY" means at any date, with respect to any Person, any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED TANGIBLE NET WORTH" means at any date the consolidated stockholders' equity of the Guarantor and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date; provided that such determination for purposes of Sections , and shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial Accounting Standards Board. For purposes of this definition "INTANGIBLE ASSETS" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to June 30, 1997 in the book value of any asset owned by the Guarantor or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. 3 "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, solely for purposes of Section 5.10 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person, provided that the term "DEBT" shall not include obligations of an insurance company under insurance policies or surety bonds issued by it. "DEBT SERVICE" means, for any period, the sum of (i) the interest expense of the Borrower for such period and (ii) scheduled payments of principal on Debt of the Borrower due during such period. "DEBT SERVICE COVERAGE RATIO" means, at any date, the ratio of Cash Available for the period of four consecutive fiscal quarters ended at such date (or, if shorter, the period from the Borrowing Date through such date) to Debt Service for such period. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DOCUMENTATION AGENT" means Morgan Guaranty Trust Company of New York in its capacity as documentation agent in respect of this Agreement. 4 "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "EFFECTIVE DATE" means the date this Agreement becomes effective in accordance with Section 10.09. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means, with respect to any Person, such Person, any Subsidiary of such Person and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with such Person or any such Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "EURO-DOLLAR LOAN" means a Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election. "EURO-DOLLAR MARGIN" has the meaning set forth in Section 2.06. "EURO-DOLLAR RATE" means a rate of interest determined pursuant to Section on the basis of a London Interbank Offered Rate. 5 "EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "EUROCURRENCY LIABILITIES" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "FINANCING DOCUMENTS" means this Agreement, the Notes, the Pledge Agreement and the Subordinated Loan Agreement. "GROUP OF LOANS" means at any time a group of Loans consisting of (i) all Base Rate Loans which are outstanding at such time or (ii) all Euro-Dollar Loans having the same Interest Period at such time; provided that, if a Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to 6 purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "GUARANTEE" used as a verb has a corresponding meaning. "GUARANTOR" means ACE Limited, a Cayman Islands company limited by shares, and its successors. "INDEMNITEE" has the meaning set forth in Section 10.03(b). "INFORMATION MEMORANDUM" means the confidential information memorandum dated November 1997 furnished to the Banks in connection with this Agreement. "INTEREST PERIOD" means, with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the Notice of Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro- Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro- Dollar Business Day of a calendar month; and (c) no Interest Period applicable to any Loan shall extend beyond any Principal Payment Date unless the aggregate principal amount of Loans represented by Base Rate Loans, or by Euro-Dollar Loans having Interest Periods that will expire on or before such Principal Payment Date, equals or exceeds the amount of principal due on such Principal Payment Date. 7 "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "INVESTMENT" means any investment in any Person, whether by means of share purchase, capital contribution, loan, Guarantee, time deposit or otherwise (but not including any demand deposit). "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "LOAN" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "LOAN" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.01(b). "MANAGING AGENT" means Citibank, N.A. in its capacity as managing agent in respect of this Agreement. "MATERIAL DEBT" means Debt (other than the Notes) of the Guarantor and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $25,000,000. "MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt and/or current payment obligations in respect of Derivatives Obligations of the Guarantor and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $25,000,000. "MATERIAL INSURANCE COMPANY" means each of ACE Insurance, Westchester Fire Insurance Company, Westchester Surplus Lines Insurance Company and Industrial Underwriters Insurance Company. "MATERIAL PLAN" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $25,000,000. 8 "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the Borrower's ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the Borrower's ERISA Group during such five year period. "NOTES" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "NOTE" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" has the meaning set forth in Section 2.02. "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.09. "OBLIGORS" means the Borrower and the Guarantor. "OTHER TAXES" has the meaning set forth in Section 8.04(b). "PARENT" means, with respect to any Bank, any Person controlling such Bank. "PARTICIPANT" has the meaning set forth in Section 10.06(b). "PERSON" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PLAN" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the Borrower's ERISA Group for employees of any member of the Borrower's ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the Borrower's ERISA Group for employees of any Person which was at such time a member of the Borrower's ERISA Group. "PLEDGE AGREEMENT" means a Pledge Agreement dated as of the Closing Date between the Borrower and the Administrative Agent, substantially in the 9 form of Exhibit B hereto, as executed and delivered and as the same may be amended from time to time in accordance with the provisions hereof and thereof. "PRICING SCHEDULE" means the Schedule hereto titled as such. "PRIME RATE" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "PRINCIPAL PAYMENT DATE" means each anniversary of the Borrowing Date from and including the first anniversary thereof to and including the seventh anniversary thereof. "REFERENCE BANKS" means the principal London offices of Deutsche Bank AG, Mellon Bank N.A. and Morgan Guaranty Trust Company of New York. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "RELATED DOCUMENTS" means (i) the Financing Documents, (ii) the "Financing Documents" as defined in each of the Five-Year Credit Agreement and the 364-Day Credit Agreement, each of even date herewith, among the Guarantor, as borrower, the guarantors party thereto, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as administrative agent for such Banks, and (iii) the "Financing Documents" as defined in the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among ACE Insurance, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as issuing bank and administrative agent for such Banks, in each case as the same may be amended and in effect from time to time. "RELEVANT PARTY" means each of the Obligors and ACE Insurance. "REQUIRED BANKS" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "RESTRICTED PAYMENT" means (i) any dividend or other distribution on any shares of the Borrower's capital stock (except dividends payable solely in shares of its capital stock other than mandatorily redeemable preferred stock) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of the Borrower's capital stock or (b) any option, warrant or other right to acquire shares of the Borrower's capital stock or (iii) any payment of principal 10 of or, if at the time of such payment any Default exists, interest on Debt incurred in reliance on clause (ii) or (iii) of Section 5.08(b). "STOCK PURCHASE AGREEMENT" means the Stock Purchase Agreement dated as of September 18, 1997, between Talegen Holdings, Inc., a Delaware corporation, and the Guarantor as amended and in effect from time to time; provided that any such amendment from the form thereof heretofore furnished to each of the Banks shall be effective for purposes of references thereto in this Agreement only if such amendment shall have received the written consent of the Required Banks (which shall not be unreasonably withheld). "SUBORDINATED LOAN AGREEMENT" means a subordinated loan agreement dated as of the Borrowing Date between ACE Insurance and the Borrower in substantially the form of Exhibit C hereto, as executed and delivered and as the same may be amended from time to time in accordance with the provisions hereof and thereof. "SUBSIDIARY" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "SUBSIDIARY" means a Subsidiary of the Guarantor. "SYNDICATION AGENT" means either J.P. Morgan Securities Inc. or Mellon Bank N.A. in its capacity as a syndication agent in respect of this Agreement, and "SYNDICATION AGENTS" means both of them. "TAXES" has the meaning set forth in Section 8.04(a). "TEMPORARY CASH INVESTMENT" means any Investment in (i) direct obligations of the United States or any agency thereof or obligations guaranteed by the United States or any agency thereof, (ii) commercial paper rated at least A-1 by Standard & Poor's Ratings Services and P-1 by Moody's Investors Services, Inc., (iii) time deposits with, including certificates of deposit issued by, any office located in the United States of any bank or trust company which is organized or licensed under the laws of the United States or any State thereof and has capital, surplus and undivided profits aggregating at least $1,000,000,000 or (iv) repurchase agreements with respect to securities described in clause (i) above entered into an office of a bank or trust company meeting the criteria specified in clause (iii) above. "TERMINATION DATE" means the date on which the Commitments terminate pursuant to Section 2.08 or 6.01. 11 "UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA (or other applicable standard), exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Borrower's ERISA Group to the PBGC or any other Person under Title IV of ERISA. "WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means, with respect to any Person, any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. "WSG" means Westchester Specialty Group, Inc., a Delaware corporation, and the owner of all outstanding capital stock of Westchester Fire Insurance Company, Westchester Surplus Lines Insurance Company and Industrial Underwriters Insurance Company, all of which are engaged in the property and casualty insurance business. "WSG ACQUISITION" means the acquisition by the Borrower of WSG pursuant to the Stock Purchase Agreement. Section 1.02. 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 United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Guarantor's independent public accountants) with the most recent audited consolidated financial statements of the Guarantor and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Obligors notify the Administrative Agent that the Obligors wish to amend any covenant in Article 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 Obligors that the Required Banks wish to amend Article for such purpose), then 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, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Obligors and the Required Banks. 12 Section 1.03. Types of Borrowings. The term "BORROWING" denotes the aggregation of the Loans of the respective Banks to be made to the Borrower pursuant to Article on a single date designated pursuant to Section . The Borrowing is classified for purposes of this Agreement by reference to the pricing of Loans comprising the Borrowing (e.g., "EURO-DOLLAR BORROWING" is used to describe the Borrowing hereunder if the Borrowing is comprised of Euro-Dollar Loans). Section 1.04. United States Dollars. Each reference herein to "DOLLARS" or "$" shall refer to United States Dollars. ARTICLE 2 The Loans Section 2.01. Commitments to Lend. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make a loan to the Borrower pursuant to this Section on a single date designated pursuant to Section 2.02, in an amount equal to the amount of its Commitment. Section 2.02. Notice of Borrowing. The Borrower shall give the Administrative Agent notice (a "NOTICE OF BORROWING") not later than 10:30 A.M. (New York City time) on (x) the date of the Borrowing if the Borrowing is a Base Rate Borrowing and (y) the third Euro-Dollar Business Day before the Borrowing if the Borrowing is a Euro-Dollar Borrowing, specifying: (a) the date of the Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) whether the Loans comprising the Borrowing are to bear interest initially at the Base Rate or a Euro-Dollar Rate, and (c) in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.03. Notice of Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and such Notice of Borrowing shall not thereafter be revocable by the Borrower. 13 (b) Not later than 12:00 Noon (New York City time) on the date of the Borrowing, each Bank shall make available its share of the Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 10.01. Unless the Administrative Agent determines that any applicable condition specified in Article has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) Unless the Administrative Agent shall have received notice from a Bank prior to the date of the Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of the Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of the Borrowing in accordance with subsection of this Section 2.03(b) of this Section 2.03 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable thereto pursuant to Section 2.06 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in the Borrowing for purposes of this Agreement. Section 2.04. Notes. (a) The Loans of each Bank shall be evidenced by a Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "NOTE" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01, the Administrative Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and type of each Loan made by it and the date and amount 14 of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of any Obligor hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.05. Amortization of Loans. The Loans shall mature in seven installments of principal as set forth below. On each Principal Payment Date, the Borrower shall repay an aggregate principal amount of the Loans equal to the applicable amount indicated in the table below.
Principal Payment Date Amortization Amount -------------------------------------------------- Nos. 1-2 $ 10,000,000 -------------------------------------------------- Nos. 3-4 $ 25,000,000 -------------------------------------------------- No. 5 $ 32,500,000 -------------------------------------------------- No. 6 $ 37,500,000 -------------------------------------------------- No. 7 $110,000,000 --------------------------------------------------
Each such payment of principal shall be made together with accrued interest thereon. Each such payment shall be applied to such Group or Groups of Loans as the Borrower may designate by not less than three Euro-Dollar Business Days' notice to the Administrative Agent (or, failing such designation, as determined by the Administrative Agent), and shall be applied ratably to the Loans of the several Banks included in any such Group. Section 2.06. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable at maturity, quarterly in arrears on the last day of each March, June, September and December prior to maturity, and with respect to the principal amount of any Base Rate Loan converted to a Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. 15 (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "EURO-DOLLAR MARGIN" means a rate per annum determined daily in accordance with the Pricing Schedule. The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin plus the London Interbank Offered Rate applicable to such Loan at the date of such payment was due and (ii) the sum of 2% plus the Euro-Dollar Margin plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Reference Banks are offered to such Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (d) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. 16 (e) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section 2.06. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.07. Fees. (a) The Borrower shall pay to the Administrative Agent for the account of the Banks ratably a ticking fee at the rate of 0.06% per annum. Such ticking fee shall accrue from and including the date hereof to but excluding the Termination Date on the aggregate amount of the Commitments and shall be payable on the Termination Date. (b) The Borrower shall pay to the Administrative Agent for the account of the Banks in the proportions heretofore mutually agreed a participation fee in the amount heretofore mutually agreed. Such participation fee shall be payable on the Borrowing Date. SECTION 2.08. Mandatory Termination of Commitments. The Commitments shall terminate at the close of business on the earlier of (i) the Borrowing Date and (ii) May 1, 1998. SECTION 2.09. Method of Electing Interest Rates. (a) The Loans included in the Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject to subsection 2.09(d) of this Section and the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, subject to Section 2.12 if any such conversion or continuation is effective on any day other than the last day of an Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "NOTICE OF INTEREST RATE ELECTION") to the Administrative Agent not later than 10:30 A.M. (New York City time) on the third Euro-Dollar Business Day before the conversion or 17 continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each at least $10,000,000 or any larger amount in multiples of $1,000,000 (unless such portion is comprised of Base Rate Loans). If no such notice is timely received before the end of an Interest Period for any Group of Euro-Dollar Loans, the Borrower shall be deemed to have elected that such Group of Loans be converted to Base Rate Loans at the end of such Interest Period. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection 2.09(a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if the Loans resulting from such conversion are to be Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Promptly after receiving a Notice of Interest Rate Election from the Borrower pursuant to subsection 2.09(a) above, the Administrative Agent shall notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. (d) The Borrower shall not be entitled to elect to convert any Loans to, or continue any Loans for an additional Interest Period as, Euro-Dollar Loans if (i) the aggregate principal amounts of any Group of Euro-Dollar Loans created or continued as a result of such election would be less than $10,000,000 or (ii) a Default shall have occurred and be continuing when the Borrower delivers notice of such election to the Administrative Agent. 18 SECTION 2.10. Optional Prepayments. (a) Subject in the case of any Euro-Dollar Loan to Section 2.12, the Borrower may, in the case of the Group of Base Rate Loans, upon at least one Domestic Business Day's notice to the Administrative Agent, or in the case of any Group of Euro-Dollar Loans, upon at least three Euro-Dollar Business Days' notice to the Administrative Agent, prepay such Group, in each case in whole at any time, or from time to time in part in amounts aggregating $10,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied (i) to prepay retably the Loans of the several Banks included in such Group and (ii) to scheduled amortization of the Loans in inverse order of maturity. (b) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.11. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 2:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City and in the lawful currency of the United States, to the Administrative Agent at its address referred to in Section 10.01. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the 19 Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.12. Funding Losses. If the Borrower makes any payment of principal with respect to any Euro-Dollar Loan or any Euro-Dollar Loan is converted to a Base Rate Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(c), or if the Borrower fails to borrow, prepay, convert or continue any Euro-Dollar Loans after notice has been given to any Bank in accordance with Section 2.03(a), 2.09(c) or 2.10(b), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or, in the case of the failure of the Borrower to borrow any Euro-Dollar Loans, prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment, conversion or continuation or failure to borrow, prepay, convert or continue, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense and setting forth the calculation thereof, which certificate shall be conclusive in the absence of manifest error. SECTION 2.13. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and all ticking fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.14. Regulation D Compensation. For so long as any Bank maintains reserves against "EUROCURRENCY LIABILITIES" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered 20 Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section 2.14 (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. ARTICLE 3 CONDITIONS SECTION 3.01 Closing. The closing hereunder shall occur upon receipt by the Administrative Agent of the following documents, each dated the Closing Date unless otherwise indicated: (a) a duly executed Note for the account of each Bank dated on or before the Closing Date complying with the provisions of Section 2.04; (b) the Pledge Agreement, duly executed by the Borrower; (c) the Subordinated Loan Agreement, duly executed by the Borrower and ACE Insurance; (d) an opinion of Maples and Calder, counsel for the Guarantor, substantially in the form of Exhibit D hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (e) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for ACE Insurance, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) an opinion of Mayer, Brown & Platt, New York counsel for the Borrower, the Guarantor and ACE Insurance, substantially in the form of Exhibit 21 F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (g) an opinion of Davis Polk & Wardwell, special United States counsel for the Agents, substantially in the form of Exhibit G hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (h) a letter from CT System in New York, New York, substantially in the form of Exhibit J hereto, evidencing CT System's agreement to act as agent for service of process for the Relevant Parties pursuant to Section 10.10(b); and (i) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the Guarantor and ACE Insurance, the corporate authority for and the validity of the Financing Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Obligors and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowing. The obligation of any Bank to make a Loan on the occasion of the Borrowing is subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to the Termination Date; (b) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02; (c) receipt by the Administrative Agent of payment of the fees payable pursuant to Section 2.07; (d) the fact that, substantially simultaneously with the Borrowing, the Borrower shall have consummated the WSG Acquisition in accordance with the Stock Purchase Agreement without waiver of any condition specified therein; (e) the fact that no development or change shall have occurred, and no information shall have become known, after the date hereof that results in a material change in or deviation from the information contained in the Information Memorandum and that has had or would reasonably be expected to have a 22 material adverse effect on the business, financial position or results of operations of the Obligors or on the rights and remedies of the Administrative Agent and the Banks under the Financing Documents; (f) the fact that, immediately before and after the Borrowing, no Default shall have occurred and be continuing; an d (g) the fact that the representations and warranties of each Obligor contained in this Agreement shall be true on and as of the Borrowing Date; (h) the fact that the chief executive office of the Borrower on the Borrowing Date shall be in Atlanta, Georgia; (i) the fact that no Subsidiary of the Borrower shall be subject to any restriction on its payment of dividends to the Borrower (directly or indirectly) except such restrictions as are imposed by regulatory authorities to whose jurisdiction such Subsidiary is subject; and (j) receipt by the Administrative Agent of (i) an opinion of LeBeouf Lamb Greene & McCrae, L.L.P., special counsel for the Borrower, to the effect that no action or consent by, or in respect of, any insurance regulatory authority to whose jurisdiction the Borrower or any of its Subsidiaries is subject is required in connection with the execution, delivery and performance by the Borrower of the Financing Documents except such as should have been obtained and be in full force and effect, which opinion shall be in form and substance satisfactory to the Administrative Agent, and (ii) a certificate of an executive officer of the Borrower to the effect that the conditions specified in this Section 3.02 shall have been satisfied on the Borrowing Date. The Borrowing hereunder shall be deemed to be a representation and warranty by the Obligors on the Borrowing Date as to the facts specified in clauses (d) through (i) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Obligors jointly and severally represent and warrant that: SECTION 4.01. Corporate Existence and Power. The Borrower and each of its Subsidiaries is a corporation, the Guarantor is a company limited by shares and ACE Insurance is a limited liability company, in each case duly incorporated, 23 validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of the Relevant Parties and the Material Insurance Companies has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its respective business as now conducted. Each of the Borrower and ACE Insurance is a Wholly-Owned Consolidated Subsidiary of the Guarantor. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each Relevant Party of each Financing Document to which it is a party are within its corporate powers, have been duly authorized by all necessary corporate action, require no action or consent by or in respect of, or filing with, any governmental body, agency or official (except such as shall have been obtained and be in full force and effect on the Borrowing Date), and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the charter or by-laws (or any comparable document) of any Relevant Party or of any agreement, judgment, injunction, order, decree or other instrument binding upon any Relevant Party or any of their respective Subsidiaries or result in the creation or imposition of any Lien on any asset of any Relevant Party or any of their respective Subsidiaries . SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of each Obligor and each other Financing Document, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of each Relevant Party party thereto, in each case enforceable in accordance with its terms. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of September 30, 1996 and therelated consolidated statements of operations, shareholders' equity and cash flows for the fiscal year then ended, reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of the Guarantor and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of June 30, 1997 and the related unaudited consolidated statements of operations and cash flows for the nine months then ended, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles (except for the absence of footnotes) applied on a basis consistent with the financial statements referred to in subsection 4.04(a) of this Section, the 24 consolidated financial position of the Guarantor and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine month period (subject to normal year-end adjustments). (c) Since June 30, 1997 there has been no material adverse change in the business, financial position, or results of operations of the Guarantor and its Consolidated Subsidiaries, considered as a whole. (d) The consolidated balance sheet of ACE Insurance and its Consolidated Subsidiaries as of September 30, 1996 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of ACE Insurance and its Consolidated Subsidiaries as of such date and their consolidated results of operations and retained earnings and cash flows for such fiscal year. (e) Since September 30, 1996 there has been no material adverse change in the business, financial position or results of operations of ACE Insurance and its Consolidated Subsidiaries, considered as a whole. (f) The consolidated balance sheet of WSG and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of operations, of shareholder's equity and of cash flows for the fiscal year then ended, all reported on by KPMG Peat Marwick LLP, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of WSG and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (g) The unaudited consolidated balance sheet of WSG and its Consolidated Subsidiaries as of June 30, 1997 and the related unaudited consolidated statements of operations, of shareholder's equity and of cash flows for the six months then ended, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles (except for the absence of footnotes), the consolidated financial position of WSG and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal period. 25 (h) Since June 30, 1997 there has been no material adverse change in the business, financial position or results of operations of WSG and its Consolidated Subsidiaries, considered as a whole. SECTION 4.05. Litigation. Except as disclosed in the notes to the financial statements referred to in Section 4.04(a), there is no action, suit or proceeding pending against, or to the knowledge of the Obligors threatened against or affecting, any Relevant Party or any of their respective Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of any Financing Document. SECTION 4.06. ERISA. (a) Each member of the Borrower's ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV or ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. (b) Neither the Guarantor, nor any member of its ERISA Group, maintains or contributes to, or has within the previous six years (whether or not while a member of its current ERISA Group) maintained or contributed to, or been required to maintain or been jointly and severally liable for contributions to, or liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. SECTION 4.07. Taxes. The Guarantor and its Subsidiaries have filed all income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Guarantor or any Subsidiary. The charges, accruals and reserves on the books of the Guarantor and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Guarantor, adequate. 26 SECTION 4.08. Not an Investment Company. No Relevant Party is an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.09. Full Disclosure. All written information heretofore furnished by the Obligors to the Administrative Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Obligors to the Administrative Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Obligors have disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Obligors can now reasonably foresee) the business, operations or financial condition of any Relevant Party and its Consolidated Subsidiaries, taken as a whole, or the ability of any Relevant Party to perform its obligations under the Financing Documents. SECTION 5.10. Compliance with Laws. The Guarantor and each Subsidiary are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Guarantor and its Consolidated Subsidiaries, considered as a whole. ARTICLE 3 COVENANTS Each Obligor agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. Each Obligor will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of such Obligor, a consolidated balance sheet of such Obligor and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, shareholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the 27 previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission or otherwise reasonably acceptable to the Required Banks by Coopers & Lybrand LLP or other independent public accountants of nationally recognized standing; (b) 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 of such Obligor, a consolidated balance sheet of such Obligor and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations and cash flows for such quarter and for the portion of such Obligor's fiscal year ended at the end of such quarter, setting forth in the case of such statements of operations and cash flows in comparative form the figures for the corresponding quarter and the corresponding portion of such Obligor's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of such Obligor; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of such Obligor (i) setting forth in reasonable detail the calculations required to establish whether such Obligor was in compliance with the requirements of Article 5 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which such Obligor is taking or proposes to take with respect thereto; (d) within five days after any executive officer of an Obligor obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of such Obligor setting forth the details thereof and the action which such Obligor is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Guarantor generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Guarantor shall have filed with the Securities and Exchange Commission; 28 (g) as soon as available and in any event within 20 days after submission, each annual or quarterly statutory statement of each Material Insurance Company in the form submitted to its principal insurance regulator; (h) as soon as available and in any event within 120 days after the end of each fiscal year of WSG, a consolidated balance sheet of WSG and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and changes in financial position for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by the independent public accountants which reported on the financial statements referred to in clause (a) above; (i) promptly after any executive officer of an Obligor obtains knowledge thereof, (i) a copy of any notice from any regulatory authority in any jurisdiction material to the business of such Material Insurance Company of the revocation, the suspension or the placing of any restriction or condition on the registration or license as an insurer of any Material Insurance Company 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 Material Insurance Company relating to an investigation conducted by any regulatory authority in any jurisdiction material to the business of such Material Insurance Company, whether pursuant to Section 132 of the Bermuda Companies Law or otherwise, (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, or questioning in any material respect the financial soundness of, any Material Insurance Company, and (iv) a copy of any notice of the imposition of, or any modification to, any restriction on the payment of dividends to the Borrower by any of its Subsidiaries (directly or indirectly); and (j) from time to time such additional information regarding the financial position, results of operations or business of such Obligor or any of its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request from time to time. SECTION 5.02. Payment of Obligations. The Guarantor will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. 29 SECTION 5.03. Maintenance of Property; Insurance. (a) The Guarantor will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Guarantor will maintain, and will cause each Subsidiary to maintain, physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense. The Guarantor will deliver to the Banks (i) upon request of any Bank through the Administrative Agent from time to time, full information as to the insurance carried. SECTION 5.04. Conduct of Business and Maintenance of Existence. The Guarantor will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Guarantor and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a Subsidiary (other than a Relevant Party) into the Guarantor or the merger or consolidation of a Subsidiary (other than a Relevant Party) with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) any merger of a Relevant Party permitted by Section 5.11 or (iii) the termination of the corporate existence of any Subsidiary (other than a Relevant Party) if the Guarantor in good faith determines that such termination is in the best interest of the Guarantor and is not materially disadvantageous to the Banks. SECTION 5.05. Compliance with Laws. The Guarantor will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Guarantor and its Consolidated Subsidiaries, considered as a whole. SECTION 5.06. Inspection of Property, Book and Records. The Guarantor will keep, and will cause each Subsidiary to keep, proper books of record and 30 account in accordance with generally accepted accounting principles in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.07. Leverage. Consolidated Debt will at no time exceed 35% of Consolidated Tangible Net Worth. SECTION 5.08. Debt. (a) The Guarantor will not permit any of its Subsidiaries to create, assume or suffer to exist any Debt, except (i) Debt under the Related Documents, (ii) Debt owing to the Guarantor or a Wholly-Owned Consolidated Subsidiary of the Guarantor, (iii) Debt of Tripar Partnership, a Bermuda general partnership, owing to other Subsidiaries or Debt of such other Subsidiaries owing to Tripar Partnership, (iv) Debt in respect of letters of credit issued in the ordinary course of business, (v) Debt created by exercise of overdraft privileges on a basis not more frequent than once each calendar month for not more than five Euro-Dollar Business Days in an amount not to exceed $50,000,000 in the aggregate at any one time, (vi) subordinated Debt of the Borrower owing to ACE Insurance under the Subordinated Loan Agreement, (vii) Debt in an amount not to exceed $70,000,000 incurred in connection with the development by the Guarantor and/or any of its Subsidiaries of the "Bermudiana Site" in Hamilton, Bermuda, and (viii) Debt not permitted by the foregoing clauses of this Section in an aggregate principal amount not to exceed $20,000,000 at any time outstanding. (b) The Borrower will not, and will not permit any of its Subsidiaries to, create, assume or suffer to exist any Debt, except (i) Debt under the Financing Documents, (ii) Debt under the Subordinated Loan Agreement owing to ACE Insurance, (iii) Debt owing to ACE Limited subordinated to the same extent as Debt under the Subordinated Loan Agreement and (iv) Debt owing to the Borrower or a Wholly-Owned Consolidated Subsidiary of the Borrower. SECTION 5.09. Minimum Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than (i) $1,400,000,000 plus (ii) 25% of Consolidated Net Income for each fiscal quarter of the Guarantor ended after December 31, 1997 and on or prior to such date of determination and for which such Consolidated Net Income is positive (but with no deduction on account of any fiscal quarter for which Consolidated Net Income is negative) plus (iii) 50% 31 of the aggregate amount by which Consolidated Tangible Net Worth shall have been increased by reason of the issuance and sale after the Effective Date and on or prior to such date of determination of any capital stock or the conversion or exchange of any Debt of the Guarantor into or with capital stock of the Guarantor consummated after the Effective Date and on or prior to such date of determination. SECTION 5.10. Negative Pledge. Neither the Guarantor nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $25,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Guarantor or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Guarantor or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $25,000,000 and (iii) 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; 32 (h) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $25,000,000; (i) Liens securing obligations in respect of letters of credit issued pursuant to any of the Related Documents; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Tangible Net Worth. SECTION 5.11. Consolidations, Mergers and Sales of Assets. No Relevant Party will (i) consolidate with or merge into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of its assets to any other Person; provided that if both immediately before and after giving effect thereto no Default shall have occurred and be continuing, then (A) ACE Insurance may merge or consolidate with any other Person so long as the surviving entity is the Guarantor or a Wholly-Owned Consolidated Subsidiary of the Guarantor and, if ACE Insurance is not the surviving entity, such surviving entity shall have assumed the obligations of ACE Insurance under the Subordinated Loan Agreement pursuant to an instrument in form and substance reasonably satisfactory to the Required Banks and shall have delivered such opinions of counsel with respect thereto as the Administrative Agent may reasonably request and (B) the Borrower and the Guarantor may each merge with another Person (other than each other) so long as the Borrower or the Guarantor, as the case may be, is the surviving entity. SECTION 5.12. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower to finance the WSG Acquisition. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. SECTION 5.13. ERISA. Neither the Guarantor nor any member of its ERISA Group will maintain or contribute to, or become obligated to maintain or become jointly and severally liable for contributions to, or have liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. SECTION 5.14. Restricted Payments. Neither the Borrower nor any Subsidiary of the Borrower will declare or make any Restricted Payment. 33 SECTION 5.15. Investments; Acquisitions. (a) Neither the Borrower nor any Subsidiary of the Borrower (other than a Material Insurance Company) will hold, make or acquire any Investment in any Person other than: (i) Investments existing on the date hereof in Persons which are Subsidiaries on the date hereof and, subject to the limitations of subsection (b), additional Investments on or after the date hereof in such Subsidiaries and in Subsidiaries formed or acquired after the date hereof ; (ii) Temporary Cash Investments; and (iii) loans and advances to the Borrower or a Wholly-Owned Consolidated Subsidiary of the Borrower. (b) Except for the WSG Acquisition, the Borrower will not, and will not permit any of its Subsidiaries to, make any Acquisitions; provided that the Borrower and its Subsidiaries may make Acquisitions of or from a Person engaged in the type of business conducted by the Borrower and other acquisitions of assets used or useful in the conduct of the business of the Borrower and its Subsidiaries. SECTION 5.16. Transactions with Affiliates. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay any funds to or for the account of, make any Investment in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect, any transaction with, any Affiliate except on an arm's-length basis on terms not materially less favorable to the Borrower or such Subsidiary than could have been obtained from a third party who was not an Affiliate; provided that the foregoing provisions of this Section shall not prohibit (i) the transactions to be effected pursuant to the Financing Documents or (ii) the declaration or payment of any lawful dividend or other payment ratably in respect of all of its capital stock of the relevant class so long as, after giving effect thereto, no Default shall have occurred and be continuing. SECTION 5.17. No Modification of Documents Without Consent. The Borrower will not, without the prior written consent of the Required Banks, consent to or solicit any amendment or supplement to, or any waiver or other modification of, the Subordinated Loan Agreement or any subordination agreement contemplated by Section 5.08(b)(iii). SECTION 5.18. Debt Service Coverage Ratio. At the end of each fiscal quarter of the Borrower, commencing with the first quarter after the Borrowing Date, the Debt Service Coverage Ratio will not be less than 1.20:1. 34 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within five Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder or the Guarantor shall fail to pay when due any such principal, interest, fees or other amount payable hereunder; provided that, for purposes of this Section 6.01(a), no such payment default by the Borrower shall be continuing if the Guarantor pays the amount thereof at the time and otherwise in the manner provided in Article 9; (b) any Obligor shall fail to observe or perform any covenant contained in Sections 5.07 through 5.11, inclusive, 5.14 or 5.17; or ACE Insurance shall fail to perform any of its obligations under the Subordinated Loan Agreement; (c) any Obligor shall fail to observe or perform any covenant or agreement contained in the Financing Documents (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Obligors by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by any Obligor in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Guarantor or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; or, without limiting the foregoing, any "Event of Default" (as defined in any of the other Related Documents) shall occur; (g) (i) (x) a resolution or other similar action is passed authorizing the voluntary winding up of the Guarantor or any other similar action with respect to the Guarantor or a petition is filed for the winding up of the Guarantor or the taking of any other similar action with respect to the Guarantor in the Grand Court 35 of the Cayman Islands or (y) any corporate action is taken authorizing the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to any Subsidiary of the Guarantor or authorizing any corporate action to be taken to facilitate any such winding up, liquidation, arrangement or other similar action or any petition shall be filed seeking the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to any Subsidiary of the Guarantor by the Registrar of Companies in Bermuda, one or more holders of insurance policies or reinsurance certificates issued by any Subsidiary of the Guarantor or by any other Person or Persons or any petition shall be presented for the winding up of any Subsidiary of the Guarantor to a court of Bermuda as provided under the Bermuda Companies Law and in either such case such petition shall remain undismissed and unstayed for a period of 60 days or any creditors' or members' voluntary winding up of any Subsidiary of the Guarantor as provided under the Bermuda Companies Law shall be commenced or any receiver shall be appointed by a creditor of any Subsidiary of the Guarantor or by a court of Bermuda on the application of a creditor of any Subsidiary of the Guarantor as provided under any instrument giving rights for the appointment of a receiver; (ii) a decree or order or a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a trustee, receiver, liquidator, custodian or other similar official in any insolvency proceedings, readjustment of debt, marshalling of assets and liabilities or similar proceedings affecting such Subsidiary or substantially all of its assets, or for the winding-up or liquidation of its affairs, shall have been entered, or a proceeding shall be commenced by any Person seeking the rehabilitation, liquidation, dissolution or conservation of the assets of any Subsidiary of the Guarantor or any substantial part thereof or any similar remedy and such proceedings shall remain undismissed and unstayed for a period of 60 days (including, in either case, without limitation, the commencement of proceedings for the rehabilitation or liquidation of such Subsidiary in accordance with the applicable provisions of Chapter 37 of the Georgia Insurance Code, Article 74 of the New York Insurance Law or Chapter 21 of the Texas Insurance Code); (iii) the Guarantor or any Subsidiary of the Guarantor shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of 36 creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (iv) an involuntary case or other proceeding shall be commenced against the Guarantor or any Subsidiary of the Guarantor seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Guarantor or any Subsidiary of the Guarantor under the United States federal bankruptcy laws as now or hereafter in effect; or (v) the rights, privileges or franchises of any Subsidiary of the Guarantor to do business shall be declared forfeited by any governmental authority or any court of competent jurisdiction where the loss of such rights, privileges or franchises would have a material adverse effect on the ability of such Subsidiary to meet its obligations under any of the Financing Documents; (h) a judgment or order for the payment of money in excess of $25,000,000 shall be rendered against the Guarantor or any Subsidiary of the Guarantor and such judgment or order shall continue unsatisfied and unstayed for a period of 45 days; (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of voting stock of the Guarantor; or, during any period of 12 consecutive calendar months, individuals who were directors of the Guarantor on the first day of such period shall cease to constitute a majority of the board of directors of the Guarantor; or either the Borrower or ACE Insurance shall cease to be a Wholly-Owned Consolidated Subsidiary of the Guarantor; (j) any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of any of the Financing Documents is invalid or unenforceable in any material respect, or any Relevant Party shall so assert in writing; (k) the registration or license of any Subsidiary of the Guarantor as an insurer shall be revoked, suspended or otherwise have restrictions or conditions placed upon it unless, in the case of the placing of any such restrictions or 37 conditions, such restrictions or conditions could not have a material adverse effect on the interests of the Administrative Agent and the Banks under the Financing Documents; or (l) any member of the Borrower's ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan in a distress termination shall be filed under Title IV of ERISA by any member of the Borrower's ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Section 4042 of Title IV of ERISA to terminate, to impose liability on Borrower's ERISA Group for an amount or amounts aggregating in excess of $25,000,000 (other than for premiums under Section 4007 of ERISA); or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which causes one or more members of the Borrower's ERISA Group to incur a current payment obligation in excess of $25,000,000 in the aggregate; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments (if still in existence), by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors; provided that in the case of any of the Events of Default specified in clause (g) above with respect to any Obligor, without any notice to any Obligor or any other act by the Administrative Agent or the Banks, the Commitments (if still in existence) shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors. SECTION 6.02. Notice of Default. The Administrative Agent shall give notice to the Obligors under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. 38 ARTICLE 7 THE AGENTS SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. SECTION 7.03. Action by Administrative Agent. The obligations of the Administrative Agent under this Agreement are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6 and in the Pledge Agreement. SECTION 7.04. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for an Obligor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks (or such different number of Banks as any provision hereof expressly requires for such consent or request) or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any Obligor; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of any Financing 39 Document or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Obligors) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in such capacity in connection with the Financing Documents or any action taken or omitted by such indemnitees hereunder or thereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each 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 any action under this Agreement. SECTION 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, which successor Administrative Agent shall be reasonably acceptable to the Borrower. 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 gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. 40 SECTION 7.09. Administrative Agent's Fee. The Borrower shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. SECTION 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on either Syndication Agent, on the Documentation Agent, on the Managing Agent or on any Co-Agent, in its capacity as such an Agent. ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determination Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the London interbank market for such Interest Period, or (b) Banks having 50% or more of the aggregate amount of the Euro-Dollar Loans advise the Administrative Agent that the London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist (i) the obligations of the Banks to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar 41 Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan as a Euro- Dollar Loan to such day. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.14), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Euro-Dollar Loans, its Note or its obligation to make Euro-Dollar Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. 42 (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections 8.03(a) and 8.03(b) of this Section 8.03, the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 180 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which because of the retroactive application of such statute, regulation or other such basis, such Bank did not know in good faith that such amount would arise or accrue. SECTION 8.04. Taxes. (a) Any and all payments by any Obligor hereunder shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all penalties, interest, expenses and similar liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction under 43 the laws of which such Bank or the Administrative Agent, as the case may be, shall be organized or any political subdivision thereof, (ii) in the case of each Bank, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof or in which such Bank's principal executive office is located or any political subdivision thereof and (iii) any Taxes imposed as a result of a change of such Bank's Applicable Lending Office to the extent such Taxes would not have been imposed absent such change; provided however, that (x) a change in such Bank's Applicable Lending Office to which the Obligor has consented and (y) a change in such Bank's Applicable Lending Office as a result of legal or regulatory restrictions shall not constitute a change for the purposes of this Section 8.04 (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). Each Obligor agrees that, if any Obligor shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank or the Administrative Agent, (A) the sum payable to such Bank or the Administrative Agent shall be increased as may be necessary so that after making all required deductions for Taxes (including deductions applicable to additional sums payable under this Section 8.04), such Bank or the Administrative Agent, as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (B) such Obligor shall make such deductions and (C) such Obligor shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law. (b) In addition, each Obligor agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which shall arise from any payment made under, or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any Note (all such taxes, charges or levies being hereinafter referred to as "Other Taxes"). (c) Each Obligor agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 8.04) paid by such Bank or the Administrative Agent or any penalties, interest, expenses and similar liabilities arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted provided that such Bank has acted in good faith with respect to such Taxes or Other Taxes and that such Bank reasonably cooperates with the Obligors in challenging such Taxes or Other Taxes. Each indemnification under this paragraph (c) shall be made within 30 days from the date such Bank or the Administrative Agent makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the Borrowing Date in the case of each Bank listed on 44 the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank at the time such Bank first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.04(a). (e) Each Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) (x) to file any certificate or document or to furnish any information as reasonably requested by any Obligor pursuant to any applicable treaty, law, rule or regulation or (y) to designate a different Lending Office if the making of such a filing, the furnishing of such information or the designation of such other Lending Office would avoid the need for or reduce the amount of any additional amounts payable by any Obligor pursuant to this Section 8.04 and would not, in the reasonable judgment of such Bank, be disadvantageous to such Bank. Notwithstanding the foregoing, it is understood and agreed that nothing in this Section 8.04 shall interfere with the rights of any Bank to conduct its fiscal or tax affairs in such manner as it deems fit. (f) Within 90 days after the date of any payment of Taxes, the Obligors will furnish to the Administrative Agent notarized copies for each Bank of the original receipt evidencing payment thereof. If no Taxes shall be payable in respect of any payment under this Agreement, the Obligors will, upon the reasonable request of the Administrative Agent, furnish to the Administrative Agent a certificate in form reasonably acceptable to the Administrative Agent's counsel confirming that such payment is exempt from or not subject to Taxes. (g) For any period with respect to which a Bank has failed to provide the Obligors with the appropriate form pursuant to Section 8.04(d) or 8.04(e) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(a) or 8.04(b) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the 45 Obligors shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or to continue or convert outstanding Loans as or to Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) Euro-Dollar Loans shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro- Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid (or converted), all payments of principal which would otherwise be applied to repay such Euro- Dollar Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank to make or to convert or continue outstanding Loans as or into Euro-Dollar Loans have been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Banks) mutually satisfactory to the Borrower, the Administrative Agent (whose consent shall not be unreasonably withheld) and the issuing banks under the Related Documents to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto, the outstanding loans of such Bank and assume the commitment and letter of credit liabilities of such Bank (and its affiliates) under each of the Related Documents, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding loans and funded letter of credit liabilities plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's commitments 46 and letter of credit liabilities plus such amount, if any, as would be payable pursuant to the funding loss indemnities in the Related Documents if the outstanding loans of such Bank were prepaid in their entirety on the date of consummation of such assignment. ARTICLE 9 GUARANTY SECTION 9.01. The Guaranty. The Guarantor hereby unconditionally, absolutely and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all amounts payable by the Borrower under the Financing Documents including, without limitation, the principal of and interest on each Note issued by the Borrower pursuant to this Agreement. Upon failure by the Borrower to pay punctually any such amount, the Guarantor shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement. SECTION 9.02. Guaranty Unconditional. The obligations of the Guarantor hereunder shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of the Borrower under any of the Financing Documents, by operation of law or otherwise; (b) any modification or amendment of or supplement to any of the Financing Documents; (c) any release, non-perfection or invalidity of any direct or indirect security for any obligation of the Borrower under any of the Financing Documents; (d) any change in the corporate existence, structure or ownership of the Borrower, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or its assets or any resulting release or discharge of any obligation of the Borrower contained in any of the Financing Documents; (e) the existence of any claim, set-off or other rights which the Guarantor may have at any time against the Borrower, the Administrative Agent, 47 any Bank or any other corporation or person, whether in connection with any of the Financing Documents or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against the Borrower for any reason of any of the Financing Documents, or any provision of applicable law or regulation purporting to prohibit the payment by the Borrower of the principal of or interest on any Note or any other amount payable under any of the Financing Documents; or (g) any other act or omission to act or delay of any kind by the Borrower, 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 the Guarantor's obligations hereunder. SECTION 9.03. Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances. The Guarantor's obligations hereunder shall remain in full force and effect until the Commitments shall have terminated and the principal of and interest on the Notes and all other amounts payable by the Borrower under the Financing Documents shall have been paid in full. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Borrower under the Financing Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, the Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 9.04. Waiver by the Guarantor. The Guarantor 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 the Borrower or any other corporation or person. SECTION 9.05. Subrogation. The Guarantor irrevocably waives any and all rights to which it may be entitled, by operation of law or otherwise, upon making any payment hereunder to be subrogated to the rights of the payee against the Borrower with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by the Borrower in respect thereof. SECTION 9.06. Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrower under any of the Financing 48 Documents is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by the Guarantor hereunder forthwith on demand by the Administrative Agent made at the request of the requisite proportion of the Banks specified in Article 6. ARTICLE 10 MISCELLANEOUS SECTION 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of any Obligor or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 10 days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. SECTION 10.02. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in the Financing Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special counsel for the Agents, reasonably incurred in connection with the preparation of the Financing Documents, any waiver or consent hereunder or thereunder or any amendment 49 hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Administrative Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be reasonably incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing Documents or any actual or proposed use of proceeds of Loans; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 10.04. Sharing; Set-Offs. (a) Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. Each Obligor agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Obligor in the amount of such participation. (b) Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request specified by Section 6.01 to the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Bank and each of its affiliates is hereby 50 authorized at any time and from time to time, 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 Bank or such affiliate to or for the credit or the account of any Obligor against any and all of the obligations of such Obligor to such Bank now or hereafter existing under the Financing Documents, irrespective of whether such Bank shall have made any demand for payment thereof and although such obligations may be unmatured. Each Bank agrees promptly to notify such Obligor, after any such setoff and application; provided, however, that the failure to give notice shall not affect the validity of such setoff and application. The rights of each Bank and its affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) that such Bank and its affiliates may have. SECTION 10.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Obligors and the Required Banks (and, if the rights or duties of the Administrative Agent are affected thereby, by the Administrative Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, (iv) release the Guarantor hereunder, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or (vii) amend this Section 10.05. SECTION 10.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Obligors may not assign or otherwise transfer any of their rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "PARTICIPANT") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall 51 continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii), (iv) or (v) of Section 10.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement and subject to subsection 10.06(e) below, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection 10.06(c) or 10.06(d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection 10.06(b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part (equivalent to an initial participation in the Related Documents of not less than $15,000,000, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit H hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Administrative Agent, which shall not be unreasonably withheld; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent of the Borrower or the Administrative Agent shall be required; and provided further that, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank, the participation in the Related Documents of such transferor Bank after giving effect to such assignment (together with the participations of its affiliates) shall not be less than $15,000,000; and provided further that such assignment shall be accompanied by a ratably equivalent assignment of the rights and obligations of the transferor Bank (and its affiliates) under each of the other Related Documents. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this 52 subsection 10.06(c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 10.07. Collateral. Each of the Banks represents to the Administrative Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 10.08. Governing Law. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. SECTION 10.09. Counterparts; Integration; Effectiveness. 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. This Agreement and the other Financing Documents constitute the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). SECTION 10.10. Judicial Proceedings. (a) Consent to Jurisdiction. Each Obligor irrevocably submits to the jurisdiction of any federal court sitting in New York City and, in the event that jurisdiction cannot be obtained or maintained in a federal court, to the jurisdiction of any New York State court sitting in New York 53 City over any suit, action or proceeding arising out of or relating to any of the Financing Documents. Each Obligor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that any suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each Obligor agrees that a final judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding upon it and will be given effect in the Cayman Islands, to the fullest extent permitted by applicable law and may be enforced in any federal or New York State court sitting in New York City (or any other courts to the jurisdiction of which such Obligor is or may be subject) by a suit upon such judgment, provided that service of process is effected upon it in one of the manners specified herein or as otherwise permitted by law. (b) Appointment of Agent for Service of Process. Each Obligor hereby irrevocably designates and appoints CT Corporation System having an office on the date hereof at 1633 Broadway, New York, New York 10019 as its authorized agent, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection 10.10(a) above in any federal or New York State court sitting in New York City. Each Obligor represents and warrants that such agent has agreed in writing to accept such appointment and that a true copy of such designation and acceptance has been delivered to the Administrative Agent. Said designation and appointment shall be irrevocable until the Commitments shall have terminated and all principal and interest and all other amounts payable hereunder and under the Notes shall have been paid in full in accordance with the provisions hereof and thereof. If such agent shall cease so to act, each Obligor covenants and agrees to designate irrevocably and appoint without delay another such agent satisfactory to the Administrative Agent and to deliver promptly to the Administrative Agent evidence in writing of such other agent's acceptance of such appointment. (c) Service of Process. Each Obligor hereby consents to process being served in any suit, action or proceeding of the nature referred to in subsection 10.10(a) above in any federal or New York State court sitting in New York City by service of process upon the agent of such Obligor for service of process in such jurisdiction appointed as provided in subsection 10.10(b) above; provided that, to the extent lawful and possible, notice of said service upon such agent shall be mailed by registered or certified air mail, postage prepaid, return receipt requested, to such Obligor at its address specified on the signature page hereof or to any other address of which such Obligor shall have given written notice to the Bank. Each Obligor irrevocably waives, to the fullest extent permitted by law, all claim of error by reason of any such service in such manner and agrees that such service shall be deemed in every respect effective service of process upon such 54 Obligor in any such suit, action or proceeding and shall, to the fullest extent permitted by law, be taken and held to be valid and personal service upon and personal delivery to such Obligor. (d) No Limitation on Service or Suit. Nothing in this Section 10.10 shall affect the right of the Administrative Agent or any Bank to serve process in any other manner permitted by law or limit the right of the Administrative Agent or any Bank to bring proceedings against any Obligor in the courts of any jurisdiction or jurisdictions. SECTION 10.11. Judgment Currency. If, under any applicable law and whether pursuant to a judgment being made or registered against any Obligor or for any other reason, any payment under or in connection with any of the Financing Documents is made or satisfied in a currency (the "OTHER CURRENCY") other than that in which the relevant payment is due (the "REQUIRED CURRENCY") then, to the extent that the payment (when converted into the Required Currency at the rate of exchange on the date of payment or, if it is not practicable for the party entitled thereto (the "PAYEE") to purchase the Required Currency with the Other Currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for it to do so) actually received by the Payee falls short of the amount due under the terms of this Agreement and the Notes, each Obligor shall, to the extent permitted by law, as a separate and independent obligation, indemnify and hold harmless the Payee against the amount of such short- fall. For the purpose of this Section, "RATE OF EXCHANGE" means the rate at which the Payee is able on the relevant date to purchase the Required Currency with the Other Currency and shall take into account any premium and other costs of exchange. SECTION 10.12. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. SECTION 10.13. Confidentiality. The Administrative Agent and each Bank agrees to keep any information delivered or made available by the Borrower pursuant to this Agreement confidential from anyone other than persons employed or retained by such Bank and its affiliates who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or to the Administrative Agent, (b) subject to provisions substantially similar to those contained in this Section 10.13, to any other Person if reasonably incidental to the administration of the credit facility 55 contemplated hereby, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation relating to the Related Documents to which the Administrative Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Administrative Agent's legal counsel and independent auditors and (i) subject to provisions substantially similar to those contained in this Section 10.13, to any actual or proposed Participant or Assignee. Notwithstanding the foregoing, this Section 10.13 shall not apply to information that is or becomes publicly available, information that was available to a Bank on a non-confidential basis prior to its disclosure hereunder and information which becomes available to a Bank on a non-confidential basis from a source that is not, to such Bank's knowledge, subject to a confidentiality agreement with any Obligor. 56 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ACE US HOLDINGS, INC. By______________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) 295-5221 ACE LIMITED, as Guarantor By______________________________ Title: The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Facsimile number: (441) 295-5221 The Common Seal of ACE Limited was hereunto affixed in the presence of: Director ____________________________ Director/Secretary ____________________________ 57 Commitments - ----------- $24,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By__________________________ Title: $24,000,000 MELLON BANK, N.A. By__________________________ Title: Managing Agent $20,000,000 CITIBANK, N.A. By__________________________ Title: Co-Agents $18,000,000 THE BANK OF NEW YORK By__________________________ Title: $18,000,000 THE BANK OF TOKYO-MITSUBISHI, LTD. By___________________________ Title: 58 $18,000,000 BARCLAYS BANK PLC By___________________________ Title: $18,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By___________________________ Title: By___________________________ Title: $18,000,000 FLEET NATIONAL BANK By___________________________ Title: $18,000,000 ING BANK, N.V. By___________________________ Title: By___________________________ Title: $18,000,000 ROYAL BANK OF CANADA By___________________________ Title: 59 Other Banks $8,000,000 BANK OF BERMUDA (LUXEMBOURG) S.A. By___________________________ Title: $8,000,000 BANQUE NATIONALE DE PARIS By___________________________ Title: By___________________________ Title: $8,000,000 THE CHASE MANHATTAN BANK By___________________________ Title: $8,000,000 CREDIT LYONNAIS NEW YORK BRANCH By___________________________ Title: 60 $8,000,000 DRESDNER BANK A.G., NEW YORK BRANCH AND GRAND CAYMAN BRANCH By___________________________ Title: By___________________________ Title: $8,000,000 THE FIRST NATIONAL BANK OF CHICAGO By___________________________ Title: $8,000,000 STATE STREET BANK AND TRUST COMPANY By___________________________ Title: - ----------------- Total Commitments $250,000,000 ================= 61 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By___________________________ Title 60 Wall Street New York, New York 10260-0060 Attention: Glenda Irving Telex number: 177615 Facsimile number: 212-648-5249 62 PRICING SCHEDULE "EURO-DOLLAR MARGIN" means, for any date, the rate set forth below in the row opposite such term and in the column corresponding to the "Pricing Level" that applies at such date: - -------------------------------------------------------------------------- Euro-Dollar Margin Level I Level II Level III Level IV - -------------------------------------------------------------------------- On or before fifth Principal Payment Date 0.375% 0.50% 0.625% 0.75% - -------------------------------------------------------------------------- After fifth Principal Payment Date 0.50% 0.625% 0.75% 0.875% - -------------------------------------------------------------------------- For purposes of this Schedule, the following terms have the following meanings: "LEVEL I" applies at any date if, at such date, ACE Insurance's claims paying ability is rated AA- or higher by S&P and (if rated by Moody's) Aa3 or --- higher by Moody's. "LEVEL II" applies at any date if, at such date, (i) ACE Insurance's claims paying ability is rated A+ or higher by S&P and (if rated by Moody's) A1 or --- higher by Moody's and (ii) Level I does not apply. "LEVEL III" applies at any date if, at such date, (i) ACE Insurance's claims paying ability is rated A or higher by S&P and (if rated by Moody's) A2 --- or higher by Moody's and (ii) neither Level I nor Level II applies. "LEVEL IV" applies at any date if, at such date, no other Pricing Level applies. "MOODY'S" means Moody's Investors Service, Inc., and any successor thereto. "PRICING LEVEL" refers to the determination of which of Level I, Level II, Level III or Level IV applies at any date. "S&P" means Standard & Poor's Rating Services, a division of The McGraw- Hill Companies, Inc., and any successor thereto. The credit ratings to be utilized for purposes of this Schedule are those ratings assigned to the claims paying ability of ACE Insurance and any rating assigned to any debt security of any Obligor or the claims paying ability of any Obligor shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 2 EXHIBIT A NOTE $______________ New York, New York December 11, 1997 For value received, ACE US Holdings, Inc., a Delaware corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Loan Agreement referred to below in installments as specified in the Loan Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Loan Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of any Obligor hereunder or under the Loan Agreement. This note is one of the Notes referred to in the Term Loan Agreement dated as of December 11, 1997 among the Borrower, ACE Limited, as Guarantor, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Loan Agreement"). Terms defined in the Loan Agreement are used herein with the same meanings. Reference is made to the Loan Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. Pursuant to the Loan Agreement payment of principal and interest on this Note is unconditionally guaranteed by the Guarantor named above and secured by the Pledge Agreement referred to in the Loan Agreement. ACE US HOLDINGS, INC. By___________________________ Title: 2 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL ________________________________________________________________________________ Amount of Amount of Type of Principal Notation Date Loan Loan Repaid Made By ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 3 EXHIBIT B PLEDGE AGREEMENT AGREEMENT dated as of December 11, 1997 between ACE US HOLDINGS, INC. (with its successors, the "BORROWER") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as administrative agent (the "ADMINISTRATIVE AGENT"). W I T N E S S E T H : WHEREAS, the Borrower, certain banks (the "BANKS") and the Administrative Agent are parties to a Term Loan Agreement dated as of December 11, 1997 (as the same may be amended from time to time, the "TERM LOAN AGREEMENT"); and WHEREAS, in order to induce the Banks and the Administrative Agent to enter into the Term Loan Agreement, the Borrower has agreed to grant a continuing security interest in and to the Collateral (as hereafter defined) to secure its obligations under the Term Loan Agreement and the Notes issued pursuant thereto; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. Terms defined in the Term Loan Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. The following additional terms, as used herein, have the following respective meanings: "ACE INSURANCE" means A.C.E. Insurance Company Ltd., a Bermuda limited liability company. "COLLATERAL" has the meaning assigned to such term in Section 3(a). "PERFECTION CERTIFICATE" means a certificate substantially in the form of Exhibit A, completed and supplemented with the schedules and attachments contemplated thereby to the satisfaction of the Administrative Agent, and duly executed by the chief executive officer and the chief legal officer of the Borrower. "PROCEEDS" means all proceeds of, and all other profits, products, rents or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or other realization upon, collateral, including without limitation all claims of the Borrower against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any collateral, and any condemnation or requisition payments with respect to any collateral, in each case whether now existing or hereafter arising. "SECURED OBLIGATIONS" means the obligations secured under this Agreement including (i) all principal of and interest (including, without limitation, any interest which accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrower, whether or not allowed or allowable as a claim in any such proceeding) on any Note issued pursuant to, the Term Loan Agreement, (ii) all other amounts payable by the Borrower hereunder or under the other Financing Documents and (iii) any renewals or extensions of any of the foregoing. "SECURITY INTERESTS" means the security interests in the Collateral granted hereunder securing the Secured Obligations. "SUBORDINATED LOAN AGREEMENT" means the subordinated loan agreement dated as of December 11, 1997 among ACE Insurance, the Borrower and the Administrative Agent, as amended from time to time. "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non- perfection. Unless otherwise defined herein, or unless the context otherwise requires, all terms used herein which are defined in the UCC shall have the meanings therein stated. SECTION 2. Representations and Warranties. The Borrower represents and warrants as follows: (a) The Borrower has good title to all of the Collateral, free and clear of any Liens. 2 (b) The Borrower has not performed any acts which might prevent the Administrative Agent from enforcing any of the terms of this Agreement or which would limit the Administrative Agent in any such enforcement. No financing statement, mortgage, security agreement or similar or equivalent document or instrument covering all or any part of the Collateral is on file or of record in any jurisdiction in which such filing or recording would be effective to perfect a Lien on such Collateral. (c) Not less than five Domestic Business Days prior to the date of the first Borrowing under the Term Loan Agreement, the Borrower shall deliver the Perfection Certificate to the Administrative Agent. The information set forth therein shall be correct and complete. Not later than 60 days following the date of the Borrowing, the Borrower shall furnish to the Administrative Agent file search reports from each UCC filing office set forth in Schedule 7 to the Perfection Certificate confirming the filing information set forth in such Schedule. (d) The Security Interests constitute valid first-priority security interests under the UCC securing the Secured Obligations. When UCC financing statements in the form specified in Exhibit A shall have been filed in the offices specified in the Perfection Certificate, the Security Interests shall constitute perfected security interests in the Collateral to the extent that a security interest therein may be perfected by filing pursuant to the UCC, prior to all other Liens and rights of others therein except for the Security Interests. SECTION 3. The Security Interests. (a) In order to secure the full and punctual payment of the Secured Obligations in accordance with the terms thereof, and to secure the performance of all the obligations of the Borrower under the Financing Documents, the Borrower hereby grants to the Administrative Agent for the benefit of the Banks a continuing security interest in and to all of the following property of the Borrower, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "COLLATERAL"): (i) The Subordinated Loan Agreement and all rights and privileges of the Borrower with respect thereto and all payments, and rights to receive payments, thereunder or with respect thereto (including without limitation all rights to demand and receive advances of subordinated loans thereunder); (ii) All books and records (including, without limitation, customer lists, credit files, computer programs, printouts and other 3 computer materials and records) of the Borrower pertaining to any of the Collateral; and (iii) All Proceeds of all or any of the Collateral described in clauses 3(a)(i) and 3(a)(ii) hereof. (b) The Security Interests are granted as security only and shall not subject the Administrative Agent or any Bank to, or transfer or in any way affect or modify, any obligation or liability of the Borrower or any of its Subsidiaries with respect to any of the Collateral or any transaction in connection therewith. SECTION 4. Further Assurances. (a) The Borrower will not change its name, identity or corporate structure in any manner unless it shall have given the Administrative Agent not less than 30 days' prior notice thereof and delivered an opinion of counsel with respect thereto in accordance with Section 4(c). The Borrower will not change the location of its chief executive office or chief place of business from the applicable location described in the Perfection Certificate unless it shall have given the Administrative Agent not less than 30 days' prior notice thereof and delivered an opinion of counsel with respect thereto in accordance with Section 4(c). (b) The Borrower will, from time to time, at its expense, execute, deliver, file and record any statement, assignment, instrument, document, agreement or other paper and take any other action, (including, without limitation, any filings of financing or continuation statements under the UCC) that from time to time may be necessary or desirable, or that the Administrative Agent may request, in order to create, preserve, perfect, confirm or validate the Security Interests or to enable the Administrative Agent and the Banks to obtain the full benefits of this Agreement, or to enable the Administrative Agent to exercise and enforce any of its rights, powers and remedies hereunder with respect to any of the Collateral. To the extent permitted by applicable law, the Borrower hereby authorizes the Administrative Agent to execute and file financing statements or continuation statements without the Borrower's signature appearing thereon. The Borrower agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. The Borrower shall pay the costs of, or incidental to, any recording or filing of any financing or continuation statements concerning the Collateral. (c) Not more than six months nor less than 30 days prior to each date on which the Borrower proposes to take any action contemplated by Section 4(a), the Borrower shall, at its cost and expense, cause to be delivered to the Banks an 4 opinion of counsel, satisfactory to the Administrative Agent, substantially in the form of Exhibit B to the effect that all financing statements and amendments or supplements thereto, continuation statements and other documents required to be recorded or filed in order to perfect and protect the Security Interests for a period, specified in such opinion, continuing until a date not earlier than six months from the date of such opinion, against all creditors of and purchasers from the Borrower have been filed in each filing office necessary for such purpose and that all filing fees and taxes, if any, payable in connection with such filings have been paid in full. SECTION 5. General Authority. The Borrower hereby irrevocably appoints the Administrative Agent its true and lawful attorney, with full power of substitution, in the name of the Borrower, the Administrative Agent, the Banks or otherwise, for the sole use and benefit of the Administrative Agent and the Banks, but at the Borrower's expense, to the extent permitted by law to exercise, at any time and from time to time while an Event of Default has occurred and is continuing, all or any of the following powers with respect to all or any of the Collateral: (a) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due thereon or by virtue thereof, and, without limiting the generality of the foregoing, to give a borrowing request under Section 2 of the Subordinated Loan Agreement, (b) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto, (c) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof, as fully and effectually as if the Administrative Agent were the absolute owner thereof, (d) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto, and (e) to exercise any other remedies provided by applicable law; provided that the Administrative Agent shall give the Borrower not less than ten days' prior notice of the time and place of any sale or other intended disposition of any of the Collateral, except any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The Administrative Agent and the Borrower agree that such notice constitutes "reasonable notification" within the meaning of Section 9- 504(3) of the UCC. 5 SECTION 6. Limitation on Duty of Administrative Agent in Respect of Collateral. Beyond the exercise of reasonable care in the custody thereof, the Administrative Agent shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Administrative Agent shall be deemed to have exercised reasonable care in the custody of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property, and shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other agent or bailee selected by the Administrative Agent in good faith. SECTION 7. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, the proceeds of any realization upon all or any part of the Collateral shall be applied by the Administrative Agent in the following order of priorities: FIRST, to payment of the expenses of such realization, including reasonable compensation to agents and counsel for the Administrative Agent, and all expenses, liabilities and advances incurred or made by the Administrative Agent in connection therewith, and any other unreimbursed expenses for which the Administrative Agent or any Bank is to be reimbursed pursuant to Section 10.03 of the Term Loan Agreement and unpaid fees owing to the Administrative Agent under the Term Loan Agreement; SECOND, to the ratable payment of unpaid principal of the Secured Obligations; THIRD, to the ratable payment of accrued but unpaid interest on the Secured Obligations in accordance with the provisions of the Term Loan Agreement; FOURTH, to the ratable payment of all other Secured Obligations, until all Secured Obligations shall have been paid in full; and finally, to payment to the Borrower or its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. The Administrative Agent may make distributions hereunder in cash or in kind or, on a ratable basis, in any combination thereof. 6 SECTION 8. Concerning the Administrative Agent. The provisions of Article 7 of the Term Loan Agreement shall inure to the benefit of the Administrative Agent in respect of this Agreement and shall be binding upon the parties to the Term Loan Agreement in such respect. In furtherance and not in derogation of the rights, privileges and immunities of the Administrative Agent therein set forth: (a) The Administrative Agent is authorized to take all such action as is provided to be taken by it as Administrative Agent hereunder and all other action reasonably incidental thereto. As to any matters not expressly provided for herein (including, without limitation, the timing and methods of realization upon the Collateral) the Administrative Agent shall act or refrain from acting in accordance with written instructions from the Required Banks or, in the absence of such instructions, in accordance with its discretion. (b) The Administrative Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part hereunder. The Administrative Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement by the Borrower. SECTION 9. Appointment of Co-Agents. At any time or times, in order to comply with any legal requirement in any jurisdiction, the Secured Party may appoint another bank or trust company or one or more other Persons, either to act as co-agent or co-agents, jointly with the Secured Party, or to act as separate agent or co-agents on behalf of the Secured Party with such power and authority as may be necessary for the effectual operation of the provisions hereof and may be specified in the instrument of appointment. SECTION 10. Termination of Security Interests; Release of Collateral. Upon the repayment in full of all Secured Obligations and the termination of the Commitments under the Credit Agreement, the Security Interests shall terminate and all rights to the Collateral shall revert to the Borrower. At any time and from time to time prior to such termination of the Security Interests, the Administrative Agent may release any of the Collateral with the prior written consent of the Required Banks. Upon any such termination of the Security Interests or release of Collateral, the Agent will, at the expense of the Borrower, execute and deliver to the Borrower such documents as the Borrower shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. SECTION 11. Notices. All notices, communications and distributions hereunder shall be given in accordance with Section 10.01 of the Term Loan Agreement. SECTION 12. Successors and Assigns. This Agreement is for the benefit of the Administrative Agent and the Banks and their successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, shall be transferred with such indebtedness. This Agreement shall be binding on the Borrower and its successors and assigns. SECTION 13. Changes in Writing. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Borrower and the Administrative Agent with the consent of the Required Banks. SECTION 14. New York Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, except as otherwise required by mandatory provisions of law and except to the extent that remedies provided by the laws of any jurisdiction other than New York are governed by the laws of such jurisdiction. SECTION 15. Severability. If any provision hereof is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the Banks in order to carry out the intentions of the parties hereto as nearly as may be possible; and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ACE US HOLDINGS, INC. By:___________________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By:___________________________________ Name: Title: 9 EXHIBIT A PERFECTION CERTIFICATE The undersigned, the _________________________ of ACE US HOLDINGS, INC., a Delaware corporation (the "BORROWER"), hereby certify with reference to the Pledge Agreement dated as of December 11, 1997 between the Borrower and Morgan Guaranty Trust Company of New York, as Administrative Agent (terms defined therein being used herein as therein defined), to the Administrative Agent and each Bank as follows: 1. Names. (a) The exact corporate name of the Borrower as it appears in its certificate of incorporation is as follows: (b) Set forth below is each other corporate name the Borrower has had since its organization, together with the date of the relevant change: (c) Except as set forth in Schedule 1, the Borrower has not changed its identity or corporate structure in any way within the past five years. (d) The following is a list of all other names (including trade names or similar appellations) used by the Borrower or any of its divisions or other business units at any time during the past five years: 2. Current Locations. (a) The chief executive office of the Borrower is located at the following address: MAILING ADDRESS COUNTY STATE --------------- ------ ----- MAILING ADDRESS COUNTY STATE --------------- ------ ----- (b) The following are all the places of business of the Borrower not identified above in the state identified above: MAILING ADDRESS COUNTY STATE --------------- ------ ----- 3. UCC Filings. A duly signed financing statement on Form UCC-1 in substantially the form of Schedule 3(A) hereto has been duly filed in the Uniform Commercial Code filing office in each jurisdiction identified in paragraph 2 hereof. Attached hereto as Schedule 3(B) is a true copy of each such filing duly acknowledged by the filing officer. 4. Schedule of Filings. Attached hereto as Schedule 4 is a schedule setting forth filing information with respect to the filings described in paragraph 4 above. 5. Filing Fees. All filing fees and taxes payable in connection with the filings described in paragraph 4 above have been paid. 2 IN WITNESS WHEREOF, we have hereunto set our hands this __ day of _________, 199_. By: ____________________________________ Name: Title: By: ____________________________________ Name: Title: 3 SCHEDULE 3(A) DESCRIPTION OF COLLATERAL 4 SCHEDULE 4 SCHEDULE OF FILINGS DEBTOR FILING OFFICER FILE NUMBER DATE OF FILING /1/ - ------------- ----------------- -------------- ------------------- ___________________ Indicate lapse of date, if other than fifth anniversary. 5 EXHIBIT C SUBORDINATED LOAN AGREEMENT AGREEMENT dated as of December 11, 1997 among ACE US HOLDINGS, INC. (together with its successors, the "BORROWER"), A.C.E. Insurance Company, Ltd., a Bermuda limited liability company (together with its respective successors and permitted assigns, the "LENDER") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H : WHEREAS the Borrower, the banks listed on the signature pages thereof (the "BANKS"), ACE Limited, a Cayman Islands company limited by shares, as Guarantor, and the Administrative Agent are parties to a Term Loan Agreement dated as of December 11, 1997 (as amended from time to time the "TERM LOAN AGREEMENT"); WHEREAS, it is a condition to the closing of the Term Loan Agreement that the parties hereto enter into a Subordinated Loan Agreement substantially in the form hereof; and WHEREAS, the Borrower will pursuant to the Pledge Agreement referred to in the Term Loan Agreement assign to the Administrative Agent as security for its obligations under the Term Loan Agreement all its right, title and interest in, to and under this Agreement; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. Each term used herein which is defined in the Term Loan Agreement shall have the meaning assigned to such term in the Term Loan Agreement. In addition, the following terms have the following meanings: "Commitment" means during any period the amount set forth for such period on Schedule 1 hereto. "Current Interest" has the meaning set forth in Section 4(b). "Deferred Interest" has the meaning set forth in Section 4(b). "Reorganization Securities" has the meaning set forth in Section 5(a). "Senior Commitments" means, without duplication, all commitments to extend credit and all instruments pursuant to which commitments or instruments Senior Debt may be incurred. "Senior Debt" means all amounts payable with respect to the Term Loan Agreement, which include (a) all principal of and interest (including any interest which accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrower or any of its Subsidiaries or Affiliates, whether or not allowed or allowable as a claim in any such proceeding) on any loan under, or any note issued pursuant to, the Term Loan, (b) all other amounts payable by the Borrower thereunder or under any other Financing Document and (c) any amendments, restatements, renewals, extensions or modifications of any of the foregoing. "Subdebt Maturity Date" means the date one year and one day after the Termination Date. "Subordinated Loans" means any subordinated loans made by the Lender pursuant to Section 2. "Subordinated Obligations" means all amounts payable with respect to this Agreement, which include (a) all principal of and interest (including any interest which accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrower or any of its Subsidiaries or affiliates, whether or not allowed or allowable as a claim in any such proceeding) on any Subordinated Loan, (b) all other amounts payable by the Borrower hereunder or with respect hereto and (c) any amendments, restatements, renewals, extensions or modifications of any of the foregoing. "Term Loan Agreement" means the Term Loan Agreement and, if the Term Loan Agreement is refinanced or repaid in its entirety and the commitments thereunder terminated, any successor agreement (i) pursuant to which all or any portion of the amounts outstanding from time to time under the Term Loan Agreement are refinanced and (ii) designated by the Borrower as a "Term Loan Agreement" for purposes hereof. "Termination Date" means the later of the latest maturity date of any Senior Debt and the latest expiration date of any Senior Commitments. 2 SECTION 2. Obligation to Make Subordinated Loans; Guarantee by Certain Lenders. (a) From time to time on or prior to the Termination Date, upon request of the Borrower or, if an Event of Default under the Term Loan Agreement has occurred or is continuing, upon request of the Administrative Agent, not less than three business days prior to the requested date of borrowing, the Lender agrees to make subordinated loans to the Borrower in an amount that equals the principal amount of the loan so requested provided, that the aggregate principal amount of the Subordinated Loans (exclusive of Deferred Interest) at any time shall not exceed the Commitment at such time. (b) Not later than 1:00 P.M. (New York City time) on the requested date of borrowing, the Lender shall deposit in immediately available funds in an account of the Borrower the principal amount of the Subordinated Loans to be made by the Lender on such date. SECTION 3. Obligations Unconditional. The obligation of the Lender hereunder shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any change in the corporate existence, structure or ownership of the Borrower or any other Person or any of their respective Subsidiaries, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or any other Person or any of their assets or any resulting release or discharge of any obligation of the Borrower or any other Person contained in any Financing Document; (b) the existence of any claim, set-off or other rights which the Lender may have at any time against the Borrower, the Administrative Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by - -------- separate suit or compulsory counterclaim; or (c) any other act or omission to act or delay of any kind by the Borrower, the Administrative Agent, any other party to any Financing Document, any Bank or any other 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 the Lender's obligations hereunder. SECTION 4. Terms of Subordinated Loans. (a) Maturity. Each Subordinated Loan shall mature, and the outstanding principal amount thereof shall be due and payable, on the Subdebt Maturity Date. 3 (b) Interest. The unpaid principal amount of the Subordinated Loans from time to time outstanding (including the unpaid principal amount of all Subordinated Loans and all amounts representing Deferred Interest) shall bear interest at a rate per annum (based upon a 365/366 day year) equal to 10%, provided, however, that the Borrower shall be obligated to pay currently (in - -------- ------- accordance with the terms of this Agreement) only such portion of such interest that accrues on the principal amount of the Subordinated Loans (exclusive of capitalized interest) at a rate per annum equal to 4% (herein "Current Interest"), with all remaining interest that accrues at a rate per annum equal to 6% being deferred and capitalized as principal outstanding under this Agreement (herein "Deferred Interest"), which Deferred Interest (together with all interest thereon) shall be due and payable on the Subdebt Maturity Date; provided, further, however, that in the event that any principal or interest - -------- ------- under this Agreement is not paid when due (whether by acceleration or otherwise), the interest rate applicable to the unpaid principal amount outstanding under this Agreement (including the unpaid principal amount of all Subordinated Loans and all amounts representing Deferred Interest) shall be at a rate per annum equal to 12% (with all such accrued interest payable upon demand in accordance with the terms of this Agreement) until such unpaid principal or interest is paid. Subject to Sections 5 and 6 hereof and Section 5.14 of the Term Loan Agreement, accrued Current Interest on the unpaid principal amount of this Agreement from time to time outstanding (including the unpaid principal amount of all Subordinated Loans and all amounts representing Deferred Interest) shall be payable on the last day of each calendar quarter, on the date of any prepayment of principal, and at maturity (including on the Subdebt Maturity Date), commencing with the first of such dates to occur after the date hereof. After maturity (whether by acceleration or otherwise), accrued Current Interest on the unpaid principal amount outstanding under this Agreement (including the unpaid principal amount of all Subordinated Loans and all amounts representing Deferred Interest) shall be payable on demand subject to Sections 5 and 6 hereof and Section 5.14 of the Term Loan Agreement. (c) Optional Prepayments. Subject to Section 5.14 of the Term Loan Agreement, the Borrower may at any time, upon at least one Domestic Business Day's notice, prepay all or any portion of the principal of, or accrued interest on, any Subordinated Loan. Any such prepayment shall be applied to prepay ratably the principal of, or accrued interest on, the Subordinated Loans of the Lender outstanding at such time. SECTION 5. Restrictions While Senior Debt or Senior Commitments Are Outstanding. (a) The Lender acknowledges and agrees that (i) the Term Loan restricts the ability of the Borrower to make payments in respect of Subordinated 4 Obligations and (ii) should the Lender collect or receive, directly or indirectly, any payment of any kind or character, whether in cash or property in respect of any Subordinated Obligations (and whether by way of payment of principal or interest, redemption, purchase, other acquisition, dividend, distribution, guarantee, grant of a security interest, realization of security or the proceeds thereof, set-off, exercise of contractual or statutory rights or otherwise), (x) at a time when such payment is prohibited by the terms of the Term Loan Agreement, (y) through exercise of remedies permitted under Section 5(c) at any time while any Senior Debt or any Senior Commitment is outstanding or (z) in the event of any insolvency or bankruptcy proceeding or any receivership, liquidation, reorganization or other similar proceeding in connection therewith, relative to the Borrower or to any of its creditors, in their capacity as creditors of the Borrower, or to substantially all of its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Borrower, whether or not involving insolvency or bankruptcy, the Lender will forthwith deliver the same to the Administrative Agent (or other representatives of the holders of Senior Debt) for the equal and ratable benefit of the holders of Senior Debt in precisely the form received (except for the endorsement or the assignment of or by the Lender where necessary) for application to payment of all Senior Debt in full, after giving effect to any concurrent payment or distribution to the holders of Senior Debt and, until so delivered, the same shall be held in trust by the Lender as the property of the holders of Senior Debt; provided that the Lender may receive -------- and hold securities of the Borrower (or any successor entity) in a reorganization of the Borrower effected pursuant to a plan of reorganization which has given effect to the subordination provisions set forth in this Agreement (without amendment, waiver or modification of any of the terms hereof), so long as such securities are subordinated to the Senior Debt at least to the same extent as the Subordinated Obligations (any such securities, "Reorganization Securities"). (b) Unless and until all Senior Debt shall have been paid in full and all Senior Commitments shall have terminated or been canceled, neither the Borrower nor any of its Subsidiaries or Affiliates shall make, and the Lender shall not demand, accept or receive, or shall attempt to collect or commence any legal proceedings to collect, any direct or indirect payment (in cash or property or by setoff, exercise of contractual or statutory rights or otherwise) of or on account of any amount payable on or with respect to any Subordinated Obligations (including any payment in respect of redemption or purchase or other acquisition), except that (i) the Borrower may make payments with respect to the Subordinated Obligations if such payments are permitted under Section 5.14 of the Term Loan Agreement, and (ii) as expressly permitted under Section 5(c). (c) Unless and until all Senior Debt shall have been paid in full and all Senior Commitments shall have terminated or been canceled, the Lender will not 5 commence or maintain any action, suit or any other legal or equitable proceeding against the Borrower or any of its Subsidiaries, or join with any creditor in any such proceeding; provided that nothing in this Section 5(c) will preclude -------- the Lender (i) from commencing at any time any action, suit or any other legal or equitable proceeding to enforce any remedies to which the Lender is entitled hereunder if at such time the holders of Senior Debt have commenced an action, suit or proceeding to enforce substantially similar remedies, (ii) from joining with any creditor in any such proceeding, under any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding if the holders of Senior Debt have joined in any such proceeding or (iii) from asserting a compulsory counterclaim in any action, suit or proceeding to which the Borrower is a party; provided that nothing in this clause(iii) shall be -------- construed to permit the Lender to enforce any judgement obtained with respect to such compulsory counterclaim or receive any payment pursuant thereto except as expressly permitted by other provisions of this Agreement. (d) The Lender hereby waives any and all notice in respect of the Term Loan Agreement and agrees and consents that without notice to or assent by the Lender: (i) the obligations and liabilities of the Borrower or any other party or parties to the Term Loan Agreement (or any promissory note, security document or guaranty evidencing or securing the same) may, from time to time, in whole or in part, be renewed, extended, modified, amended, restated, accelerated, compromised, supplemented, terminated, sold, exchanged, waived or released; (ii) the Administrative Agent and the Banks may exchange, release or surrender any collateral to the Borrower or any other Person, waive, release or subordinate any security interest, obtain a guaranty of any Person or a security interest in or mortgage or other encumbrance on any additional property as collateral for any obligations of the Borrower in its sole discretion may elect; (iii) the Administrative Agent and the Banks may apply payments by the Borrower or any other Person to such portion of the Secured Obligations (as defined in the Pledge Agreement) as they in their sole discretion may elect; (iv) the Administrative Agent and the Banks may exercise or refrain from exercising any right, remedy or power granted by or in connection with the Term Loan Agreement, any other Financing Documents or any other agreements relating thereto; and 6 (v) any Bank or the Administrative Agent may surrender or release, from time to time, in whole or in part, any balance or balances of funds with the Administrative Agent or any Bank at any time standing to the credit of the Borrower; all as the Administrative Agent or the Banks may deem advisable and all without impairing, abridging, diminishing, releasing or affecting the obligations of the Borrower and the Lender hereunder. SECTION 6. Dissolution, Liquidation or Reorganization of the Borrower. (a) In the event of any insolvency or bankruptcy proceedings, and any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the Borrower or to any of its creditors, in their capacity as creditors of the Borrower, or to substantially all of its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Borrower, whether or not involving insolvency or bankruptcy, then: (i) the holders of the Senior Debt shall first be entitled to receive payment in full in cash of the principal thereof, premium, if any, interest and all other amounts payable thereon (accruing before and after the commencement of the proceedings) before the Lender is entitled to receive any payment on account or in respect of Subordinated Obligations; provided -------- that nothing in this clause (i) shall prevent the Lender from receiving or holding Reorganization Securities; and (ii) any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities to which the Lender would be entitled, but for the provisions of this Section 6, shall be paid or distributed by the liquidating trustee or agent or other Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or other trustee or agent, directly to the Administrative Agent and any other representative on behalf of the holders of Senior Debt to the extent necessary to make payment in full of all amounts of Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of the Senior Debt; provided that nothing in this clause (ii) shall prevent the Lender from -------- receiving or holding Reorganization Securities. (b) The Lender shall not be subrogated to the rights of the holders of the Senior Debt to receive payments or distributions of assets of the Borrower until all 7 Senior Debt shall have been paid in full and all Senior Commitments shall have terminated or been canceled; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of any cash, property or securities to which the Lender would be entitled except for these provisions shall, as between the Borrower, its creditors other than the holders of the Senior Debt, and the Lender, be deemed to be a payment by the Borrower to or on account of the Senior Debt. The provisions of Sections 5 and 6 of this Agreement are and are intended solely for the purpose of defining the relative rights of the Lender, on the one hand, and the holders of the Senior Debt, on the other hand. (c) Upon payment in full of all Senior Debt and the termination or cancellation of all Senior Commitments, the Lender shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, property or securities of the Borrower applicable to the Senior Debt until all amounts owing on the Subordinated Obligations shall be paid in full. For purposes of such subrogation, no payments or distributions to the holder of the Subordinated Obligations of cash, property, securities or other assets by virtue of the subrogation herein provided which otherwise would have been made to the holders of the Senior Debt shall, as between the Borrower, its creditors other than the holders of Senior Debt and the holder of the Subordinated Obligations, be deemed to be a payment to or on account of the Subordinated Obligations. The Lender agrees that, in the event that all or any part of any payment made on account of the Senior Debt is recovered from the holders of Senior Debt as a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law, any payment or distribution received by the Lender on account of the Subordinated Obligations at any time after the date of the payment so recovered, whether pursuant to the right of subrogation provided for in this Section 6(c) or otherwise, shall be deemed to have been received by such holder of Subordinated Obligations in trust as the property of the holders of the Senior Debt and such holders shall forthwith deliver the same to the Administrative Agent for the equal and ratable benefit of the holders of the Senior Debt for application to payment of all Senior Debt in full. (d) The provisions of Sections 5 and 6 of this Agreement are applicable by their terms to the Lender in its capacity as holder of the Subordinated Obligations, and shall not affect any right or claim the Lender may have against the Borrower or any of its Subsidiaries with respect to any obligation owed by the Borrower or any of its Subsidiaries to the Lender other than the Subordinated Obligations and any claim arising under, or with respect to, the Subordinated Obligations and this Agreement. SECTION 7. Representations and Warranties of Lender. The Lender represents and warrants that: 8 (a) The execution, delivery and performance by the Lender of this Agreement require no action by or in respect of, or filing with, any governmental body, agency or official, do not contravene, or constitute a default under, any provision of applicable law or regulation, or of any agreement, instrument, judgment, injunction, order or decree binding upon the Lender or result in the creation or imposition of any Lien on any asset of the Lender. (b) This Agreement constitutes a valid and binding agreement of the Lender, enforceable against the Lender in accordance with its terms. SECTION 8. Governing Law; Consent to Jurisdiction. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (b) EACH PARTY HERETO HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY FEDERAL COURT SITTING IN THE CITY OF NEW YORK AND, IN THE EVENT THAT JURISDICTION CANNOT BE OBTAINED OR MAINTAINED IN A FEDERAL COURT, TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE CITY OF NEW YORK FOR PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT THAT MAY BE BROUGHT OR INSTITUTED AGAINST IT. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. (c) Each of the Borrower and the Lender hereby irrevocably designates and appoints CT Corporation System having an office on the date hereof at 1633 Broadway, New York, New York 10019 as its authorized agent, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection 8(b) above until the Commitment shall have terminated and the Subordinated Obligations shall have been paid in full in accordance with the provisions hereof. Each of the Borrower and the Lender represents and warrants that such agent has agreed in writing to accept such appointment and that a true copy of such designation and acceptance has been delivered to the Administrative Agent. SECTION 9. Notices. All notices, requests and other communications to any party hereunder shall be given at the address, facsimile number or telex number of such party set forth on the signature pages hereof (or at such other 9 address as such party shall specify for such purpose from time to time by notice to all other parties hereto) and shall be effective upon receipt. SECTION 10. Successors and Assigns. The covenants of the Lender contained herein shall be binding upon the Lender and upon its respective heirs, legal representatives, successors and assigns. The Lender agrees that it will not assign, pledge or otherwise transfer, for security purposes or otherwise, any interest in the Subordinated Obligations held by it unless (i) the Borrower and the Administrative Agent (with the prior written consent of the Required Banks) shall have given their prior written consent to such transfer and (ii) the transferee thereof expressly acknowledges and agrees in a writing delivered to the Administrative Agent that the transfer is made subject to the terms of this Agreement and further agrees to be bound by the terms hereof. This Agreement is for the benefit of the holders of Senior Debt and their respective successors and assigns, and the Lender acknowledges that each of the Administrative Agent and each Bank has relied upon the obligations of the Lender hereunder in entering into the Term Loan Agreement. SECTION 11. 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. 10 SCHEDULE 1 Period Commitment ------ ---------- Borrowing Date to but not $ 35,000,000 including the first anniversary of the Borrowing Date First anniversary of the Borrowing $ 65,000,000 Date to but not including the second anniversary of the Borrowing Date Second anniversary of the $95,000,000 Borrowing Date to but not including the third anniversary of the Borrowing Date Third anniversary of the $120,000,000 Borrowing Date to but not including the fourth anniversary of the Borrowing Date Fourth anniversary of the $130,000,000 Borrowing Date to but not including the fifth anniversary of the Borrowing Date Fifth anniversary of the $140,000,000 Borrowing Date to but not including the sixth anniversary of the Borrowing Date Sixth anniversary of the $150,000,000 Borrowing Date to but not including the seventh anniversary of the Borrowing Date On and after the seventh $160,000,000 anniversary of the Borrowing Date 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. ACE US HOLDINGS, INC. By___________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By___________________________ Name: Title: A.C.E. INSURANCE COMPANY, LTD. By___________________________ Name: Title: The Common Seal of A.C.E. Insurance Company, Ltd. was hereunto affixed in the presence of: Director _______________________________ Director/Secretary _______________________________ 12 EXHIBIT G FORM OF DAVIS POLK & WARDWELL OPINION ------------------------------------- To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260-0060 Ladies and Gentlemen: We have participated in the preparation of the Term Loan Agreement (the "Loan Agreement") dated as of December 11, 1997 among ACE US Holdings, Inc., a Delaware corporation, as Borrower, ACE Limited, a Cayman Islands company limited by shares, as Guarantor, the Banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Administrative Agent, and have acted as special United States counsel for the Agents for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Loan Agreement. Terms defined in the Loan Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Loan Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The execution, delivery and performance by the Guarantor of the Loan Agreement are within the Guarantor's corporate powers and have been duly authorized by all necessary corporate action. 3. The Loan Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. The Loan Agreement constitutes a valid and binding agreement of the Guarantor enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. In giving the foregoing opinion we have relied, with your consent and without independent investigation, as to all matters governed by the laws of the Cayman Islands, upon the opinion of Maples and Calder dated the date hereof, a copy of which has been delivered by you pursuant to Section 3.01(b) of the Loan Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person without our prior written consent. Very truly yours, 2 EXHIBIT H ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of __________ __, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), ACE Limited, ACE US Holdings, Inc. ("ACE US"), A.C.E. Insurance Company, Ltd ("ACE Insurance") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H - - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Assignment Agreement") relates to (i) the Five-Year Credit Agreement (as amended from time to time, the "Five Year Credit Agreement") and the 364-Day Credit Agreement (as amended from time to time, the "364-Day Credit Agreement") each dated as of December 11, 1997 among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent, (ii) the Term Loan Agreement (as amended from time to time, the "Term Loan Agreement") the dated as of December 11, 1997 among ACE US, as Borrower, ACE Limited, as Guarantor, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent and (iii) the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among ACE Insurance, the Assignor and the other Banks party thereto and the Administrative Agent (the "Reimbursement Agreement" and together with the Five- Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement, collectively, the "Facilities"); WHEREAS, under the Five-Year Credit Agreement, the Assignor has a Commitment to make Loans to ACE Limited and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to ACE Limited by the Assignor under the Five-Year Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; WHEREAS, Letters of Credit with a total amount available for drawing under the Five-Year Credit Agreement of $____________ are outstanding at the date hereof; WHEREAS, under the 364-Day Credit Agreement, the Assignor has a Commitment to make Loans to ACE Limited in an aggregate principal amount at any time outstanding not to exceed $_________; WHEREAS, Committed Loans made to ACE Limited by the Assignor under the 364- Day Credit Agreement in the aggregate principal amount of $_________ are outstanding at the date hereof; WHEREAS, under the Term Loan Agreement, the Assignor has [a Commitment to make][outstanding] Loans to ACE US in an aggregate principal amount of $_____________ at the date hereof; WHEREAS, pursuant to the Reimbursement Agreement, the Assignor is a participant to the extent of _____% in up to (pound)153,584,466 of Letters of Credit outstanding thereunder; WHEREAS, the Assignor proposes to assign to the Assignee an aggregate interest in the Facilities of $__________, comprised as follows: (i) all of the rights of the Assignor under the Five-Year Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Five-Year Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans and Letter of Credit Liabilities thereunder, (ii) all of the rights of the Assignor under the 364-Day Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $_____________ (the "364-Day Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans thereunder, (iii) all of the rights of the Assignor under the Term Loan Agreement in respect of a portion of its [Commitment] [Loans] thereunder in an amount equal to $_______________ (the "Term Loan Assigned Amount" and, together with the Five-Year Assigned Amount and the 364- Day Assigned Amount, collectively the "Assigned Amounts"), and (iv) a portion of the rights and obligations of the Assignor under the Reimbursement Agreement equivalent to a Participation Percentage of ____% (the "Assigned Percentage"), 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: 2 SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Five-Year Credit Agreement, the 364-Day Credit Agreement, the Term Loan Agreement and the Reimbursement Agreement, as applicable. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement to the extent of the Five-Year Assigned Amount, the 364-Day Assigned Amount and the Term Loan Assigned Amount, respectively, and under the Reimbursement Agreement to the extent of the Assigned Percentage, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement to the extent of the Five-year Assigned Amount, the 364- Day Assigned Amount and the Term Loan Assigned Amount and under the Reimbursement Agreement to the extent of the Assigned Percentage, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor and Letter of Credit Liabilities of and the corresponding portion of the participating interests of the Assignor in the Letters of Credit under the Reimbursement Agreement, outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, ACE Limited, ACE US, ACE Insurance, the Issuing Bank(s) and the Administrative Agent 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 the Assignor under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement with a Commitment in an amount equal to the Five-Year Assigned Amount, the 364-Day Assigned Amount and the Term Loan Assigned Amount, respectively and under the Reimbursement Agreement to the extent of the Assigned Percentage, and (ii) the Commitment of the Assignor under each of the Facilities and the Participation Percentage of the Assignor under the Reimbursement Agreement shall, as of the date hereof, be reduced by the corresponding amount and the Assignor released from its obligations under each of the Five-Year Credit Agreement, the 364-Day Credit Agreement, the Term Loan Agreement and 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. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the 3 date hereof in Federal funds the amount heretofore agreed between them.* It is understood that ticking and/or facility fees accrued to the date hereof 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 any Related Document 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. SECTION 4. Consents. This Agreement is conditioned upon the consent of the Administrative Agent and the Issuing Bank(s) and ACE Limited, ACE US and ACE Insurance, pursuant to Section 10.06 of each of the Five-Year Credit Agreement, the 364-Day Credit Agreement and the Term Loan Agreement and Section 8.06(c) of the Reimbursement Agreement. The execution of this Agreement by such persons is evidence of such consents. Pursuant to Section 10.06 of each of the 364-Day Credit Agreement, the Five-Year Credit Agreement and the Term Loan Agreement, each of ACE Limited and ACE US, respectively, agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 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 any of ACE Limited and its subsidiaries or the validity and enforceability of the obligations of ACE Limited and its subsidiaries under the Related Documents. 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 ACE Limited and its subsidiaries. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 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. __________________ *Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any up front fee to be paid by the Assignor to the Assignee. 4 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: ACE US HOLDINGS, INC. By______________________________ Title: A.C.E. INSURANCE COMPANY, LTD. By______________________________ Title: 5 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and as Administrative Agent By_____________________________ Title: 6 EXHIBIT I [CT Corporation System] December 11, 1997 To the Persons Identified on on Schedule A Attached Hereto: We have reviewed (i) the Five-Year Credit Agreement dated as of December 11, 1997 (the "Five-Year Credit Agreement") and the 364-Day Credit Agreement (the "364-Day Credit Agreement") each among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd., Corporate Officers & Directors Assurance Ltd. and Tempest Reinsurance Company Limited, as Guarantors, the Banks listed therein, and Morgan Guaranty Trust Company of New York, as Administrative Agent, (ii) the Term Loan Agreement (the "Term Loan Agreement") dated as of December 11, 1997 among ACE US Holdings, Inc., as Borrower, ACE Limited, as Guarantor, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Administrative Agent, (iii) the Subordinated Loan Agreement dated as of December 11, 1997 (the "Subordinated Loan Agreement") among ACE US Holdings, Inc., as Borrower, A.C.E. Insurance Company, Ltd., as Lender and Morgan Guaranty Trust Company of New York, as Administrative Agent and (iv) the Amended and Restated Reimbursement Agreement dated as of December 11, 1997 among A.C.E. Insurance Company, Ltd., as Account Party, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent (the "Amended and Restated Reimbursement Agreement" and together with the Five- Year Credit Agreement, the 364-Year Credit Agreement, the Term Loan Agreement and the Subordinated Loan Agreement, collectively, the "Agreements"), in each of which CT Corporation System is named as agent to receive service of process in the State of New York on behalf of (a) the Borrower and each Guarantor under each of the Five-Year Credit Agreement and the 364- Day Credit Agreement, (b) the Borrower and the Guarantor under the Term Loan Agreement, (c) the Borrower and the Lender under the Subordinated Loan Agreement and (d) the Account Party under the Amended and Restated Reimbursement Agreement, at the address of 1633 Broadway, New York, New York 10019. Upon review of our appointment outlined in Section 10.10(b) of each of the 364-Day Credit Agreement, the Five-Year Credit Agreement and the Term Loan Agreement, Section 8(c) of the Subordinated Loan Agreement and Section 8.10(b) of the Amended and Restated Reimbursement Agreement, we understand that our role as registered agent is confined to receiving service of process only. We also understand that the term of our appointment as registered agent under each such Agreements shall remain in effect until each of the Agreements shall have been terminated and all obligations thereunder of each Borrower, each Guarantor, the Lender and the Account Party shall have been paid in full, or until such time as we are instructed in writing by the Administrative Agent to discontinue our service. We accept and confirm our appointment as registered agent and we understand that any notice or process received by us in our capacity as registered agent shall be promptly sent by telephone, fax, telex, cable or any other means of instant communication, and thereafter by reputable overnight carrier to: On Behalf of the Borrower and each Guarantor under each of the 364-Day Credit Agreement and the Five-Year Credit Agreement and the Guarantor under the Term Loan Agreement: ACE Limited The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda (Fax 441-295-5221) with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) On behalf of the Borrower under the Term Loan Agreement and the Subordinated Loan Agreement 2 ACE US Holdings, Inc. Atlanta, GA 30374 with copy to: Morgan Guaranty Trust 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) On behalf of the Account Party under the Amended and Restated Reimbursement Agreement and the Lender under the Subordinated Loan Agreement A.C.E. Insurance Company, Ltd. The ACE Building 30 Woodbourne Avenue Hamilton HM 08, Bermuda (Fax 441-295-5221) with copy to: Morgan Guaranty Trust Company of New York 60 Wall Street New York, NY 10260-0060 (Fax 212-648-5249) We appreciate this opportunity to be of service. Very truly yours, CT CORPORATION SYSTEM ___________________________ By: Title: 3 SCHEDULE A Morgan Guaranty Trust Company of New York, as Issuing Bank and as Administrative Agent Morgan Guaranty Trust Company of New York Mellon Bank, N.A. Citibank, N.A. The Bank of New York The Bank of Tokyo-Mitsubishi, Ltd. Barclays Bank PLC Deutsche Bank AG, New York and/or Cayman Islands Branch Fleet National Bank ING Bank, N.V. Royal Bank of Canada Bank of Bermuda (Luxembourg) S.A. Banque Nationale de Paris The Chase Manhattan Bank Credit Lyonnais New York Branch Dresdner Bank A.G., New York Branch and Grand Cayman Branch The First National Bank of Chicago 4 State Street Bank and Trust Company ACE Limited, as Borrower under the 364-Day Credit Agreement and the Five-Year Credit Agreement and as Guarantor under the Term Loan Agreement A.C.E. Insurance Company, Ltd., as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement, as Account Party under the Amended and Restated Reimbursement Agreement and as Lender under the Subordinated Loan Agreement Corporate Officers & Directors Assurance Ltd., as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement Tempest Reinsurance Company Limited, as Guarantor under the 364-Day Credit Agreement and the Five-Year Credit Agreement ACE US Holdings, Inc., as Borrower under the Term Loan Agreement and as Borrower under the Subordinated Loan Agreement 5 EX-11.1 8 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 ACE LIMITED AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AND PER SHARE DATA) Earnings (loss) per share Primary Weighted average Ordinary Shares outstanding............ 56,606,877 49,275,027 46,859,168 48,202,545 40,619,319 Average stock options outstanding (net of repurchased shares under the treasury stock method) (i)...... 886,794 538,601 199,838 -- 21,944 ---------- ---------- ---------- ---------- ---------- Weighted average Ordinary shares and ordinary share equivalents outstanding............ 57,493,671 49,813,628 47,059,006 48,202,545 40,641,263 ========== ========== ========== ========== ========== Net income (loss)....... $ 461,354 $ 289,733 $ 237,566 $ (45,678) $ 223,547 ---------- ---------- ---------- ---------- ---------- Earnings (loss) per share.................. $ 8.02 $ 5.82 $ 5.05 $ (0.95) $ 5.50 ========== ========== ========== ========== ========== Earnings (loss) per share Assuming full dilution Weighted average Ordinary shares outstanding............ 56,606,877 49,275,027 46,859,168 48,202,545 40,619,319 Average stock options outstanding (net of repurchased shares under the treasury stock method) (i)...... 1,322,417 717,156 199,838 -- 414,744 ---------- ---------- ---------- ---------- ---------- Weighted average Ordinary shares and ordinary share equivalents outstanding............ 57,929,294 49,992,183 47,059,006 48,202,545 41,034,063 ========== ========== ========== ========== ========== Net income (loss)....... $ 461,354 $ 289,733 $ 237,566 $ (45,678) $ 223,547 ---------- ---------- ---------- ---------- ---------- Earnings (loss) per share.................. $ 7.96 $ 5.79 $ 5.05 $ (0.95) $ 5.45 ========== ========== ========== ========== ==========
The number of shares for all periods presented have been adjusted to reflect the eight-for-one stock split effective January 14, 1993. - -------- (i) In 1994, the inclusion of stock options in the loss per share calculations would be antidilutive. 36 EX-13.1 9 PAGES 20 THRU 53 FROM 1997 ANNUAL REPORT ACE LIMITED AND SUBSIDIARIES Exhibit 13.1 SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company as of and for each of the years in the five year period ended September 30, 1997. These selected financial and other data should be read in conjunction with the consolidated financial statements and related notes and with "Management's Discussion and Analysis of Results of Operations and Financial Condition" presented on pages 32 to 53 and 21 to 31 respectively, of this annual report.
For the years ended September 30 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands except share and per share data and selected other data) Operations data: Net premiums written $ 639,744 $ 602,707 $ 424,756 $ 385,926 $ 340,355 ================================================================================================================================== Net premiums earned 644,838 587,245 428,661 391,117 319,578 Net investment income 237,823 206,524 181,375 142,677 119,978 Net realized gains on investments 127,982 55,229 50,765 3,717 98,371 Losses and loss expenses (1) 435,941 464,824 350,653 520,556 262,117 Acquisition costs and administrative expenses 113,348 94,441 72,582 62,633 52,263 - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) (1) $ 461,354 $ 289,733 $ 237,566 $ (45,678) $ 223,547 ================================================================================================================================== Earnings (loss) per share (2) $ 8.02 $ 5.82 $ 5.05 $ (0.95) $ 5.50 ================================================================================================================================== Weighted average shares outstanding 57,493,671 49,813,628 47,059,006 48,202,545 40,641,263 Pro forma (3): Earnings per share $ 4.49 =========== Weighted average shares outstanding $ 49,831,087 Cash dividends per share (4) $ 0.80 $ 0.64 $ 0.50 $ 0.42 $ 0.43 Balance sheet data (at end of period]: Total investments and cash $ 4,474,765 $ 4,170,071 $ 3,132,200 $ 2,538,321 $ 2,211,230 Total assets 5,001,546 4,574,358 3,236,906 2,632,361 2,293,587 Unpaid losses and loss expenses (1) 1,869,995 1,836,113 1,437,930 1,160,392 650,180 Total shareholders' equity (1) 2,619,194 2,244,278 1,442,663 1,088,745 1,368,180 Book value per share (1) $ 47.37 $ 38.58 $ 31.29 $ 22.96 $ 27.47 Fully diluted book value per share (1) $ 47.14 $ 38.31 $ 31.19 $ 22.95 $ 27.46 Selected other data: Loss and loss expense ratio (1) 67.6% 79.1% 81.8% 133.1% 82.0% Underwriting and administrative expense ratio 17.6% 16.1% 16.9% 16.0% 16.4% Combined ratio (1) 85.2% 95.2% 98.7% 149.1% 98.4% Loss reserves to capital and surplus ratio (1) 71.4% 81.8% 99.7% 106.6% 47.5% Ratio of net premiums written to capital and surplus 0.24:1 0.27:1 0.29:1 0.35:1 0.25:1 - ----------------------------------------------------------------------------------------------------------------------------------
1. At June 30, 1994 the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million (see "Management's Discussion and Analysis - Breast Implant Litigation"). 2. Earnings (loss) per share are computed using net income (loss) divided by the weighted average number of Ordinary Shares outstanding and, if dilutive, shares issuable under outstanding options. There is no material difference between primary and fully diluted earnings (loss) per share. 3. Pro forma earnings per share have been calculated by dividing net income by the weighted average number of Ordinary Shares and Ordinary Share equivalents outstanding as adjusted to reflect the recapitalization and the repurchase of Ordinary Shares, effected in March 1933, and assumes the recapitalization and repurchase of Ordinary Shares occurred at the beginning of each year for which pro forma information is provided. 4. The dividends declared in 1993 included a special "RPII" dividend of $0.23 per Ordinary Share paid to shareholders of record on July 7, 1993. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- The following is a discussion of the Company's financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the consolidated financial statements, and related notes thereto, presented on pages 32 to 53 of this annual report. General ACE Limited ("ACE") is a holding company which, through its Bermuda-based operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"), Corporate Officers & Directors Assurance Ltd. ("CODA") and Tempest Reinsurance Company Limited ("Tempest"), provides insurance and reinsurance for a diverse group of international clients. In addition, the Company provides funds at Lloyd's to support underwriting by Lloyd's syndicates managed by Methuen Underwriting Limited ("MUL"), ACE London Aviation Limited ("ALA") and ACE London Underwriting Limited ("ALU"), its indirect wholly owned subsidiaries. The term "the Company" refers to ACE and its subsidiaries excluding MUL, ALA and ALU. On March 27, 1996, the Company acquired a controlling interest in Methuen Group Limited ("Methuen"), the holding company for MUL. On November 26, 1996, the Company acquired the remaining 49 percent interest in Methuen. Also on November 26, 1996, the Company acquired Ockham Worldwide Holdings plc which subsequently changed its name to ACE London Holdings Ltd. ("ACE London"). ACE London owns two Lloyd's managing agencies, ALA and ALU. For the 1996, 1997 and 1998 years of account, the Company, through corporate subsidiaries, has or will participate in the underwriting of these syndicates by providing funds at Lloyd's, primarily in the form of a letter of credit, supporting approximately $37 million, $229 million and $485 million, respectively, of underwriting capacity. The syndicates managed by these agencies in which the Company participates underwrite aviation, marine and non-marine risks. Underwriting capacity is the amount of gross premiums that a syndicate at Lloyd's can underwrite in a given year of account. However, a syndicate is not required to fully utilize all of the capacity and it is not unusual for capacity utilization to be significantly lower than 100 percent. In March 1997, the Company, together with two other insurance companies, formed a managing general agency in Bermuda to provide underwriting services to the three organizations for political risk insurance coverage. The new company, Sovereign Risk Insurance Ltd. ("Sovereign") issues subscription policies with the Company assuming 50 percent of each risk underwritten. The Company currently cedes 10 percent of all risks assumed from Sovereign. Sovereign offers limits of up to $50 million per project and $100 million per country. In April 1997, the Company announced that it had signed a quota share treaty reinsurance agreement with the Multilateral Investment Guarantee Agency ("MIGA"), part of the World Bank Group. MIGA provides coverage for foreign investments in developing countries. The agreement allows MIGA to provide private investors and developing countries additional capacity to support developmentally sound investment projects. The coverages offered will be the same as those offered by MIGA's guarantee program, namely, transfer restriction, expropriation, war and civil disturbance and breach of contract. The quota share treaty offers limits of up to $25 million per contract with an aggregate of $100 million per country. On September 18, 1997, the Company announced it had executed a definitive agreement for the acquisition, through a newly-created U.S. holding company, of Westchester Specialty Group, Inc. ("WSG"), an indirect wholly owned subsidiary of Xerox Corporation. WSG, through its insurance subsidiaries, provides specialty commercial property and umbrella liability coverages in the U.S. Under the terms of the agreement, the Company will purchase all of the outstanding capital stock of WSG for aggregate cash consideration of approximately $333 million. In connection with the acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, will provide $750 million (75 percent quota share of $1 billion) of reinsurance protection to WSG with respect to their loss reserves for the 1996 and prior accident years. The acquisition, which is subject to, among other matters, regulatory approval and other customary closing conditions, is expected to close in early 1998. The Company expects to finance this transaction with $250 million of bank debt and the remainder with available cash (see "Liquidity and Capital Resources"). MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- On September 30, 1997, the Company announced the incorporation of ACE Insurance Company Europe Limited ("AICE"), as part of the International Financial Services Centre in Dublin, Ireland. AICE has been granted a license to write all 18 classes of non-life insurance in all member states of the European Union. The Company will continue to evaluate potential new product lines and other opportunities in the insurance and reinsurance markets. Results of Operations - Years ended September 30, 1997, 1996 and 1995 Net Income
1997 1996 1995 -------------------------------- (in millions) Income excluding net realized gains on investments $ 333.4 $ 234.5 $ 186.8 Net realized gains on investments 128.0 55.2 50.8 -------------------------------- Net income $ 461.4 $ 289.7 $ 237.6 ================================
During the years ended September 30, 1997 and 1996, the Company has experienced strong growth in income from insurance operations and net investment income. The increase was partially offset by an increase in general and administrative expenses. In fiscal 1997, Tempest contributed $119.8 million to income excluding net realized gains on investments compared to $23.8 million for 1996. A full year of operations for Tempest is included in the results for fiscal 1997 versus one quarter of operations in 1996 as Tempest was purchased on July 1, 1996. For 1996, strong growth in income from insurance operations and net investment income resulted in income excluding net realized gains on investments of $234.5 million compared to $186.8 million in 1995. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) ---------------------------------------------------------
Premiums Percentage Percentage 1997 Change 1996 Change 1995 ---------------------------------------------------- (in millions) Gross premiums written ACE Insurance (including CODA) Excess liability $144.6 (31.2)% $210.2 (14.9)% $246.9 Financial lines 134.7 12.1 120.2 N.M. 9.2 Satellite 111.2 7.0 104.0 N.M. 44.9 Directors and officers liability 85.4 (12.4) 97.6 (7.3) 105.0 Aviation 35.5 6.6 33.3 N.M. 8.9 Excess property 25.4 53.4 16.5 N.M. 5.6 Other 7.4 (50.1) 14.8 (2.6) 15.3 Lloyd's syndicates 78.8 N.M. 14.4 N.M. - Property catastrophe (Tempest) 119.6 N.M. 34.8 N.M. - ---------------------------------------------------- $742.6 15.0% $645.8 48.2% $435.8 ==================================================== Net premiums written ACE Insurance (including CODA) Excess liability $139.6 (31.0)% $202.3 (15.4)% $239.1 Financial lines 117.2 (1.7) 119.2 N.M. 9.2 Satellite 68.1 (20.1) 85.3 89.7 45.0 Directors and officers liability 85.4 (12.4) 97.6 (7.1) 105.0 Aviation 27.0 (0.4) 27.1 N.M. 7.0 Excess property 24.2 74.0 13.9 N.M. 5.3 Other 7.1 (45.1) 12.8 (9.4) 14.2 Lloyd's syndicates 55.8 N.M. 9.7 N.M. - Property catastrophe (Tempest) 115.3 N.M. 34.8 N.M. - ---------------------------------------------------- $639.7 6.2% $602.7 41.9% $424.8 ==================================================== Net premiums earned ACE Insurance (including CODA) Excess liability $183.0 (23.2)% $238.2 (9.2)% $262.4 Financial lines 99.3 16.9 84.9 N.M. 0.8 Satellite 66.8 (14.1) 77.8 79.7 43.3 Directors and officers liability 85.3 (18.4) 104.5 (5.0) 110.1 Aviation 26.5 39.5 19.0 N.M. 1.5 Excess property 21.5 81.7 11.8 N.M. 1.0 Other 11.0 (12.6) 12.5 30.6 9.6 Lloyd's syndicates 27.5 N.M. 2.8 N.M. - Property catastrophe (Tempest) 123.9 N.M. 35.7 N.M. - ---------------------------------------------------- $644.8 9.8% $587.2 37.0% $428.7 ====================================================
N.M. = Not Meaningful MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- The Company's ability to make strategic acquisitions, develop new and existing product lines and maintain a high level of policy renewals on existing business despite continuing competitive pressure in certain markets, particularly the excess liability and directors and officers liability markets, has resulted in increases in gross and net premiums written and net premiums earned for the years ended September 30, 1997 and 1996. Gross premiums written increased by $96.8 million to $742.6 million in 1997 from $645.8 million in 1996 despite continuing competitive pressures in most insurance markets. The growth in gross premiums written is primarily attributable to the inclusion of a full year of premiums for Tempest and the increased participation in the Lloyd's syndicates managed by the Company. As Tempest was purchased on July 1, 1996, the 1996 comparatives only include three months of Tempest premiums. Tempest's gross written premiums for 1997 are down by approximately 17 percent compared to their full year 1996 premiums primarily due to rate reductions, increasing attachment points and some cancellations due to pricing. The Company's portion of gross premiums written by the Lloyd's syndicates in which the Company participates amounted to $78.8 million in 1997 compared to $14.4 million in 1996 primarily as a result of the Company's increased participation in these syndicates. Satellite, aviation, excess property and financial lines also contributed to the increase. These increases in gross premiums written were offset by declines in excess liability and directors and officers liability gross premiums written. The decline in excess liability premiums of $65.6 million is mainly the result of continuing competitive pressures in that market which have adversely affected the pricing of the excess liability business but have also led to a reduction in the Company's exposure and an improved risk profile as a result of higher average attachment points and lower average limits. Directors and officers liability premiums declined by $12.2 million as this line faces an extremely competitive environment with its corresponding pressures on prices. In 1996, gross premiums written increased by $210.0 million or 48.2 percent compared to 1995. This growth was a result of a very strong year for the Company's financial lines and satellite product lines together with the increased contributions from aviation and excess property insurance which both included a full year of underwriting in 1996. Gross premiums written in 1996 also included property catastrophe premiums written by Tempest from July 1, 1996, as well as premiums from the Company's participation in the Lloyd's syndicates managed by the Company. These increases were offset by decreases in excess liability and directors and officers liability premiums written in 1996 as a result of competitive pressures in these markets. Net premiums written increased by $37.0 million in 1997 to $639.7 million compared to $602.7 million for 1996. The inclusion of a full year of net premiums written for Tempest, our increased participation in the Lloyd's syndicates managed by the Company and growth in excess property premiums contributed to the increase in net premiums written. These increases were partially offset by declines in excess liability and directors and officers liability premiums as discussed above. A portion of the decline in net premiums written is also the result of the Company's use of reinsurance for the satellite and financial lines product lines in 1997. Net premiums written for Tempest were also reduced as a result of the purchase of a modest amount of retrocessional cover during the current fiscal year. In 1996, net premiums written increased by $177.9 million or 41.9 percent compared to 1995 as a result of a very strong year for the Company's financial lines and satellite product lines together with other factors discussed above in the analysis of gross premiums written. For 1997, net premiums earned increased by $57.6 million to $644.8 million from $587.2 million in 1996. The growth in net premiums earned was primarily the result of the inclusion of a full year of premiums earned for Tempest in 1997 compared to three months in 1996 and the Company's increased participation in the Lloyd's syndicates managed by the Company. Aviation, excess property and financial lines also experienced growth during the year. These increases were offset by declines in excess liability, directors and officers liability and satellite premiums earned. For 1996, net premiums earned increased by $158.5 million to $587.2 million compared with $428.7 million in 1995. The increase was the result of contributions from the new lines of business, particularly financial lines, together with the increase in satellite premiums earned primarily from launch insurance, and the inclusion of Tempest earned premiums since July 1, 1996, the date of acquisition, which amounted to $35.7 million. These increases were offset by a decline in excess liability and directors and officers liability premiums earned in the year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) ---------------------------------------------------------
Net Investment Income Percentage Percentage 1997 Change 1996 Change 1995 ------------------------------------------------ (in millions) Net investment income $237.8 15.2% $206.5 13.9% $181.4 =================================================
The average yield earned on the investment portfolio in 1997 was down slightly compared to the yield generated in 1996. This is largely due to the fact that during the first quarter of fiscal 1997 the Company increased the equity exposure of the externally managed investment portfolio to 20 percent from 15 percent. The remainder of the portfolio is comprised of fixed maturity securities. On average, the portfolio generated a lower yield in 1996 compared to 1995 as a result of general market conditions. Despite the decreases in yield, net investment income increased by $31.3 million in 1997 compared to 1996 and by $25.1 million in 1996 compared to 1995, primarily as a result of a larger investable asset base. The increase in the investable asset base in 1997 and 1996 were due to positive cash flows from insurance operations, the reinvestment of funds generated by the portfolio and the fact that the consolidated investment portfolio included the Tempest portfolio for the entire period of fiscal 1997 and for three months during fiscal 1996. Net Realized Gains (Losses) on Investments
1997 1996 1995 -------------------------------- (in millions) Fixed maturities and short-term investments $ 59.0 $14.4 $ 8.4 Equity securities 38.1 15.8 3.6 Financial futures and option contracts 57.1 26.7 39.8 Currency (26.2) (1.7) (1.0) -------------------------------- $128.0 $55.2 $50.8 ================================
The Company's investment strategy takes a long-term view and the portfolio is actively managed to maximize total return within certain specific guidelines which minimize risk. The portfolio is reported at fair value. The effect of market movements on the investment portfolio will directly impact net realized gains (losses) on investments when securities are sold. Changes in unrealized gains and losses, which result from the revaluation of securities held, are reported as a separate component of shareholders' equity. The Company uses foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar holdings. The contracts used are not designated as specific hedges and therefore, realized and unrealized gains and losses recognized on these contracts are recorded as a component of net realized gains (losses) on investments in the period in which the fluctuations occur, together with net foreign currency gains and losses recognized when non-U.S. dollar securities are sold. Sales proceeds for fixed maturity securities were generally higher than their amortized costs during 1997 and 1996 which resulted in net realized gains on sale of fixed maturities and short-term investments of $59.0 million in 1997 compared to gains of $14.4 million during 1996 and $8.4 million in 1995. With strong equity markets and the increased equity exposure as discussed above, net realized gains on sales of equity securities were $38.1 million in 1997 compared to $15.8 million in 1996. There were gains of $3.6 million in 1995. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- The realized gains on financial futures and options contracts were generated from U.S. Treasury futures contracts and from the equity index futures contracts held in the synthetic equity fund. Gains and losses on these instruments are closely linked to fluctuations in the U.S. Treasury and equity markets and therefore, realized gains would be expected during periods of broad market improvements while losses are realized during periods of market declines. Net realized gains on financial futures and option contracts of $57.1 million recorded in 1997 were primarily generated by the equity index futures contracts held, as a result of the rise in the S&P 500 Stock Index of nearly 40 percent during the fiscal year. The realized gains of $26.7 million in 1996 were generated from U.S. Treasury futures contracts and from the equity index futures contracts held in the synthetic equity fund as a result of broad market improvements during the year. The $39.8 million generated in 1995 arose from gains in the S&P 500 stock index and gains recognized on futures contracts used by certain of the Company's external managers of fixed income securities. Currency losses for the year were $26.2 million compared to a loss of $1.7 million for 1996. During 1997 the Company increased its exposure to non-U.S. dollar securities from 8 percent of its externally managed investment portfolio to 12 percent. Currency markets generally suffered declines against the U.S. dollar during the year. At September 30, 1997 there were unrealized currency losses of $20.0 million on securities held in the portfolio compared to $7.2 million as at September 30, 1996. Unrealized currency losses are reflected in net unrealized appreciation on investments in shareholders' equity. At September 30, 1995 there was an unrealized currency gain of $1.7 million in net unrealized appreciation on investments in shareholders' equity. The Company's externally managed investment portfolio contains certain market sensitive instruments which may be adversely effected by changes in interest rates and foreign currency exchange rates (for further discussion see "Market Sensitive Instruments and Risk Management"). Combined Ratio
1997 1996 1995 -------------------------------------- Loss and loss expense ratio 67.6% 79.1% 81.8% Underwriting and administrative expense ratio 17.6 16.1 16.9 -------------------------------------- Combined ratio 85.2% 95.2% 98.7% ======================================
The underwriting results of a property and casualty insurer are discussed frequently by reference to its loss and loss expense ratio, underwriting and administrative expense ratio and combined ratio. Each ratio is derived 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 profits and a combined ratio exceeding 100 percent indicates underwriting losses. Losses and Loss Expenses
Percentage Percentage 1997 Change 1996 Change 1995 -------------------------------------------------- (in millions) Losses and loss expenses $435.9 (6.2)% $464.8 32.6% $350.6 ==================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- For the years ended September 30, 1997 and 1996, the loss and loss expense ratios were 67.6 percent and 79.1 percent. These ratios have been favorably impacted by the results of Tempest. Property catastrophe loss experience is generally characterized as low frequency but high severity short-tail claims which may result in significant volatility in results. For the year ended September 30, 1997 and the three month period from July 1, 1996, the date of acquisition to September 30, 1996, the loss and loss expense ratio for Tempest was 8.8 percent and 36.4 percent, respectively. These favorable loss ratios are the result of low loss activity in Tempest since July 1, 1996. Excluding Tempest, the loss and loss expense ratios would have been 80.9 percent for 1997 and 81.8 percent for 1996. The loss and loss expense ratio for 1995 was 81.8 percent. Several aspects of the Company's operations, including the low frequency and high severity of losses in the high excess layers in certain lines of business in which the Company provides insurance and reinsurance, complicate the actuarial reserving techniques utilized by the Company. Management believes, however, that the Company's reserve for unpaid losses and loss expenses, including those arising from breast implant litigation, are adequate to cover the ultimate cost of losses and loss expenses incurred through September 30, 1997. Since such provisions are necessarily based on estimates, future developments may result in ultimate losses and loss expenses significantly greater or less than such amounts (see "Breast Implant Litigation"). Underwriting and Administrative Expenses
Percentage Percentage 1997 Change 1996 Change 1995 ------------------------------------------------------------------ (in millions) Underwriting and administrative expenses $113.4 20.0% $94.4 30.0% $72.6 =========================================================================-
The underwriting and administrative expense ratio has increased to 17.6 percent in 1997 compared to 16.1 percent in 1996, an increase of $19.0 million. This increase is due to an increase in administrative expenses of $24.9 million in 1997 over 1996, which is partially offset by a decrease in acquisition costs. The increase in administrative expenses is primarily due to the increased cost base resulting from the strategic diversification by the Company over the past two years, including the recent acquisition of Tempest, Methuen and ACE London as well as the development of the newer insurance lines and products. Of the $24.9 million increase in administrative expenses in 1997, $12.7 million relates directly to Tempest and the Company's Lloyd's operations, compared to $3.1 million in 1996. Of these amounts, $5.1 million and $1.3 million for 1997 and 1996 respectively, relate to the amortization of goodwill resulting from the acquisition of Tempest. The decrease in acquisition costs in 1997 to $47.0 million from $53.0 million in 1996 is due primarily to the continuing change in the mix of business written by the Company. Underwriting and administrative expenses increased by $21.8 million in 1996 compared to 1995 but the underwriting and administrative expense ratio actually decreased to 16.1 percent from 16.9 percent in 1995. The increase in expenses is a result of increases of $6.4 million of acquisition costs and $15.6 million of administrative expenses. Acquisition costs increased as a result of the significant increase in net premiums earned in 1996 versus 1995. However, the acquisition cost ratio decreased to 9.0 percent from 10.9 percent primarily due to the change in the mix of premiums earned in the year. As with 1997, administrative expenses increased primarily due to the increased cost base resulting from the strategic diversification by the Company over the past two years, including the acquisition of Tempest and Methuen in 1996 as well as the development of the new insurance lines and products. In addition, the Company recorded expenses related to stock appreciation rights of $6.0 million in 1996 compared to $2.5 million in 1995. All stock appreciation rights were either exercised or forfeited during 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES As a holding company, ACE's assets consist primarily of the stock of its subsidiaries as well as other investments. In addition to investment income, its cash flows depend primarily on dividends or other statutorily permissible payments from its Bermuda-based insurance and reinsurance subsidiaries (the "Bermuda subsidiaries"). 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 shareholder's equity at a level adequate to support the level of insurance and reinsurance operations. On December 20, 1996, ACE received a dividend of $10 million from ACE Insurance Management Limited and on May 30, 1997, ACE received a dividend of $180 million from ACE Insurance. The Company's consolidated sources of funds consist primarily of net premiums written, investment income, and the proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses and dividends, for the purchase of investments and for share repurchases. For the years ended September 30, 1997, 1996 and 1995, the Company's consolidated net cash flows from operating activities were $282.1 million, $624.0 million and $437.0 million respectively. Cash flows are affected by claim payments, which due to the nature of the Company's 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 periods. Total loss and loss expense payments amounted to $402.1 million, $101.4 million and $73.1 million in fiscal 1997, 1996 and 1995, respectively. At September 30, 1997, total investments and cash amounted to $4.5 billion compared with $4.2 billion at September 30, 1996. The increase is mainly attributable to cash flows from operating activities, the reinvestment of funds generated by the portfolio as well as market appreciation during the year. The increase generated by these items was partially offset by share repurchases and dividends paid during 1997. The Company's consolidated investment portfolio is structured to provide a high level of liquidity to meet insurance related or other obligations. During 1997, an average of 9.4 percent of the externally managed investment portfolio was held in short-term investments which mature in one year or less from date of issue. Additionally, at September 30, 1997, 5.5 percent of the fixed maturity portfolio had a maturity date within the succeeding twelve month period, providing a further source of liquid funds. The consolidated investment portfolio is externally managed by independent professional investment managers and is invested in high quality investment grade marketable fixed income and equity securities, the majority of which trade in active, liquid markets (see note 4 of the Notes to Consolidated Financial Statements for a detailed analysis of the portfolio). At September 30, 1997, 92.5 percent of the fixed maturity portion of the portfolio was rated "A" or better by one or more nationally recognized U.S. rating agencies. The Company believes that its cash balances, cash flow from operations, routine sales of investments and the liquidity provided under its committed line of credit (discussed below) are adequate to allow the Company to pay claims within the time periods required under its policies. The Company has a $50 million committed unsecured line of credit provided by a syndicate of banks, led by Morgan Guaranty Trust Company of New York ("Morgan"). In accordance with the Company's cash management strategy, this facility is utilized when it is determined that borrowing on a short-term basis is advantageous to the Company. Borrowings from this facility are generally repaid from operating cash flows, primarily premium receipts. There were no drawdowns on the facility during 1997 or 1996. The line of credit agreement requires the Company to maintain consolidated tangible net worth of not less than $1.25 billion. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- The same syndicate of banks have also provided up to (Pounds)75 million (approximately $113 million) for a five year, secured letter of credit ("LOC"), which is primarily used to provide funds at Lloyd's to support underwriting capacity on Lloyd's syndicates in which the Company participates. Subsequent to September 30, 1997, the Company has put in place syndicated credit facilities which replace the existing facilities described in the preceding two paragraphs. J.P. Morgan Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the arranging, structuring and syndication of these credit facilities. The new facilities provide: A $200 million 364 day revolving credit facility and a $200 million five year revolving credit facility which together make up a combined $400 million committed, unsecured revolving credit facility. This new five year revolving credit facility has a $50 million LOC sublimit. A five year LOC facility of approximately (Pounds)154 million (approximately $250 million). This facility will primarily be used on fulfill the requirements of Lloyd's to provide funds to support underwriting capacity on Lloyd's syndicates in which the Company participates. The minimum consolidated tangible net worth covenant for ACE Insurance under this LOC facility is $1.0 billion. A $250 million seven year Amortizing Term Loan Facility which will be used to partially finance the acquisition of WSG. The interest rate on the term loan is LIBOR plus an applicable spread. The revolving credit and term loan facilities require that the Company maintain a minimum consolidated tangible net worth of $1.4 billion. The Board of Directors has authorized the repurchase from time to time of the Company's Ordinary Shares in open market and private purchase transactions. During 1997, the Company repurchased 3,031,000 Ordinary Shares under share repurchase programs for an aggregate cost of $182.6 million. On May 9, 1997, the Board of Directors terminated the then existing share repurchase program and authorized a new program for up to $300.0 million of the Company's Ordinary Shares. As at September 30, 1997, approximately $268.0 million of the current Board authorization had not been utilized. During the period October 1, 1997 through November 25, 1997 the Company repurchased an additional 786,200 Ordinary Shares under the Share Repurchase Program for an aggregate cost of $71.8 million, leaving approximately $196 million of the May 9, 1997 Board authorization not utilized. During 1996, the Company repurchased 1,268,000 Ordinary Shares under share repurchase programs for an aggregate cost of $58.0 million. On October 18, 1996, January 17, 1997 and April 18, 1997, the Company paid quarterly dividends of 18 cents per share to shareholders of record on September 30, 1996, December 29, 1996 and March 31, 1997. On July 18, 1997 the Company paid a quarterly dividend of 22 cents per share to shareholders of record on June 30, 1997. On August 8, 1997 the Board of Directors declared a quarterly dividend of 22 cents per share paid on October 17, 1997 to shareholders of record on September 30, 1997. On November 13, 1997, the Board of Directors declared a quarterly dividend of 24 cents per share payable on January 16, 1998, to shareholders of record on December 13, 1997. The declaration and payment of future dividends is at the discretion of the Board of Directors and will be dependent upon the profits and financial requirements of the Company and other factors, including legal restrictions on the payment of dividends and such other factors as the Board of Directors deems relevant. Fully diluted net asset value per share was $47.14 at September 30, 1997, compared with $38.31 at September 30, 1996. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- Changes in shareholders' equity for the years ended September 30, 1997 and 1996 were as follows:
1997 1996 ----------------------------- (in millions) Balance, beginning of year $2,244 $1,443 Net income 461 290 Change in net unrealized appreciation (depreciation) on investments 135 (33) Repurchase of Ordinary Shares (183) (58) Dividends declared (45) (32) Other 7 -- Value of Ordinary Shares and options issued in Tempest acquisition -- 634 ------------------------------- Balance, end of year $2,619 $2,244 ===============================
The Company maintains loss reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. The reserve for unpaid losses and loss expenses of $1.9 billion at September 30, 1997, includes $924.2 million of case and loss expense reserves. While the Company believes that its reserve for unpaid losses and loss expenses at September 30, 1997 is adequate, future developments may result in ultimate losses and loss expenses significantly greater or less than the reserve provided. A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. During fiscal 1997, the Company has made certain payments to policyholders with respect to these claims. However, the Company does not have adequate data upon which to anticipate the timing of future payments relating to these liabilities, and it expects that the amount of time required to determine the ultimate financial impact of the options selected by claimants may extend well into 1998 and beyond (see "Breast Implant Litigation"). The Company's financial condition, results of operations and cash flow are influenced by both internal and external forces. Claims 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 elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the settlement of the Company's liability for that loss. The liquidity of its investment portfolio, cash flows and the line of credit are, in management's opinion, adequate to meet the Company's expected cash requirements. Breast Implant Litigation A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. Lawsuits, including class actions, involving thousands of implant recipients have been filed in both state and federal courts throughout the United States. Most of the federal cases have been consolidated pursuant to the rules for Multidistrict Litigation to a Federal District Court in Alabama, although cases are in the process of being transferred back to federal courts or remanded to state courts. On May 15, 1995, the Dow Corning Corporation, one of the major defendants, filed for protection under Chapter 11 of the U.S. Bankruptcy Code and claims against Dow Corning remain stayed subject to the Bankruptcy Code. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of an individual settlement plan for U.S. claimants with at least one implant from any of those manufacturers ("the Settlement"). In general, under the Settlement, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of participants electing to opt out from the new plan. Also, in general, the compensation would be fixed and not affected by the number of participants, and the manufacturers would not have a right to walk away because of the amount of claims payable. Finally, each settling defendant agreed to be responsible only for cases in which its implant was identified, and not for a percentage of all cases. By November 13, 1995, the Settlement was approved by the three major defendants. In addition, two other defendants became part of the Settlement, although certain of their settlement terms are different and more restricted than the plan offered by the original three defendants. On December 22, 1995, the multidistrict litigation judge approved the Settlement and the materials for giving notice to claimants although an appeal concerning the Settlement is pending with the Eleventh Circuit Court of Appeals. Beginning in mid-January, 1996, the three major defendants have each made payments to a court-established fund for use in making payments under the Settlement. The Settlement Claims Office had reported that as of August 29, 1997, it has sent out Notification of Status Letters to 361,377 non-opt-out domestic implant recipients who had registered with the Settlement Claims Office. As of August 31, 1997, approximately $518 million had been distributed under the Settlement to implant recipients of the three major defendants. Certain potential payments to claimants relating to other implants remain suspended because of the pending appeals. The Settlement Claims Office has also reported that approximately 32,500 domestic registrants (out of the 361,377 domestic registrants sent Notification of Status Letters) exercised opt-out rights after receiving their status letters. Previously, approximately 19,000 other domestic implant recipients had exercised opt-out rights in 1994 and/or before receiving status letters. Although the Company has underwritten the coverage for a number of the defendant companies including four of the companies involved in the Settlement, the Company anticipates that insurance coverage issued prior to the time the Company issued policies will be available for a portion of the defendants' liability. In addition, the Company's policies only apply when the underlying liability insurance policies or per occurrence retentions are exhausted. Declaratory judgment lawsuits, involving four of the Company's insureds, have been filed seeking guidance on the appropriate trigger for their insurance coverage. None of the insureds have named the Company in such lawsuits, although other insurers and third parties have sought to involve the Company in those lawsuits. To date, one court has stayed a lawsuit against the Company by other insurers; two courts have dismissed actions by other insurers against the Company. Another court in Texas has ruled against the Company's arguments that the court should dismiss the claims by other insurers and certain doctors attempting to bring the Company into coverage litigation there. On appeal in the Texas lawsuit, the appellate court affirmed the lower court's order refusing to dismiss the claims against the Company; further appellate review in the Texas Supreme Court is pending. In addition, further efforts are contemplated to stay or dismiss the doctor's claims against the Company in the Texas lawsuit. At June 30, 1994, the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million. The increase in reserves was based on information made available in the pending lawsuits and information from the Company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the Company commenced underwriting operations). No additional reserves relating to breast implant claims have been added since June 30, 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. During 1997, the Company made payments of approximately $250 million with respect to breast implant claims. These payments were included in previous reserves and are consistent with the Company's belief that its reserves are adequate. Significant uncertainties continue to exist with regard to the ultimate outcome and cost of the Settlement and value of the opt-out claims. While the Company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company, may be necessary in the future, the Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as at September 30, 1997. Market Sensitive Instruments And Risk Management In accordance with the Securities and Exchange Commission's Financial Reporting Release No. 48, the following analysis presents hypothetical losses in cash flows, earnings and fair values of derivative instruments and other market sensitive instruments used in the Company's portfolio as at September 30, 1997. The Company uses investment derivative instruments such as futures, options and foreign currency forward and option contracts for duration management and management of foreign currency exposures. These instruments are sensitive to changes in interest rates and foreign currency exchange rates. The portfolio includes other market sensitive instruments such as mortgage-backed securities which are subject to prepayment risks and changes in market values, with changes in interest rates. These mortgage-backed security instruments are held for purposes other than trading and are classified as available for sale in the Company's balance sheet. Duration Management and Market Exposure Management The Company uses financial futures and option contracts for the purpose of managing certain investment portfolio exposures. Futures contracts are not recognized in the financial statements as assets or liabilities and any changes in fair value of these instruments due to changes in market interest rates would be recognized in the statement of operations as realized gains or losses in accordance with the our accounting policy. Option contracts are utilized in the portfolio for the purposes of duration management, providing protection against any unexpected shifts in interest rates. At September 30, 1997, the fair value of the option contracts held and written was $178,000 and $(222,000) respectively, and the market value of mortgage-backed securities, another category of market sensitive instruments, was $1,342 million, or approximately 31 percent of the total investment portfolio. Mortgage-backed securities include pass through mortgage bonds and collateralized mortgage obligations. The aggregate hypothetical loss generated from an immediate adverse shift in the treasury yield curve of 100 basis points would be a decrease in total return of 4.5 percent which equates to a decrease in market value of approximately $167 million on a portfolio valued at $4.2 billion at September 30, 1997. An immediate time horizon was used as this presents the worse case scenario. Foreign Currency Exposure Management Foreign currency forward and option contracts are used in the portfolio to minimize the effect of fluctuating currencies on the non-U.S. dollar portfolio. The value of premiums paid for the contracts represents approximately 9 percent of the non-U.S. dollar portfolio. A hypothetical adverse change of the forward exchange rate (a strengthening of the U.S. dollar) is assumed in order to estimate the exposure risk. Potential losses in cash flows represent additional cash requirements to be paid out, to settle those foreign currency forward positions in the portfolio as at September 30, 1997. The hypothetical loss in cash flows of the foreign currency contracts is estimated to be $1.4 million. The loss was based on modeling assumptions using a two standard deviation move in currency rates, and forward yield curves were determined using the implied volatility, spot rates and forward rates of the contracts at September 30, 1997. The foreign currency forward contracts are not considered hedges for financial accounting purposes and have maturity dates of no more than six months. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- The hypothetical loss in cash flows from the foreign currency put options assumes that the options were not exercised. For long option positions, the maximum loss is the premium paid for the options and at September 30, 1997 the hypothetical loss is approximately $400,000. New Accounting Pronouncements In February 1997, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("FAS 128"), effective for financial statements issued for periods ending after December 15, 1997. This Statement establishes standards for computing and presenting earnings per share ("EPS"). This Statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, which the Company is considered to have, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement requires restatement of all prior- period EPS data presented. The Company anticipates presenting its EPS in compliance with the dual presentation standards mandated by the Statement at December 31, 1997. The Company has calculated basic and diluted EPS, as defined in FAS 128 and interpreted by the Company based on information currently available, and has determined that such amounts do not differ materially from primary EPS, which is reflected in the Company's statement of operations for the years presented. ACE LIMITED AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. The Company's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. The Company's internal audit department performs independent audits on the Company's internal controls. The Company's policies and procedures prescribe that the Company and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. Coopers & Lybrand L.L.P., independent accountants, are retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which includes the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. /s/ Brian Duperreault /s/ Christopher Z. Marshall - ------------------------------ ------------------------------- Brian Duperreault Christopher Z. Marshall Chairman, President and Chief Financial Officer Chief Executive Officer REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of ACE Limited: We have audited the consolidated balance sheets of ACE Limited and Subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ACE Limited and Subsidiaries as of September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. New York, New York November 5, 1997 ACE LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1997 and 1996
1997 1996 ----------- ----------- (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 - $3,226,511 and $3,394,437)........................ $3,290,336 $3,389,762 Equity securities, at fair value (cost - $502,481 and $257,049)......... 634,970 323,005 Short-term investments, at fair value (amortized cost - $364,552 and $376,680)............................ 364,432 376,680 Other investments, at cost.............................................. 78,691 27,250 Cash.................................................................... 106,336 53,374 ---------- ---------- Total investments and cash............................................. 4,474,765 4,170,071 Goodwill on Tempest acquisition............................................ 196,667 201,742 Premiums and insurance balances receivable................................. 135,815 85,033 Accrued investment income.................................................. 40,581 42,728 Deferred acquisition costs................................................. 27,018 34,546 Prepaid reinsurance premiums............................................... 22,196 15,421 Other assets............................................................... 104,504 24,817 ---------- ---------- Total assets........................................................ $5,001,546 $4,574,358 ========== ========== Liabilities Unpaid losses and loss expenses............................................ $1,869,995 $1,836,113 Unearned premiums.......................................................... 400,689 398,731 Premiums received in advance............................................... 36,218 29,852 Accounts payable and accrued liabilities................................... 63,014 54,913 Dividend payable........................................................... 12,436 10,471 ---------- ---------- Total liabilities................................................... 2,382,352 2,330,080 ---------- ---------- Commitments and contingencies Shareholders' equity Ordinary Shares ($0.125 par value, 100,000,000 shares authorized; 55,293,218 and 58,170,755 shares issued and outstanding)................ 6,911 7,271 Additional paid-in capital................................................. 1,102,824 1,156,194 Unearned stock grant compensation.......................................... (1,993) (1,299) Net unrealized appreciation on investments................................. 196,194 61,281 Cumulative translation adjustments......................................... 855 131 Retained earnings.......................................................... 1,314,403 1,020,700 ---------- ---------- Total shareholders' equity.......................................... 2,619,194 2,244,278 ---------- ---------- Total liabilities and shareholders' equity.......................... $5,001,546 $4,574,358 ========== ==========
See accompanying notes to consolidated financial statements ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended September 30, 1997, 1996 and 1995
1997 1996 1995 ----------- ---------- ---------- (in thousands of U.S. dollars, except share and per share data) Revenues Gross premiums written............. $ 742,654 $ 645,800 $ 435,820 Reinsurance premiums ceded......... (102,910) (43,093) (11,064) ---------- ---------- ---------- Net premiums written............... 639,744 602,707 424,756 Change in unearned premiums........ 5,094 (15,462) 3,905 ---------- ---------- ---------- Net premiums earned................ 644,838 587,245 428,661 Net investment income.............. 237,823 206,524 181,375 Net realized gains on investments.. 127,982 55,229 50,765 ---------- ---------- ---------- Total revenues................. 1,010,643 848,998 660,801 ---------- ---------- ---------- Expenses Losses and loss expenses........... 435,941 464,824 350,653 Acquisition costs.................. 46,957 52,954 46,647 Administrative expenses............ 66,391 41,487 25,935 ---------- ---------- ---------- Total expenses................. 549,289 559,265 423,235 ---------- ---------- ---------- Net income............................ $ 461,354 $ 289,733 $ 237,566 ========== ========== ========== Earnings per share.................... $ 8.02 $ 5.82 $ 5.05 ========== ========== ========== Weighted average shares outstanding... 57,493,671 49,813,628 47,059,006 ========== ========== ==========
See accompanying notes to consolidated financial statements ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended September 30, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- (in thousands of U.S. dollars) Ordinary Shares Balance - beginning of year .................................................... $ 7,271 $ 5,764 $ 5,928 Shares issued in Tempest transaction............................................ -- 1,666 -- Issued under Employee Stock Purchase Plan (ESPP)................................ 1 -- Issued under Stock Appreciation Right (SAR) Plan................................ 8 -- Exercise of stock options....................................................... 9 -- 3 Repurchase of shares............................................................ (378) (159) (167) ---------- ---------- -------- Balance - end of year...................................................... 6,911 7,271 5,764 ---------- ---------- -------- Additional paid-in capital Balance - beginning of year..................................................... 1,156,194 548,513 564,198 Shares issued in Tempest acquisition............................................ -- 620,552 -- Options issued in Tempest acquisition........................................... -- 12,124 -- Exercise of stock options....................................................... 2,182 27 165 Cancellation of restricted stock awards......................................... (87) -- -- Issued under ESPP............................................................... 228 -- -- Issued under SAR Plan........................................................... 3,919 -- -- Repurchase of Ordinary Shares................................................... (59,612) (25,022) (15,850) ---------- ---------- -------- Balance - end of year...................................................... 1,102,824 1,156,194 548,513 ---------- ---------- -------- Unearned stock grant compensation Balance - beginning of year................................................... (1,299) (1,796) (412) Stock grants awarded.......................................................... (3,244) (708) (2,413) Stock grants forfeited........................................................ 79 60 -- Amortization.................................................................. 2,471 1,145 1,029 ---------- ---------- -------- Balance - end of year...................................................... (1,993) (1,299) (1,796) ---------- ---------- -------- Net unrealized appreciation (depreciation) on investments Balance - beginning of year..................................................... 61,281 94,694 (79,685) Net appreciation (depreciation) during year..................................... 134,913 (33,413) 174,379 ---------- ---------- -------- Balance - end of year...................................................... 196,194 61,281 94,694 ---------- ---------- -------- Cumulative translation adjustments Balance - beginning of year..................................................... 131 -- -- Net adjustment for year......................................................... 724 131 -- ---------- ---------- -------- Balance - end of year......................................................... 855 131 -- ---------- ---------- -------- Retained earnings Balance - beginning of year..................................................... 1,020,700 795,488 598,716 Net income...................................................................... 461,354 289,733 237,566 Dividends declared.............................................................. (44,993) (31,699) (23,297) Repurchase of Ordinary Shares................................................... (122,658) (32,822) (17,497) ---------- ---------- ---------- Balance - end of year...................................................... 1,314,403 1,020,700 795,488 ---------- ---------- ---------- Total shareholders' equity............................................ $2,619,194 $2,244,278 $1,442,663 ========== ========== ==========
See accompanying notes to consolidated financial statements ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended September 30, 1997, 1996 and 1995
1997 1996 1995 -------------- ------------ ------------ (in thousands of U.S. dollars) Cash flows from operating activities Net income............................................................. $ 461,354 $ 289,733 $ 237,566 Adjustments to reconcile net income to net cash provided by operating activities: Unearned premiums................................................. 1,958 14,247 (1,771) Unpaid losses and loss expenses................................... 33,882 363,448 277,538 Deferred acquisition costs........................................ 7,528 9,262 3,016 Premiums and insurance balances receivable........................ (50,782) 3,460 (11,948) Premiums received in advance...................................... 6,336 5,976 4,230 Prepaid reinsurance premiums...................................... (6,775) (11,267) (2,134) Net realized gains on investments................................. (127,982) (55,229) (50,765) Amortization of premium/discount.................................. (6,104) (7,847) (12,590) Accounts payable and accrued liabilities.......................... (23,327) 11,308 1,029 Change in cumulative translation adjustments...................... (724) (131) -- Other............................................................. (13,271) 1,076 (7,148) ----------- ----------- ----------- Net cash flows from operating activities........................ 282,123 624,036 437,023 ----------- ----------- ----------- Cash flows from investing activities Purchases of fixed maturities..................................... (6,415,568) (8,781,390) (7,562,469) Purchases of equity securities.................................... (603,598) (222,382) (325,509) Sales of fixed maturities......................................... 6,640,245 8,220,230 7,336,706 Sales of equity securities........................................ 385,552 209,350 118,825 Maturities of fixed maturities.................................... 5,000 59,830 39,342 Net realized gains on financial futures and option contracts...... 57,076 26,678 39,788 Acquisition of subsidiaries, net of cash acquired................. (27,098) (11,572) (25,794) Other investments................................................. (51,441) (2,676) -- ----------- ----------- ----------- Net cash flows used for investing activities.................... (9,832) (501,932) (379,111) ----------- ----------- ----------- Cash flows from financing activities Repurchase of Ordinary Shares..................................... (182,648) (58,003) (33,514) Proceeds from exercise of options for shares...................... 2,191 28 168 Proceeds from shares issued under SAR Plan........................ 4,156 -- -- Dividends paid.................................................... (43,028) (27,684) (22,058) ----------- ----------- ----------- Net cash used for financing activities.......................... (219,329) (85,659) (55,404) ----------- ----------- ----------- Net increase in cash...................................................... 52,962 36,445 2,508 Cash - beginning of year.................................................. 53,374 16,929 14,421 ----------- ----------- ----------- Cash - end of year........................................................ $ 106,336 $ 53,374 $ 16,929 =========== =========== ===========
See accompanying notes to consolidated financial statements ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization ACE Limited ("ACE" or "the Company") is incorporated with limited liability under the Cayman Islands Companies Law and maintains its principal business office in Bermuda. The Company, through its Bermuda-based operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"), Corporate Officers & Directors Assurance Ltd. ("CODA") and Tempest Reinsurance Company Limited ("Tempest"), provides insurance and reinsurance for a diverse group of international clients. In addition, the Company, through corporate subsidiaries, provides funds at Lloyd's to support underwriting by Lloyd's syndicates managed by Methuen Underwriting Limited ("MUL"), ACE London Aviation Limited ("ALA") and ACE London Underwriting Limited ("ALU"), its indirect wholly owned subsidiaries. On March 27, 1996, the Company acquired a controlling interest in Methuen Group Limited ("Methuen"), the holding company for MUL, a leading Lloyd's managing agency. This acquisition has been recorded using the purchase method of accounting and accordingly, the accompanying consolidated financial statements include the results of Methuen since March 27, 1996, the date of acquisition. Had the results of Methuen been included commencing with operations in 1995, the reported results would not have been materially affected. On July 1, 1996, the Company completed the acquisition of Tempest, a leading Bermuda-based property catastrophe reinsurer (the "Tempest Acquisition"). Under the terms of the Agreement and Plan of Amalgamation, Tempest shares outstanding at the time of the acquisition were cancelled and converted into the right to receive 13,333,247 Ordinary Shares of the Company. These shares were capitalized at a value of $46 2/3 per share, which was determined in accordance with the EITF 95-19 concensus that deals with the value of equity securities issued to effect a purchase combination. In addition, options to acquire Tempest shares were converted into 446,089 Company options at a total cost of $12.1 million. The total value of the acquisition amounted to $638.7 million, which includes the value of the shares and options issued as well as other transaction expenses which amounted to $4.4 million. This acquisition has been recorded using the purchase method of accounting and accordingly, the accompanying consolidated financial statements include the results of Tempest since July 1, 1996, the date of acquisition (see note 15 for pro forma financial information with respect to the Tempest Acquisition). On November 26, 1996, the Company acquired Ockham Worldwide Holdings plc which subsequently changed its name to ACE London Holdings Ltd. ("ACE London"). ACE London owns two Lloyd's managing agencies, ALA and ALU. The acquisition has been recorded using the purchase method of accounting and accordingly, the accompanying consolidated financial statements include the results of ACE London since November 26, 1996, the date of acquisition. Had the results of ACE London been included commencing with operations in 1996, the reported results would not have been materially affected. On November 26, 1996, the Company, also acquired the remaining 49 percent interest in Methuen. The Company had originally acquired a 51 percent interest in Methuen on March 27, 1996. The acquisition of the remaining 49 percent interest has been recorded using the purchase method of accounting. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 1. Organization (cont'd.) On September 18, 1997, the Company announced it had executed a definitive agreement for the acquisition, through a newly-created U.S. holding company, of Westchester Specialty Group, Inc. ("WSG"), an indirect wholly owned subsidiary of Xerox Corporation. WSG, through its insurance subsidiaries, provides specialty commercial property and umbrella liability coverages in the U.S. Under the terms of the agreement, the Company will purchase all of the outstanding capital stock of WSG for aggregate cash consideration of approximately $333 million. In connection with the acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, will provide $750 million (75 percent quota share of $1 billion) of reinsurance protection to WSG with respect to their loss reserves for the 1996 and prior accident years. The acquisition, which is subject to, among other matters, regulatory approval and other customary closing conditions, is expected to close in early 1998. On September 30, 1997, the Company announced the incorporation of ACE Insurance Company Europe Limited ("AICE"), as part of the International Financial Services Centre in Dublin, Ireland. AICE has been granted a license to write all 18 classes of non-life insurance in all member states of the European Union. 2. Operations a) Insurance operations The Company, through ACE Insurance and CODA, writes excess liability insurance, directors and officers liability insurance, satellite insurance, aviation insurance, excess property insurance and financial lines products. At September 30, 1997 approximately 67 percent of the Company's written premiums with respect to these lines of business came from North America with approximately 23 percent coming from the United Kingdom and continental Europe and approximately 10 percent from other countries. Two insurance brokers produced approximately 59 percent, 42 percent and 59 percent of the Company's insurance business for ACE Insurance and CODA in 1997, 1996 and 1995. The Company writes excess liability coverage on an occurrence first reported stand alone form to a maximum of $200 million per occurrence and annual aggregate. The minimum attachment point for this excess liability coverage is generally $100 million; however, for certain classes of non-U.S. domiciled insureds the Company allows a minimum attachment point of $50 million. For all new and renewal business, effective on or after December 15, 1994, the Company reduced the maximum limits offered for integrated occurrences from $200 million to $100 million. The Company maintains excess of loss clash reinsurance to protect it from losses arising from a single set of circumstances (occurrence) covered by more than one excess liability insurance policy. The reinsurance provides protection to a maximum of $150 million, and in the aggregate excess of $225 million, for each and every loss occurrence involving three or more insureds. Integrated occurrences are specifically excluded. There have been no reinsurance recoveries to date on this reinsurance. Total clash reinsurance premiums expensed were $5.0 million for fiscal 1997, $7.9 million for fiscal 1996 and $7.8 million in fiscal 1995. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 2. Operations (Cont'd.) a) Insurance operations (Cont'd.) The Company offers excess directors and officers liability coverage with a maximum policy limit of $50 million and a minimum attachment point, in most circumstances, of $25 million. This coverage is frequently written on a following form basis to underlying policies. The Company also provides up to $75 million of either primary, excess or excess and difference-in-conditions directors and officers liability coverage for claims with respect to losses not covered by corporate reimbursement. In all cases coverage is on a claims made basis. The Company does not purchase reinsurance for its directors and officers liability risks. The Company's satellite insurance operations offers separate gross limits of up to $50 million per risk for launch insurance, including ascent to orbit and/or initial testing and up to $50 million per risk for in-orbit insurance. The Company has entered into a surplus treaty arrangement which provides for up to $25 million of reinsurance on each risk. Prior to February 1996, the Company offered separate limits of up to $25 million per risk, which was fully retained by the Company. The Company currently offers aviation insurance with limits of up to $150 million per insured, with no minimum attachment point. The Company reduces its net exposure to approximately $50 million with a dedicated reinsurance program. Classes of business written include aviation product liability, aircraft manufacturer's hull and liability, airport liability, aviation refueling operations and associated aircraft liability risks. The Company offers global excess property "all risk" insurance, providing limits of up to a maximum of $50 million per occurrence with a minimum attachment point generally of $25 million. Coverage includes such perils as windstorm, earthquake and fire, as well as explosion. Consequential business interruption coverage is also offered. In certain circumstances, the Company uses reinsurance to establish the retained net limit per risk. The Company's financial lines product group offers specifically designed financial, insurance and reinsurance solutions to address complex risk management problems. The programs offered typically have the following common characteristics: multi-year contract terms, broad coverage that includes stable capacity and pricing for the insured, aggregate policy limits and insured participation in the results of their own loss experience. Each contract is unique because it is tailored to the insurance or reinsurance needs, specific loss history and financial strength of the insured. Premium volume, as well as the number of contracts written, can vary significantly from period to period due to the nature of the contracts being written. Profit margins may vary from contract to contract depending on the amount of underwriting risk and investment risk assumed on each contract. The Company has purchased a multi-year reinsurance contract which protects a number of financial lines inwards programs exposed to natural perils. In March 1997, the Company, together with two other insurance companies, formed a managing general agency in Bermuda to provide underwriting services to the three organizations for political risk insurance coverage. The new company, Sovereign Risk Insurance Ltd. ("Sovereign") issues subscription policies with the Company assuming 50 percent of each risk underwritten. The Company currently cedes 10 percent of all risks assumed from Sovereign. Sovereign offers limits of up to $50 million per project and $100 million per country. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 2. Operations (Cont'd.) b) Reinsurance operations The Company, through Tempest, underwrites property catastrophe reinsurance on a worldwide basis, emphasizing excess layer coverages, and has large aggregate exposures to man-made and natural disasters. Tempest underwrites principally on an excess of loss basis, with attachment points designed to minimize claims from relatively high frequency and low severity events. For the year ended September 30, 1997, approximately 68 percent of Tempest's written premiums came from the United States, approximately 13 percent came from United Kingdom, 6 percent from Australia and New Zealand and 13 percent from other countries. Two reinsurance brokers produced approximately 46 percent and 33 percent of Tempest's reinsurance business for the year ended September 30, 1997 and the ten month period ended September 30, 1996. In April 1997, ACE Insurance signed a quota share treaty reinsurance agreement with the Multilateral Investment Guarantee Agency ("MIGA"), part of the World Bank Group. MIGA provides coverage for foreign investments in developing countries. The agreement allows MIGA to provide private investors and developing countries additional capacity to support developmentally sound investment projects. The coverages offered will be the same as those offered by MIGA's guarantee program, namely, transfer restriction, expropriation, war and civil disturbance and breach of contract. The quota share treaty offers limits of up to $25 million per contract with an aggregate of $100 million per country. As discussed in note 2(a), the Company's financial lines product group also offers reinsurance products and the Lloyd's syndicates in which the Company participates also participate in certain reinsurance markets (see note 2 (c)). c) Lloyd's operations The Company, through corporate subsidiaries, participates in the underwriting of syndicates managed by MUL, ALA and ALU by providing funds at Lloyd's, primarily in the form of a letter of credit, supporting underwriting capacity. The syndicates in which the Company participates underwrite aviation, marine and non-marine risks. For the 1996, 1997 and 1998 years of account, the Company has or will provide funds at Lloyd's to support up to approximately $37 million, $229 million and $485 million, respectively, of underwriting capacity to syndicates managed by MUL, ALA and ALU. Underwriting capacity is the amount of gross premiums that a syndicate at Lloyd's can underwrite in a given year of account. However, a syndicate is not required to fully utilize all of the capacity and it is not unusual for capacity utilization to be significantly lower than 100 percent. 3. Significant accounting policies a) Basis of presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company and its subsidiaries. The Company records its proportionate share of the results of the Lloyd's syndicates in which it participates. All significant intercompany balances and transactions have been eliminated. Certain items in the prior year financial statements have been reclassified to conform with the current year presentation. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 3. Significant accounting policies (Cont'd.) b) Investments The Company's investments are considered to be "available for sale" under the definition included in the Financial Accounting Standard Board's ("FASB") Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Except for "other investments", the Company's investment portfolio is reported at fair value, being the quoted market price of these securities provided by either independent pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. Realized gains or losses on sales of investments are determined on a first-in, first-out basis and include adjustments to the net realizable value of investments for declines in value that are considered to be other than temporary. Unrealized gains and losses are reported as a separate component of shareholders' equity. Short-term investments comprise securities due to mature within one year of date of issue. Other investments comprise investments in entities for which there is no quoted market value. It is not practicable to estimate the fair value of the investments and thus they are carried at original cost. The Company utilizes financial futures and option contracts and foreign currency forward and option contracts for the purpose of managing certain investment portfolio exposures (see note 7(a) for additional discussion of the objectives and strategies employed). Futures contracts are not recognized as assets or liabilities in the accompanying consolidated financial statements. Changes in the market value of futures contracts produce daily cash flows, which are included in net realized gains or losses on investments in the statements of operations. Collateral held by brokers equal to a percentage of the total value of open futures contracts is included in short-term investments. Option contracts that are designated as hedges of securities are marked-to- market. Unrealized gains and losses on forward currency and option contracts which are designated as specific hedges are recognized in the financial statements as a component of shareholders' equity. Gains and losses resulting from currency fluctuations on transactions which are not designated as specific hedges against any single security or group of securities are recognized as a component of income in the period in which the fluctuations occur. Premiums paid or received on option contracts that have expired, been closed out or exercised, are recognized as realized gains and losses on investments in the statements of operations. Net investment income includes interest and dividend income together with amortization of market premiums and discounts and is net of investment management and custody fees and loan expense. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized in current income. c) Premiums Premiums are generally recognized as written upon inception of the policy. For multi-year policies written which are payable in annual installments, due to the ability of the insured/reinsured to commute or cancel coverage within the term of the policy, only the annual premium is included as written at policy inception. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 3. Significant accounting policies (Cont'd.) c) Premiums (Cont'd.) Premiums written are primarily earned on a daily pro rata basis over the terms of the policies to which they relate. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired portion of the policies in force. Premium estimates for retrospectively rated policies are recognized within the periods in which the related losses are incurred. Property catastrophe reinsurance premiums written are estimated based on information provided by ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. These premiums are earned over the terms of the related reinsurance contracts. d) Acquisition costs Acquisition costs, consisting primarily of commissions, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are reviewed to determine that they do not exceed recoverable amounts after considering investment income. e) Losses and loss expenses A reserve is established for the estimated unpaid losses and loss expenses of the Company under the terms of, and with respect to, its policies and agreements. The methods of determining such estimates and establishing the resulting reserve are reviewed continuously and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses significantly greater or less than the reserve provided. f) Goodwill The Company amortizes goodwill recorded in connection with its business combinations on a straight-line basis over the lesser of the expected life of the related operations acquired or forty years. Amortization of goodwill amounting to $5.1 million and $1.3 million with respect to the Tempest Acquisition is included in administrative expenses in the statements of operations for the years ended September 30, 1997 and 1996, respectively. g) Translation of foreign currencies Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("FAS 52"). Under FAS 52, functional currency assets and liabilities are translated into U.S. dollars generally using period end rates of exchange and the related translation adjustments are recorded as a separate component of shareholders' equity. Functional currencies are generally the currencies of the local operating environment. Statement of operations amounts expressed in functional currencies are translated using average exchange rates. Gains and losses resulting from foreign currency transactions are recorded in current income. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 3. Significant accounting policies (Cont'd.) h) Accounting estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's principal estimates include property and casualty loss and loss expense reserves and estimated premiums for situations where the Company has not received ceding company reports. Actual results may differ from these estimates. i) Earnings per share Earnings per share are computed using net income divided by the weighted average number of Ordinary Shares outstanding and, if dilutive, shares issuable under outstanding options. There is no material difference between primary and fully diluted earnings per share. j) Cash flow information Purchases and sales or maturities of short-term investments are recorded net for purposes of the statements of cash flows and are included with fixed maturities. 4. Investments a) Fixed maturities The fair values and amortized costs of fixed maturities at September 30, 1997 and 1996 are as follows:
1997 1996 ----------------------- ----------------------- Fair Amortized Fair Amortized Value Cost Value Cost ---------- ---------- ---------- ---------- (in thousands) U.S. Treasury and agency.... $ 505,783 $ 488,961 $ 973,362 $ 971,615 Non-U.S. governments........ 158,506 157,206 190,999 191,727 Corporate securities........ 1,283,606 1,255,837 950,532 948,694 Mortgage-backed securities.. 1,342,441 1,324,507 1,274,869 1,282,401 ---------- ---------- ---------- ---------- Fixed maturities.......... $3,290,336 $3,226,511 $3,389,762 $3,394,437 ========== ========== ========== ==========
The gross unrealized gains and losses related to fixed maturities at September 30, 1997 and 1996 are as follows: 1997 1996 ------------------------ ---------------------- Gross Gross Gross Gross Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ---------- ----------- ---------- ---------- (in thousands) U.S. Treasury and agency.... $ 17,769 $ (947) $ 8,254 $ (6,507) Non-U.S. governments........ 4,003 (2,703) 3,752 (4,480) Corporate securities........ 29,800 (2,031) 11,271 (9,433) Mortgage-backed securities.. 21,678 (3,744) 11,251 (18,783) ---------- ---------- --------- ---------- $ 73,250 $ (9,425) $ 34,528 $ (39,203) ========== ========== ========= ==========
ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 4. Investments (Cont'd.) a) Fixed maturities (Cont'd.) Mortgage-backed securities issued by U.S. government agencies are combined with all other mortgage derivatives held and are included in the category "mortgage- backed securities". Approximately 67 percent of the total mortgage holdings at September 30, 1997 and 72 percent at September 30, 1996 are represented by investments in GNMA, FNMA and FHLMC bonds. The remainder of the mortgage exposure consists of CMO's (Collaterialized Mortgage Obligations) and non- government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a "AAA" rating by the major credit rating agencies. Fixed maturities at September 30, 1997, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
Fair Amortized Value Cost ---------- ---------- (in thousands) Maturity period - --------------- Less than 1 year......................................... $ 181,317 $ 180,289 1-5 years................................................ 459,568 455,704 5-10 years............................................... 608,143 599,972 Greater than 10 years.................................... 698,867 666,039 ---------- ---------- 1,947,895 1,902,004 Mortgage-backed securities............................... 1,342,441 1,324,507 ---------- ---------- Total fixed maturities.............................. $3,290,336 $3,226,511 ========== ==========
b) Equity securities The gross unrealized gains and losses on equity securities at September 30, 1997 and 1996 are as follows:
1997 1996 --------- --------- (in thousands) Equity securities - cost................................. $ 502,481 $ 257,049 Gross unrealized gains................................... 152,406 81,935 Gross unrealized losses.................................. (19,917) (15,979) --------- --------- Equity securities - fair value....................... $ 634,970 $ 323,005 ========= =========
ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 4. Investments (Cont'd.) c) Net realized gains and change in net unrealized appreciation (depreciation) on investments The analysis of net realized gains on investments and the change in net unrealized appreciation (depreciation) on investments for the years ended September 30, 1997, 1996 and 1995 is as follows:
1997 1996 1995 -------- -------- -------- (in thousands) Fixed maturities Gross realized gains..................................................... $ 83,933 $ 63,416 $ 78,021 Gross realized losses.................................................... (24,892) (48,963) (69,669) -------- -------- -------- 59,041 14,453 8,352 Equity securities Gross realized gains..................................................... 70,449 39,768 15,371 Gross realized losses.................................................... (32,379) (23,985) (11,763) -------- -------- -------- 38,070 15,783 3,608 Currency losses............................................................ (26,204) (1,685) (983) Financial futures and option contracts - net realized gains................ 57,075 26,678 39,788 -------- -------- -------- Net realized gains on investments...................................... 127,982 55,229 50,765 -------- -------- -------- Change in net unrealized appreciation (depreciation) on investments Fixed maturities......................................................... 68,500 (56,226) 131,236 Equity securities........................................................ 66,533 22,813 43,143 Short-term investments................................................... (120) -- -- -------- -------- -------- Change in net unrealized appreciation (depreciation) on investments.... 134,913 (33,413) 174,379 -------- -------- -------- Total net realized gains and change in net unrealized appreciation (depreciation) on investments............................................ $262,895 $ 21,816 $225,144 ======== ======== ========
d) Net investment income Net investment income for the years ended September 30, 1997, 1996 and 1995 was derived from the following sources:
1997 1996 1995 -------- -------- -------- (in thousands) Fixed maturities and short-term investments................................ $236,998 $210,517 $184,240 Equity securities.......................................................... 6,178 1,480 944 Other investments.......................................................... 2,300 1,840 1,736 Other...................................................................... 2,304 156 774 -------- -------- -------- Gross investment income.................................................. 247,840 213,993 187,694 Investment expenses........................................................ (9,800) (7,217) (5,662) Loan expense............................................................... (217) (252) (336) Amortization of acquisition liabilities.................................... -- -- (321) -------- -------- -------- Net investment income.................................................... $237,823 $206,524 $181,375 ======== ======== ========
ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 5. Losses and loss expenses The reserve for unpaid losses and loss expenses represents estimated ultimate losses and loss expenses less paid losses and loss expenses and is comprised of the following at September 30, 1997 and 1996:
1997 1996 ---------- ---------- (in thousands) Case and loss expense reserves............................................. $ 924,221 $ 993,671 IBNR loss reserves......................................................... 945,774 842,442 ---------- ---------- Total unpaid losses and loss expenses.................................. $1,869,995 $1,836,113 ========== ==========
The Company uses statistical and actuarial methods to reasonably estimate ultimate expected losses and loss expenses using the Company's loss development history, data obtained from underwriting applications, actuarial evaluations and, in the case of excess liability reserves, research of large liability losses. 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 the Company and the settlement of the Company's liability for the loss. During the loss settlement period, additional facts regarding individual claims and trends usually will become known. As these become apparent, case reserves may be adjusted by allocation from IBNR loss reserves without any change in the overall reserve. In addition, application of the statistical and actuarial methods may require the adjustment of the overall reserves from time to time. The reconciliation of unpaid losses and loss expenses for the years ended September 30, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ------------------------------------ (in thousands) Unpaid losses and loss expenses at beginning of year....................... $1,836,113 $1,437,930 $1,160,392 Unpaid losses and loss expenses assumed in respect of acquired companies... -- 34,735 -- ---------- ---------- ---------- Total.................................................................. 1,836,113 1,472,665 1,160,392 ---------- ---------- ---------- Losses and loss expenses incurred in respect of losses occurring in: Current year............................................................. 435,941 464,824 350,653 Prior years.............................................................. -- -- -- ---------- ---------- ---------- Total.................................................................. 435,941 464,824 350,653 ---------- ---------- ---------- Losses and loss expenses paid in respect of losses occurring in: Current year............................................................. 52,547 39,567 14,394 Prior years.............................................................. 349,512 61,809 58,721 ---------- ---------- ---------- Total.................................................................. 402,059 101,376 73,115 ---------- ---------- ---------- Unpaid losses and loss expenses at end of year......................... $1,869,995 $1,836,113 $1,437,930 ========== ========== ==========
ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 5. Losses and loss expenses (Cont'd.) A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. Lawsuits including class actions, involving thousands of implant recipients have been filed in both state and federal courts throughout the United States. Most of the federal cases have been consolidated pursuant to the rules for Multidistrict Litigation to a Federal District Court in Alabama. On May 15, 1995, the Dow Corning Corporation, a significant defendant, filed for protection under Chapter 11 of the U.S. Bankruptcy Code and claims against Dow Corning remain stayed subject to the Bankruptcy Code. On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of a revised individual settlement plan for U.S. claimants with at least one implant from any of those manufacturers ("the Settlement"). In general, under the Settlement, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of claimants electing to opt out from the new plan. Also, in general, the compensation would be fixed and not affected by the number of participants, and the manufacturers would not have a right to walk away because of the amount of claims payable. Finally, each defendant agreed to be responsible only for cases in which its implant was identified, and not for a percentage of all claims. By November 13, 1995, the Settlement was approved by the three major defendants. In addition, two other defendants became part of the Settlement, although certain of their settlement terms are different and more restricted than the plan offered by the original three defendants. On December 22, 1995, the multidistrict litigation judge approved the Settlement and the materials for giving notice to claimants although an appeal concerning the Settlement is pending with the Eleventh Circuit Court of Appeals. Beginning in mid-January, 1996, the three major defendants have each made payments to a court-established fund for use in making payments under the Settlement. The Settlement Claims Office had reported that as of August 29, 1997, it has sent out Notification of Status Letters to 361,377 non-opt-out domestic implant recipients who had registered with the Settlement Claims Office. As of August 31, 1997, approximately $518 million had been distributed under the Settlement to implant recipients of the three major defendants. Certain potential payments to claimants relating to other implants remain suspended because of the pending appeals. The Settlement Claims Office has also reported that approximately 32,500 domestic registrants (out of the 361,377 domestic registrants sent Notification of Status Letters) exercised opt-out rights after receiving their status letters. Previously, approximately 19,000 other domestic implant recipients had exercised opt-out rights in 1994 and/or before receiving status letters. At June 30, 1994, the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million. The increase in reserves was based on information made available in conjunction with the lawsuits and information made available from the Company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the Company commenced underwriting operations). No additional reserves relating to breast implant claims have been added since June 30, 1994. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 5. Losses and loss expenses (Cont'd.) The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. During 1997, the Company made payments of approximately $250 million with respect to breast implant claims. These payments were included in previous reserves and are consistent with the Company's belief that its reserves are adequate. Significant uncertainties continue to exist with regard to the ultimate outcome and cost of the Settlement and value of the opt-out claims. While the Company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company, may be necessary in the future, the Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as at September 30, 1997. 6. Reinsurance The Company purchases reinsurance to manage various exposures including catastrophic 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 Company evaluates the financial condition of its reinsurers through internal reinsurance committees consisting of certain members of senior management. No single reinsurer is a material reinsurer to the Company nor is the Company's business dependent on any reinsurance contract. The statements of operations amounts for net premiums written and net premiums earned are net of reinsurance. Direct, assumed and ceded amounts for these items for the years ended September 30, 1997, 1996 and 1995 are as follows:
1997 1996 1995 ---------- ---------- ---------- (in thousands) Premiums written Direct......... $ 611,633 $596,176 $416,040 Assumed........ 131,021 49,624 19,780 Ceded.......... (102,910) (43,093) (11,064) --------- -------- -------- Net............ $ 639,744 $602,707 $424,756 ========= ======== ======== Premiums earned Direct......... $ 594,043 $566,293 $425,569 Assumed........ 140,942 51,201 12,024 Ceded.......... (90,147) (30,249) (8,932) --------- -------- -------- Net............ $ 644,838 $587,245 $428,661 ========= ======== ========
The Company's provision for loss recoveries on reinsurance ceded is not material in each of the years ended September 30, 1997, 1996 and 1995. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 7. Commitments and contingencies a) Financial instruments with off-balance sheet risk The Company's investment guidelines permit, subject to specific approval, investments in derivative instruments such as futures, options and foreign currency forward contracts for purposes other than trading. Their use is limited to yield enhancement, duration management, foreign currency exposure management or to obtain an exposure to a particular financial market. (i) Foreign currency exposure management The Company uses foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S dollar securities currently held in the portfolio. Approximately $495 million is invested in non-U.S. dollar fixed maturity and equity securities. The forward currency contracts purchased are not specifically identifiable against any single security or group of securities denominated in those currencies and therefore do not qualify as hedges for financial reporting purposes. All contract gains and losses, realized and unrealized, are reflected in the statements of operations. At September 30, 1997, no foreign currency forward or option contract had a maturity of more than six months. The table below summarizes the notional amounts, the current fair values and the unrealized gain or loss of the Company's foreign currency forward and option contracts as at September 30, 1997.
Contractual/Notional Unrealized Amount Fair Value Gains/(Losses) -------------------- ---------- -------------- (in thousands) Forward contracts.................. $ 43 $716 $ 673 Foreign currency option contracts.. 25,130 118 (293)
The fair value of the forward contracts represents the estimated cost to the Company at September 30, 1997, of obtaining the specified currency to meet the obligation of the contracts. The unrealized gain is a measure of the net exposure to the Company of its use of forward contracts after any netting agreements given current rates of exchange. The fair value of the options represents the market price of the options at September 30, 1997. The unrealized loss represents the difference between the fair value and the premium paid. The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Non- performance is not anticipated; however, in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties. For forward contracts, the counterparties are principally banks which must meet certain criteria according to the Company's investment guidelines. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 7. Commitments and contingencies (Cont'd.) (ii) Duration management and market exposure Futures A portion of the Company's investment portfolio is managed as a synthetic equity fund, whereby S&P 500 index futures contracts are held in an amount equal to the market value of an underlying portfolio comprised of short-term investments and fixed maturities. This creates an equity market exposure equal in value to the total amount of funds invested in this strategy. Each index futures contract held by the Company is rolled over quarterly into a new contract with a later maturity, thereby maintaining a constant equity market exposure. The value of this fund was $286 million and $305 million at September 30, 1997 and 1996, respectively. Exchange traded bond and note futures contracts may be used in fixed maturity portfolios as substitutes for ownership of the physical bonds and notes without significantly increasing the risk in the portfolio. Investments in financial futures contracts may be made only to the extent that there are assets under management, not otherwise committed. Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. The contract amounts of $380 million and $478 million reflect the net extent of involvement the Company had in these financial instruments at September 30, 1997 and 1996, respectively. Options Option contracts may be used in the portfolio as protection against unexpected shifts in interest rates, which would thereby affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the account can be reduced. An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. The price of an option is influenced by the underlying security, expected volatility, time to expiration and supply and demand. For long option positions, the maximum loss is the premium paid for the option. To minimize the risk of non-performance, all brokers and dealers used as counterparties must be approved. Additional performance assurance is required where deemed necessary. The maximum credit exposure is represented by the fair value of the options held. For short option positions, the potential loss is the same as having taken a position in the underlying security. Short call options are backed in the portfolio with the underlying, or highly correlated, securities and short put options are to be backed by uncommitted cash for the in-the-money portion. Summarized below are the notional amounts, the current fair values and the unrealized gains of the options in the portfolio as at September 30, 1997. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 7. Commitments and contingencies (Cont'd.)
Contractual/Notional Unrealized Amount Fair Value Gains --------------------- ----------- ---------- (in thousands) Options held..... $ 374,000 $ 178 $ 88 Options written.. (742,400) (222) 579
The fair value of the options represents the market price of the options at September 30, 1997. The unrealized gain represents the difference between the fair value and the premium paid (received). The notional amounts summarized in the above tables are not representative of amounts exchanged by parties and, therefore, do not measure the exposure to the Company of its use of derivatives. b) Concentrations of credit risk The investment portfolio is managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuers. All fixed maturity securities held must have an investment grade rating. The Company believes that there are no significant concentrations of credit risk associated with its investments. c) Letters of credit With effect from November 1996, the Company has a five year, secured letter of credit, up to (Pounds)75 million (approximately $113 million) which is primarily used to provide funds at Lloyd's to support underwriting capacity on Lloyd's syndicates in which the Company participates (see note 9). Tempest is not an admitted reinsurer in the United States. Accordingly, the terms of certain reinsurance contracts require Tempest to provide letters of credit ("LOCs") to Tempest's clients in respect of reported claims. Tempest has a facility for the issuance of LOCs of up to $20 million. At September 30, 1997, LOCs outstanding amounted to $6.9 million. Investments with a market value of $8.0 million were pledged as collateral for these LOCs. d) Lease commitments The Company rents office space in The ACE Building in Hamilton, Bermuda under a lease which expires in 2000, with one five year renewal option. The ACE Building is 40 percent owned by the Company through a joint venture agreement. During 1994, the Company financed the cost of an addition to The ACE Building and entered into a supplemental lease for the additional space for 14 years effective October 1, 1994. The cost of the addition is being amortized as rent expense over the period of the lease. Tempest also leases office space in Hamilton, Bermuda under a non-cancelable lease expiring in 1998 with a three year renewal option. Methuen currently leases office space in London, England under a lease that expires in 2012. Methuen also leases an office in the 1986 Lloyd's Building in London, under a lease that expires in 2001. ACE London also leases office space in London, England for its principal offices, under two leases that expire in 2008. Total rent expense was approximately $4.7 million in 1997, $2.3 million in 1996 and $1.5 million in 1995. Subsequent to year end, the Company consolidated the operations of Methuen and ACE London into one location in London, England. The lease for this office space expires in 2012. As a result of this consolidation, Methuen and ACE London will vacate their existing premises and will either sublet the premises or surrender the leases. Future minimum rental commitments under the leases, assuming the vacated premises are sublet, are expected to be approximately $6.5 million per annum. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 8. Shareholders' equity a) Shares issued and outstanding Following is a table of changes in Ordinary Shares issued and outstanding for fiscal 1997, 1996 and 1995:
Ordinary Shares ----------- Balance at September 30, 1994........................ 47,423,976 Repurchase of shares.............................. (1,332,300) Exercise of stock options......................... 19,509 ---------- Balance at September 30, 1995........................ 46,111,185 Shares issued in Tempest acquisition.............. 13,333,247 Repurchase of shares............................ (1,268,600) Exercise of stock options......................... 1,000 Cancellation of non-vested restricted stock....... (6,077) ---------- Balance at September 30, 1996........................ 58,170,755 Shares issued under Employee Stock Purchase Plan.. 9,801 Shares issued under SAR Plan...................... 61,364 Repurchase of shares.............................. (3,031,000) Exercise of stock options......................... 84,798 Cancellation of non-vested restricted stock....... (2,500) ---------- Balance at September 30, 1997........................ 55,293,218 ==========
b) Share repurchases The Board of Directors has authorized the repurchase from time to time of the Company's Ordinary Shares in open market and private purchase transactions. During 1997, the Company repurchased 3,031,000 Ordinary Shares under share repurchase programs for an aggregate cost of $182.6 million. On May 9, 1997, the Board of Directors terminated the then existing share repurchase programs and authorized a new program for up to $300.0 million of the Company's Ordinary Shares. As at September 30, 1997, approximately $268.0 million of the current Board authorization had not been utilized. During 1996 the Company repurchased 1,268,000 Ordinary Shares under share repurchase programs for an aggregate cost of $58.0 million, and during 1995 1,332,300 Ordinary Shares were repurchased by the Company for a total cost of $33.5 million. c) General restrictions The holders of the Ordinary Shares are entitled to receive dividends and are allowed one vote per share provided that, if the controlled shares of any shareholder constitute 10 percent or more of the outstanding Ordinary Shares of the Company, only a fraction of the vote will be allowed so as not to exceed 10 percent. Generally, the Company's directors have absolute discretion to decline to register any transfer of shares. All transfers are subject to the restriction that they may not increase to 10 percent or higher the proportion of issued Ordinary Shares owned by any shareholder. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 8. Shareholders' equity (Cont'd.) d) Dividends declared Dividends declared amounted to $0.80, $0.64 and $0.50 per Ordinary Share for fiscal 1997, 1996 and 1995, respectively. e) Options (i) Options outstanding Following is a table of changes in options outstanding for 1997, 1996 and 1995:
Year Average Options for of Exercise Ordinary Expiration Price Shares ---------- -------- ------------ Balance at September 30, 1994................... 184,009 Options granted............................... 2005 $24.19 536,000 Options exercised............................. 1995 $ 8.59 (19,509) Options forfeited............................. 2003-2005 $26.83 (15,000) --------- Balance at September 30, 1995................... 685,500 Options granted............................... 2004-2005 $37.41 409,200 Options issued to holders of Tempest options.. 2004-2005 $23.69 446,089 Options exercised............................. 2003 $27.50 (1,000) Options forfeited............................. 2003-2004 $25.64 (35,000) --------- Balance at September 30, 1996................... 1,504,789 Options granted............................... 2006-2007 $59.23 743,850 Options issued under SAR Plan................. 2002-2003 $64.00 316,800 Options exercised............................. 2003-2004 $27.99 (84,798) Options forfeited............................. 2003-2007 $30.28 (102,500) --------- Balance at September 30, 1997................... 2,378,141 =========
ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 8. Shareholders' equity (Cont'd.) e) Options (Cont'd.) (ii) FAS 123 pro forma disclosures In October 1995, FASB issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 establishes accounting and reporting standards for stock-based employee compensation plans which include stock option and stock purchase plans. FAS 123 provides employers a choice: adopt FAS 123 accounting standards for all stock compensation arrangements which requires the recognition of compensation expense for the fair value of virtually all stock compensation awards; or continue to account for stock options and other forms of stock compensation under Accounting Principles Board Opinion No. 25 ("APB 25"), while also providing the disclosure required under FAS 123. The Company continues to account for stock-based compensation plans under APB 25. Had the compensation cost for this plan been determined in accordance with the fair value method recommended in FAS 123, the Company's net income and earnings per share would have been $454.2 million or $7.90 per share for 1997 and $289.0 million or $5.80 per share for 1996. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted- average assumptions used for grants in 1997 and 1996, respectively: dividend yield of 1.45 percent and 1.46 percent; expected volatility 26.2 percent and 22.5 percent; risk free interest rate of 5.92 percent and 5.67 percent; and an expected life of 3.5 years and 4.8 years. 9. Line of credit With effect from November 1996, the Company has a $50 million committed unsecured line of credit provided by a syndicate of banks, led by Morgan Guaranty Trust Company of New York ("Morgan"). The line of credit agreement requires the Company to maintain consolidated tangible net worth of not less than $1.25 billion. This same syndicate of banks have also provided a secured letter of credit (see note 7(c)). Prior to November 15, 1996 the Company had a committed line of credit provided by a syndicate of banks, led by Morgan which provided for unsecured borrowings up to an aggregate amount of $150 million. 10. Employee benefit plans a) Pension plans The Company has defined contribution pension plans for its Bermuda-based employees, which are non-contributory and cover all full-time employees. Contributions are based on a percentage of eligible compensation. Pension costs amounted to $2,244,000, $1,741,000, and $1,206,000 for 1997, 1996 and 1995, respectively. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 10. Employee benefit plans (Cont'd.) b) Options and Stock Appreciation Rights In February 1996, shareholders of the Company approved the ACE Limited 1995 Long-Term Incentive Plan (the "Incentive Plan") which incorporates stock options, stock appreciation rights, restricted stock awards and stock purchase programs. There are 2,300,000 Ordinary Shares of the Company available for award under this Incentive Plan. This Incentive Plan superseded and replaced the existing Equity Linked Incentive Plan, which incorporated both a Stock Appreciation Rights Plan ("SAR Plan") and a Stock Option Plan ("Option Plan") which will continue to run off. Stock options granted under the Incentive Plan may be exercised for Ordinary Shares of the Company upon vesting. Under the Incentive Plan, generally, options expire ten years after the award date and vest in equal portions over three years. During 1997, 743,850 options were issued under the Incentive Plan. In addition, 316,800 options were issued under the SAR Plan. During 1996, 409,200 options were issued under the Incentive Plan and 446,089 options were issued with respect to the Tempest acquisition (see note 8 (e)). Under the Option Plan, generally, options expire ten years after the award date and are subject to a vesting period of four years. During 1995, 236,000 options were granted (see note 8(e)). Of the outstanding options at September 30, 1997, 880,443 were vested. In addition to the Option Plan, the Company entered into an Option and Restricted Share Agreement and Plan in connection with the employment of its Chairman, President and Chief Executive Officer whereby, during the year ended September 30, 1995, he was awarded 300,000 stock options at an exercise price of $22.63 which may be exercised for Ordinary Shares. These options expire ten years after the award date and vest at various dates up to September 30, 1999. The Chairman also received 100,000 restricted stock under this agreement (see note 10(d)). With respect to the SAR plan, certain stock appreciation rights were forfeited in return for cash during the year. All remaining stock appreciation rights were exercised in return for options and cash and/or shares of the Company under the terms of the Replacement Plan. Total expenses incurred during 1997 relating to the SAR plan, including those incurred under the Replacement Plan, amounted to $5,500,000. In 1996 and 1995, compensation expense of $6,023,000 and $2,465,000 was recorded, respectively. The SAR Plan entitled participants the right to receive cash equal to the appreciation in value, as provided for in the plan, of the rights represented by the grant. Rights vested over a period of up to six years from the date of grant. Participants were entitled to receive cash payments equal to the amount of dividends paid on an equivalent number of shares. Compensation expense was accrued and recorded based on the change in the value of the stock appreciation rights during the year and the applicable vesting period. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 10. Employee benefit plans (Cont'd.) c) Employee Stock Purchase Plan In February 1996, shareholders of the Company approved the ACE Limited Employee Stock Purchase Plan. Participation in the plan is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10 percent of the participant's compensation or $25,000, whichever is less. Participants may purchase shares at a purchase price equal to 85 percent of the closing market price of the Company's shares on the last day of each subscription period. Subscription periods run for six months. With respect to the year ending September 30, 1997, 9,801 shares were subscribed for, resulting in an expense of $74,000 to the Company. d) Restricted stock awards During 1997, 49,725 restricted Ordinary Shares were awarded to officers of the Company and its subsidiaries. These shares vest at various dates through November 1999. In addition, 5,028 restricted Ordinary Shares were awarded to outside directors of the Company under the terms of the 1995 Outside Directors Plan ("the Plan"). These shares vest in February 1998. Also during 1997, 2,500 restricted Ordinary Shares were forfeited due to resignations by officers of the Company and its subsidiaries. During 1996, 9,000 restricted Ordinary Shares were awarded to an officer of the Company. These shares vest at various dates up to July 1999. Also, during 1996, 6,734 restricted Ordinary Shares were awarded to outside directors of the Company under the terms of the Plan. These shares vested in February 1997. All non-vested restricted Ordinary Shares issued to directors prior to approval of the Plan in February 1996 were canceled upon approval of the Plan. Subsequently, two directors resigned resulting in the forfeiture of their restricted Ordinary Shares awards. During 1995, 102,400 restricted Ordinary Shares were awarded principally to the Chairman and four directors of the Company. The Chairman's award vests at various dates up to September 30, 1999. All restricted stock awards contain restrictions relating to, among other things, transferability and forfeiture under certain circumstances. 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 operations over the vesting period. 11. Related party transactions Included in net premiums written are amounts related to policies held by shareholders of the Company of approximately $17 million, $31 million and $43 million for 1997, 1996 and 1995, respectively. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 12. Taxation Under current Cayman Islands law, the Company is not required to pay any taxes 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 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 are subject to United Kingdom corporation taxes. 13. Statutory financial data Under the Bermuda Insurance Act 1978, (as amended by the Insurance Amendment Act 1995) and Related Regulations the Company's Bermuda-based insurance and reinsurance subsidiaries ("the Bermuda subsidiaries") are required to file an annual Statutory Financial Return and Statutory Financial Statements and to maintain certain measures of solvency and liquidity during each year. Statutory capital and surplus of the Bermuda subsidiaries was $2,265 million, $1,885 million and $1,327 million at September 30, 1997, 1996 and 1995 and statutory net income was $489 million, $301 million and $249 million for 1997, 1996 and 1995, respectively. Statutory capital and surplus and statutory net income include the results of Tempest from July 1, 1996, the date of acquisition by the Company. The principal difference between statutory capital and surplus and statutory net income of the Bermuda subsidiaries and shareholders' equity and net income as reported in conformity with GAAP relates to deferred acquisition costs of the subsidiaries, goodwill and assets and financial activity of the parent company. There are no statutory restrictions on the payment of dividends from retained earnings by any of 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. ACE LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.) 14. Condensed unaudited quarterly financial data
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share data) 1997 Net premiums earned......................... $164,400 $158,641 $163,605 $158,192 Net investment income....................... 59,738 58,094 59,545 60,446 Net realized gains (losses) on investments.. 41,723 (2,339) 45,786 42,812 -------- -------- -------- -------- Total revenues......................... $265,861 $214,396 $268,936 $261,450 ======== ======== ======== ======== Losses and loss expenses.................... $110,150 $105,290 $111,380 $109,121 ======== ======== ======== ======== Net income.................................. $125,741 $ 77,949 $130,038 $127,626 ======== ======== ======== ======== Earnings per share.......................... $2.14 $1.34 $2.30 $2.26 ======== ======== ======== ======== First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share data) 1996 Net premiums earned......................... $115,984 $146,393 $145,897 $178,971 Net investment income....................... 47,126 48,312 50,641 60,445 Net realized gains (losses) on investments.. 44,602 5,261 (1,633) 6,999 -------- -------- -------- -------- Total revenues......................... $207,712 $199,966 $194,905 $246,415 ======== ======== ======== ======== Losses and loss expenses.................... $ 92,924 $121,076 $120,438 $130,386 ======== ======== ======== ======== Net income.................................. $ 93,536 $ 56,803 $ 52,476 $ 86,918 ======== ======== ======== ======== Earnings per share.......................... $2.02 $1.22 $1.13 $1.46 ======== ======== ======== ========
15. Condensed unaudited pro forma financial information relating to Tempest Acquisition The following pro forma information assumes the acquisition of Tempest occurred at the beginning of each year presented. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Tempest Acquisition been consummated at the beginning of each year presented, nor is it necessarily indicative of future operating results. 1996 1995 ---- ---- (in thousands, except per share data) Pro forma:
Net premiums earned.............................. $671,320 $580,850 Investment income................................ 225,331 213,068 Net income...................................... 373,755 360,776 Earnings per share............................... $ 6.23 $ 5.96
EX-21.1 10 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF PERCENTAGE NAME ORGANIZATION OWNERSHIP ---- -------------- ---------- A.C.E. Insurance Company, Ltd......................... Bermuda 100% Corporate Officers & Directors Assurance Ltd........ Bermuda 100 ACE UK Limited...................................... United Kingdom 100 ACE Capital Limited............................... United Kingdom 100 Methuen Group Limited............................. United Kingdom 100 Methuen Holdings Limited........................ United Kingdom 100 Methuen Underwriting Ltd...................... United Kingdom 100 ACE London Holdings Ltd........................... United Kingdom 100 ACE Capital II Ltd.............................. United Kingdom 100 ACE London Investments Ltd...................... United Kingdom 100 ACE London Aviation Limited................... United Kingdom 100 ACE London Underwriting Limited............... United Kingdom 100 ACE Capital III Limited......................... United Kingdom 100 ACE Staff Corporate Member Limited.............. United Kingdom 100 ACE Reinsurance Company Europe Ltd.................. Ireland 100 ACE Insurance Company Europe Ltd.................. Ireland 100 Oasis Real Estate Co. Ltd........................... Bermuda 100 Scarborough Property Holdings, Ltd................ Bermuda 40 Tempest Reinsurance Company Limited................... Bermuda 100 ACE Insurance Management Ltd.......................... Bermuda 100 ACE Services Ltd...................................... Cayman 100 Tripar Partnership.................................... Bermuda 100 ACE Realty Holdings Ltd............................... Bermuda 100 Oasis Investments Limited............................. Bermuda 100
37 EX-23.1 11 CONSENT OF COOPERS & LYBRAND EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this annual report on Form 10-K of our report dated November 5, 1997, on our audits of the consolidated financial statements of ACE Limited as of September 30, 1997 and 1996 and for each of the three years in the period ended September 30, 1997 from page 32 of the 1997 Annual Report to Shareholders of ACE Limited. Coopers & Lybrand L.L.P. New York, New York December 22, 1997 38 EX-27.1 12 FINANCIAL DATA SCHEDULE
7 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 3,290,336 0 0 634,970 0 0 4,368,429 106,336 0 27,018 5,001,546 1,869,995 400,689 36,218 0 0 6,911 0 0 2,612,283 5,001,546 644,838 237,823 127,982 0 435,941 46,957 0 461,354 0 461,354 0 0 0 461,354 8.02 7.96 0 0 0 0 0 0 0
EX-99.1 13 EXTRACTS FROM S-1 (333-04153) TAXATION OF ACE AND ITS SHAREHOLDERS The following summary of (i) the taxation of ACE and its subsidiaries and (ii) the taxation of ACE shareholders is based upon current law. Legislative, judicial or administrative changes may be forthcoming that could be retroactive and could affect this summary. The tax treatment of any particular shareholder may vary depending on such shareholder's particular tax situation or status. The following summary is for general information only and does not purport to be a complete analysis or listing of all tax considerations that might be applicable to ACE and its subsidiaries or a holder of ACE Ordinary Shares, including persons who may be subject to special tax rules (e.g. tax exempt entities or dealers in securities) or shareholders who are not U.S. persons. A U.S. person who holds ACE Ordinary Shares as capital assets will be referred to herein as a "U.S. ACE Shareholder." Each prospective shareholder is urged to consult his or its own tax advisors as to the particular tax consequences to such shareholder of owning ACE Ordinary Shares. Taxation of ACE and its Subsidiaries Bermuda. CODA and ACE Insurance have received from the Minister of Finance of Bermuda an assurance under The Exempted Undertakings Tax Protection Act, 1966 of Bermuda, to the effect that in the event of there being enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to CODA or ACE Insurance or to any of their operations or the shares, debentures or other obligations of CODA or ACE Insurance until March 28, 2016. This assurance does not prevent the application of any such tax or duty to such persons as are ordinarily resident in Bermuda, nor does it prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 of Bermuda or otherwise payable in relation to the property leased to CODA or ACE Insurance. ACE, as a permit company under the Companies Act 1981 of Bermuda (the "Bermuda Act"), has received similar assurances which are effective until March 28, 2016. CODA and ACE Insurance, under current rates, pay annual Bermuda government and business fees in the aggregate of BD$4,515 and BD$7,875, respectively. ACE is required to pay certain annual Bermuda government fees. Under current rates, ACE pays a fixed annual fee of BD$1,680. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax to the Bermuda Government. For the fiscal year ended September 30, 1996, ACE paid approximately $776,000 in payroll tax. Currently there is no Bermuda withholding tax on dividends paid by CODA or ACE Insurance. Cayman Islands. Under current Cayman Islands law, ACE is not obligated to pay any taxes in the Cayman Islands on its income or gains. ACE has received an undertaking from the Governor-in-Council of the Cayman Islands pursuant to the provisions of the Tax Concessions Law, as amended, that until the year 2005 (i) no subsequently enacted law imposing any tax on profits, income, gains or appreciations shall apply to ACE and (ii) no such tax and no tax in the nature of an estate duty or an inheritance tax shall be payable on any shares, debentures or other obligations of ACE. The Cayman Islands currently imposes stamp duties on certain categories of documents; however, the current operations of ACE do not involve the payment of stamp duties in any material amount. The Cayman Islands currently imposes an annual corporate fee upon all exempted companies; at current rates ACE pays fees of approximately $1,750 per annum. United Kingdom. Methuen is subject to United Kingdom corporation tax and value added tax. ACE's corporate subsidiary which has acquired a 51% interest in Methuen and ACE's corporate subsidiary that is a Lloyd's corporate member participating in the Methuen syndicates are also subject to United Kingdom corporation tax and value added tax. Although ACE has a representative office in London, ACE has been advised that it is not deemed to be doing insurance business in the United Kingdom and therefore is subject only to minimal tax in the United Kingdom. United States. Except as provided below with respect to ACE's corporate subsidiary that is a Lloyd's corporate member, ACE and its subsidiaries do not conduct business within the United States and thus are not subject to net income tax imposed by the United States. However, because definitive identification of activities which constitute being engaged in a trade or business in the United States is not provided by the Code, regulations or court decisions, there can be no assurance that the IRS will not contend successfully that ACE or one or more of its subsidiaries is engaged in a trade or business in the United States. A foreign corporation deemed to be so engaged would be subject to U.S. income tax, as well as the branch profits tax, on its income which is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of the Bermuda Treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a domestic corporation, except that a foreign corporation can anticipate an allowance of deductions and credits only if it files a U.S. income tax return. Under regulations, the foreign corporation would be entitled to deductions and credits only if the return is filed timely under rules set forth therein. ACE and its subsidiaries have in the past and expect to continue filing protective tax returns to ensure that it and its subsidiaries would be entitled to deductions and credits if they are considered to be engaged in a U.S. trade or business. The highest federal tax rates currently are 35% for a corporation's effectively connected income and 30% for the branch profits tax. The branch profits tax is imposed on effectively connected net income after subtracting the regular corporate tax and making certain other adjustments and on interest paid or deemed paid from the U.S. branch to persons outside the United States. Pursuant to a Closing Agreement between Lloyd's and the IRS, ACE's corporate subsidiary that is a Lloyd's corporate member is treated as engaged in business in the United States and subject to net income tax in the United States on its U.S. source income. Under the Bermuda Treaty, CODA and ACE Insurance are subject to U.S. income tax on any income found to be effectively connected with a U.S. trade or business only if that trade or business is conducted through a permanent establishment in the United States. No regulations interpreting the Bermuda Treaty have been issued. While there can be no assurances, ACE does not believe CODA or ACE Insurance has a permanent establishment in the United States. Neither CODA nor ACE Insurance would be entitled to the benefits of the Bermuda Treaty if (i) less than 50% of such subsidiary's stock were beneficially owned, directly or indirectly, by Bermuda residents or U.S. citizens or residents, or (ii) such subsidiary's income were used in substantial part to make disproportionate distributions to, or to meet certain liabilities of, persons who are not Bermuda residents or U.S. citizens or residents. While there can be no assurances, ACE believes that no exception to Bermuda Treaty benefits will apply after the Amalgamation. Foreign corporations not engaged in a trade or business in the United States are nonetheless subject to U.S. income tax on certain "fixed or determinable annual or periodic gains, profits and income" derived from sources within the United States as enumerated in Section 881(a) of the Code (such as dividends and certain interest on investments). The amount of such taxes paid by ACE has not exceeded $1.7 million in any fiscal year. Effect of the Amalgamation. ACE believes that the Amalgamation will not cause ACE or its existing subsidiaries to be subject to tax in the Cayman Islands, Bermuda or the United States (except to the very limited extent noted above that they are currently subject to tax in those jurisdictions), and it is expected that the ACE Reinsurance Subsidiary will be taxed in a manner similar to ACE's other subsidiaries. Accordingly, the foregoing description of the tax treatment of ACE and its operating subsidiaries by Bermuda, the Cayman Islands, the United Kingdom and the United States should remain unchanged after the Effective Time and should, where applicable, apply equally to the ACE Reinsurance Subsidiary. Taxation of ACE Shareholders Cayman Islands. Dividends paid by ACE are not subject to Cayman Islands withholding tax. Bermuda. Under current Bermuda law, there is no Bermuda income tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the respective shareholders of ACE with respect to an investment in ACE Ordinary Shares. United States--Taxation of dividends. Subject to the discussion below relating to the potential application of the "controlled foreign corporation" and "passive foreign investment company" rules, cash distributions made with respect to ACE Ordinary Shares will constitute dividends for U.S. federal income tax purposes to the extent paid out of current or accumulated E&P of ACE. U.S. ACE Shareholders generally will be subject to U.S. federal income tax on the receipt of such dividends. Generally, such dividends will not be eligible for the corporate dividends received deduction. To the extent that a distribution exceeds E&P, it will be treated first as a return of the U.S. ACE Shareholder's basis to the extent thereof, and then as gain from the sale of a capital asset. United States--Classification as a controlled foreign corporation. Under Section 951(a) of the Code, each "U.S. 10% shareholder" (as defined below) that, on the last day of foreign corporation's taxable year, owns, directly or indirectly through a foreign entity, shares of a foreign corporation that is a "controlled foreign 6/ corporation" ("CFC") for an uninterrupted period of 30 days or more during any taxable year must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's "subpart F income" for such year, even if the subpart F income is not distributed. In addition, the U.S. 10% shareholders of a CFC may be deemed to receive taxable distributions to the extent the CFC increases the amount of its earnings that are invested in certain specified types of U.S. property or if the CFC holds "excess passive assets," as defined in Section 956A of the Code. "Subpart F income" includes, inter alia, (i) "foreign personal holding company income", such as interest, dividends, and other types of passive investment income and (ii) "insurance income," which is defined to include any income (including underwriting and investment income) that is attributable to the issuing (or reinsuring) of any insurance or annuity contract in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, a country other than the country under the laws of which the CFC is created or organized, and which (subject to certain modifications) would be taxed under the insurance company provision of the Code if such income were the income of a domestic insurance company ("Subpart F Insurance Income"). However, Subpart F income does not include any income from sources within the U.S. which is effectively connected with the conduct of a trade or business within the U.S. and not exempted or subject to a reduced rate of tax by applicable treaty. Therefore, all of ACE's income, and all income of ACE's operating subsidiaries that is not attributable to a permanent establishment in the U.S., is expected to be Subpart F income. Under Section 951(b) of the Code, any U.S. Person who owns, directly or indirectly through foreign entities, or is considered to own (by application of the rules of constructive ownership set forth in Code Section 958(b), generally applying to family members, partnerships, estates, trusts or 10% controlled corporations) 10% or more of the total combined voting power of all classes of stock of a foreign corporation will be considered to be a "U.S. 10% shareholder." In general, a foreign corporation is treated as a CFC only if its U.S. 10% shareholders collectively own more than 50% of the total combined voting power or total value of the corporation's stock on any day (the "50% Test"). However, for purposes only of taking into account Subpart F Insurance Income, a foreign corporation will be treated as a CFC if (i) more than 25% of the total combined voting power or total value of its stock is owned by U.S. 10% shareholders and (ii) the gross amount of premiums or other consideration in respect of risks outside its country of incorporation exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks (the "25% Test"). It is anticipated that the gross premiums of each of the insurance subsidiaries of ACE in respect of Subpart F Insurance Income will exceed 75% of its gross premiums in respect of all risks so that the 25% Test, rather than the 50% Test, will be applicable with respect to its Subpart F Insurance Income. However, the 50% test will continue to apply to ACE itself. After the Amalgamation, all the capital stock of ACE Insurance, CODA, and the ACE Reinsurance Subsidiary will be owned directly or indirectly by ACE. In determining the U.S. 10% shareholders of ACE Insurance, CODA, or the ACE Reinsurance Subsidiary, U.S. Persons who are shareholders of ACE are considered as owning proportionately the stock of ACE Insurance, CODA, and the ACE Reinsurance Subsidiary. After the Amalgamation, U.S. Persons who own, directly, indirectly or by attribution under the rules of Section 958(b) of the Code, more than 10% in value of the stock of ACE will not own more than 25% of the total combined voting power or value of the stock of ACE. As a result, none of ACE Insurance, CODA, or the ACE Reinsurance Subsidiary, will be a CFC under the 25% Test. However, depending on the future ownership of ACE stock, any U.S. Person who subsequently acquires 10% or more of the stock of ACE may be required to include their share of the Subpart F income of ACE and its subsidiaries in their U.S. taxable income. It is not expected that ACE itself would ever be a CFC under the 50% test, so U.S. persons are not expected to have to include any of ACE's Subpart F income in their U.S. taxable income. United States--RPII companies. A different definition of "controlled foreign corporation" is applicable in the case of a foreign corporation which earns related person insurance income ("RPII"). RPII is defined in Code Section 953(c)(2) as any "insurance income" (as defined above) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a "U.S. shareholder" of the foreign corporation or a "related person" to such a shareholder. For purposes only of taking into account RPII, and subject to the exceptions described below, an insurance subsidiary of ACE will be treated as a CFC it its 7/ "RPII shareholders" (as defined below) collectively own, directly, indirectly, or by attribution under Code Section 958(b), 25% or more of the total combined voting power or value of such subsidiary's stock on any day during a fiscal year. If an insurance subsidiary of ACE is a CFC under the special RPII rules for an uninterrupted period of at least 30 days during any fiscal year, a U.S. Person who owns, directly or indirectly through foreign entities, shares of shares of such subsidiary on the last day of such fiscal year must include in its gross income for U.S. federal income tax purposes its allocable share of RPII for the entire taxable year, subject to certain modifications. For purposes of inclusion of RPII from an insurance subsidiary of ACE in the income of U.S. Persons who own ACE Ordinary Shares, unless an exception applies, the term "RPII shareholder" includes all U.S. Persons who own, directly or indirectly through foreign entities, any amount (rather than 10% or more) of the ACE Ordinary Shares. Generally, the term "related person" for purposes of the RPII rules means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock, with respect to corporations, or more than 50% of the beneficial interests, with respect to partnerships, trusts, or estates, applying constructive ownership principles similar to the rules of Section 958 of the Code. The term "related persons" also includes, with respect to insurance policies covering liability arising from services performed as a director, officer or employee of a corporation or a partner or employee of a partnership, the person performing such services and the entity for which the services are performed. The above RPII rules do not apply if (A) direct and indirect insureds and persons related to such insureds, whether or not U.S. persons, are treated as owning less than 20% of the voting power and less than 20% of the value of the stock of ACE's insurance company subsidiaries, or (B) the RPII of each of ACE's insurance subsidiaries, determined on a gross basis, is less than 20% of each such subsidiary's gross insurance income for the taxable year. ACE believes that the RPII income of each of ACE Insurance and CODA has been, and should be for the foreseeable future, less than 20% of such subsidiary's gross insurance income for the taxable year and, based in part on information provided by Tempest, it is expected that the ACE Reinsurance Subsidiary's RPII income will constitute less than 20% of its gross insurance income for future taxable years. As a consequence, the special RPII rules should not apply, and U.S. Persons owning ACE Ordinary Shares should not be required to include in gross income any RPII income under the special RPII rules. The IRS may assert, however, that ACE's reinsurance subsidiaries indirectly reinsure shareholders of ACE. ACE does not expect any of its subsidiaries to enter into reinsurance arrangements where the ultimate risk insured is that of a holder of ACE Ordinary Shares that is a U.S. person or person related to such a U.S. person at a level which would cause any subsidiary to have RPII income of 20% or more of its gross insurance income. However, unless final Treasury Regulations under Code Section 953 provide that this rule would apply only if the reinsured entity is fronting for another party, it may be difficult for ACE to obtain and, if requested of ACE or a shareholder by the IRS, provide shareholders with enough information to document and be certain that each of ACE's subsidiaries providing significant reinsurance have satisfied the 20% test. ACE believes that it is unlikely that enough of the underlying reinsured parties will own sufficient ACE Ordinary Shares to cause the RPII income of any of ACE's subsidiaries to be 20% or more of their gross insurance income and ACE will endeavor to avoid failing the 20% test. However, the ultimate application of the RPII rules and the proof that will be required to establish compliance thereunder is uncertain and each prospective investor should consult their own tax advisor with respect to this issue. United States--Passive foreign investment companies. Code Sections 1291 through 1297 contain special rules applicable to foreign corporations that are "passive foreign investment companies" ("PFIC's"). In general, a foreign corporation will be a PFIC if 75% or more of its gross income constitutes "passive income" (the "75% Income Test") or 50% or more of its assets produce, or are held for the production of, passive income (the "50% Asset Test"). If ACE were to be characterized as a PFIC, its U.S. shareholders would have to make an election (a "QEF Election") to be taxable currently on their pro-rata shares of earnings of ACE whether or not such earnings were distributed or they would be subject to a special tax and an interest charge at the time of the sale of, or receipt of an "excess distribution" with respect to, their shares, and a portion of any gain may be recharacterized as ordinary income, which for an individual would be taxed at the highest marginal rate of 39.6%. 8/ In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the stock during the three preceding taxable years (or shorter period during which the taxpayer held the stock). In general, the special tax and interest charges are based on the value of the tax deferral of the taxes that are deemed due during the period the U.S. shareholder owned the shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the shares was taxed in equal portions throughout the holder's period of ownership at the highest marginal tax rate. The interest charge is computed using the applicable rate imposed on underpayments of U.S. federal income tax for such period. In general, if a U.S. Person owns stock in a foreign corporation during any taxable year in which such corporation is a PFIC and such shareholder does not make a QEF Election, the stock will be treated as stock in a PFIC for all subsequent years. For the above purposes, "passive income" is defined to include income of a kind that would be characterized as foreign personal holding company income under Code Section 954(c), and generally includes interest, dividends, annuities and other investment income. The PFIC statutory provisions contain and express exception for income "derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business . . ." "This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income. Thus, to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business, it may be treated as passive income for purposes of the PFIC rules. The PFIC statutory provisions also contain a look-through rule that states that, for purposes of determining whether a foreign corporation is a PFIC, such foreign corporation shall be treated as if it "received directly its proportionate share of the income . . . "and as if it "held its proportionate share of the assets . . ." of any other corporation in which it owns at least 25% of the value of the stock. In ACE's view each of its direct and indirect insurance subsidiaries (including the ACE Reinsurance Subsidiary, after the Effective Time) is predominantly engaged in an insurance business and does not have financial reserves in excess of the reasonable needs of its insurance business. Under the look-through rule, ACE would be deemed to own its proportionate share of the assets and to have received its proportionate share of the income of ACE Insurance, CODA, and the ACE Reinsurance Subsidiary for purposes of the 75% Income and 50% Assets Test. However, no regulations interpreting the substantive PFIC provisions have yet been issued. Therefore, substantial uncertainty exists with respect to their application or their possible retroactivity. Each U.S. Person who holds ACE Ordinary Shares should consult his tax advisor as to the possible effects of these rules. Information Reporting. Every U.S. Person who "controls" a foreign corporation by owning directly or by attribution more than 50% of the total value of shares of all classes of stock of such corporation, for an uninterrupted period of 30 days or more during a fiscal year of that corporation, must file IRS Form 5471 with its U.S. income tax return. However, the IRS has the authority to, and does require, any U.S. Person treated as a U.S. 10% shareholder or RPII shareholder of a CFC that owns shares directly or indirectly through a foreign entity to file a Form 5471. In addition, U.S. Persons who own more than 5% in value of the outstanding stock of ACE or its subsidiaries at any time during a taxable year are required in certain circumstances to file Form 5471 even if neither corporation is a CFC. A tax- exempt organization that is treated as a U.S. 10% shareholder or a RPII shareholder for any purpose under subpart F will be required to file a Form 5471 in the circumstances described above. Failure to file Form 5471 may result in penalties. Dispositions of ACE Ordinary Shares. Subject to the discussion elsewhere relating to the potential application of the CFC and PFIC rules, gain or loss realized by a U.S. ACE Shareholder on the sale, exchange or other disposition of ACE Ordinary Shares will be includible in gross income as capital gain or loss in an amount equal to the difference between such holder's basis in the ACE Ordinary Shares and the amount realized on the sale, exchange or other disposition. If a U.S. ACE Shareholder's holding period for the ACE Ordinary Shares is more than one year, any gain will be subject to the U.S. federal income tax at a current maximum marginal rate of 28% for individuals and 35% for corporations. earnings and profits during the period that the shareholder held the shares (with certain adjustments). Code Section 953(c)(7) generally provides that Section 1248 also will apply to the sale or exchange of shares by a U.S. shareholder in a foreign corporation that earns RPII and is characterized as a CFC under the RPII rules if the foreign corporation would be taxed as an insurance company if it were a domestic corporation, regardless of whether the shareholder is a 10% shareholder or whether RPII constitutes 20% or more of the corporation's gross insurance income. ACE believes, based on the advice of counsel, that Code Section 1248 will not apply to dispositions of ACE Ordinary Shares, so long as ACE is not a CFC, because ACE is not directly engaged in the insurance business. There can be no assurance, however, that the IRS will interpret proposed regulations under Code Section 953 in this manner or that the Treasury Department will not amend the proposed regulations under Section 953 or other regulations to provide that Section 1248 will apply to dispositions of shares in a corporation such as ACE which is engaged in the insurance business directly on indirectly through its subsidiaries. If the IRS or Treasury Department were to take such action ACE would notify shareholders that Code Section 1248 will apply to dispositions of Common Shares. Foreign Tax Credit. Because it is anticipated that U.S. Persons will own a majority of ACE's shares after the Amalgamation and because a substantial part of the insurance business of ACE's subsidiaries includes the insurance of U.S. risks only a portion of the RPII and Subpart F inclusions (if any) and dividends paid by ACE (including any gain from the sale of ACE Ordinary Shares that is treated as a dividend under Code Section 1248) will be treated as foreign source income for purposes of computing a shareholder's U.S. foreign tax credit limitation. Except in the case of U.S. 10% shareholders it is likely that all of the RPII and Subpart F inclusions (if any) and dividends that are foreign source income will constitute either "passive" or "financial services" income for foreign tax credit limitation purposes. Thus, it may not be possible for certain U.S. shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income. Other. Dividends paid by ACE to U.S. corporate shareholders will not be eligible for the dividends received deduction provided by Code Section 243. Except as discussed below with respect to backup withholding, dividends paid by ACE will not be subject to a U.S. withholding, tax. Information reporting to the IRS by paying agents and custodians located in the U.S. will be required with respect to payments of dividends (if any) on the ACE Ordinary Shares to U.S. Persons or to paying agents or custodians located in the U.S. In addition, a holder of ACE Ordinary Shares may be subject to backup withholding at the rate of 31% with respect to dividends paid by such persons, unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. The backup withholding tax is not an additional tax and may be credited against a holder's regular Federal income tax liability. Sales of ACE Ordinary Shares through brokers by certain U.S. Persons also may be subject to backup withholding. Sales by corporations, certain tax-exempt entities, individual retirement plans, REITs, certain financial institutions, and other "exempt recipients" as defined in applicable Treasury regulations currently are not subject to backup withholding. Holders of ACE Ordinary Shares should consult their own tax advisors regarding the possible applicability of the backup withholding rules to sales of their ACE Ordinary Shares. The foregoing discussion (including and subject to the matters and qualifications set forth in such summary) is based on current law and is for general information only. The tax treatment of a holder of ACE Ordinary Shares for U.S. federal income, state, local or non-U.S. tax purposes may vary depending on the holder's particular tax situation. Legislative, judicial or administrative changes or interpretations may be forthcoming that could be retroactive and could affect the tax consequences to holders of ACE Ordinary Shares. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF OWNING THE ACE ORDINARY SHARES. 70 -----END PRIVACY-ENHANCED MESSAGE-----