UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ______________ to ______________
Commission file number: 0-26456
ARCH CAPITAL GROUP LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Bermuda Not Applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Wessex House, 3rd Floor
45 Reid Street
Hamilton, Bermuda HM 12
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (441) 278-9250
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of common shares.
Class Outstanding At June 30, 2002
------------------------------ ----------------------------
Common Shares, $0.01 par value 23,795,740
================================================================================
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ARCH CAPITAL GROUP LTD.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants 2
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income
For the three and six month periods ended June 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity
For the six month periods ended June 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income
For the six month periods ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 20
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 40
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS 40
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 41
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 42
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Arch Capital Group Ltd.:
We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries as of June 30, 2002, and the related consolidated statements of income for each of the three and six month periods ended June 30, 2002 and 2001, and the consolidated statements of comprehensive income, changes in shareholders' equity, and cash flows for each of the six month periods ended June 30, 2002 and 2001. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of income, comprehensive income and changes in shareholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 28, 2002, except as to the matters described in Note 18 to the consolidated financial statements which are as of March 7, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet information as of December 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York August 2, 2002 |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost: .................
2002, $1,043,700; 2001, $467,154) .................................................. $ 1,056,780 $ 468,269
Short-term investments available for sale, at fair value (amortized cost: ...........
2002, $176,119; 2001, $477,058) .................................................... 175,720 476,820
Publicly traded equity securities available for sale, at fair value (cost: 2002,-- ;
2001, $960) ........................................................................ -- 235
Securities held in escrow, at fair value (amortized cost: 2002,--; 2001, $22,156) .. -- 22,156
Privately held securities (cost: 2002, $31,537; 2001, $41,587) ..................... 31,571 41,608
----------- ------------
Total investments ................................................................... 1,264,071 1,009,088
----------- ------------
Cash ................................................................................ 37,641 9,970
Accrued investment income ........................................................... 13,681 7,572
Premiums receivable ................................................................. 330,086 59,463
Unpaid losses and loss adjustment expenses recoverable .............................. 137,051 90,442
Paid losses and loss adjustment expenses recoverable ................................ 22,315 14,418
Prepaid reinsurance premiums ........................................................ 56,430 58,961
Goodwill ............................................................................ 28,823 26,336
Deferred income tax asset ........................................................... 18,342 13,716
Deferred acquisition costs .......................................................... 61,803 5,412
Loan to Chairman .................................................................... 13,530 --
Other assets ........................................................................ 23,963 18,323
----------- ------------
TOTAL ASSETS ........................................................................ $ 2,007,736 $ 1,313,701
=========== ============
LIABILITIES
Reserve for losses and loss adjustment expenses ..................................... $ 266,590 $ 113,507
Unearned premiums ................................................................... 408,759 88,539
Reinsurance balances payable ........................................................ 38,147 47,029
Reserve for loss of escrowed assets ................................................. -- 18,833
Other liabilities ................................................................... 48,193 25,424
----------- ------------
TOTAL LIABILITIES ................................................................... 761,689 293,332
----------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 2002,
36,563,488, 2001, 35,687,735) ...................................................... 366 357
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2002,
23,795,740, 2001, 13,513,538) ...................................................... 238 135
Additional paid-in capital .......................................................... 1,282,401 1,039,887
Deferred compensation under share award plan ........................................ (59,241) (8,230)
Retained earnings (deficit) ......................................................... 11,582 (11,610)
Accumulated other comprehensive income consisting of unrealized
appreciation (decline) in value of investments, net of income tax ................... 10,701 (170)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY .......................................................... 1,246,047 1,020,369
----------- ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............................................ $ 2,007,736 $ 1,313,701
=========== ============
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See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Net premiums written .............. $ 223,025 $ 6,719 $ 503,736 $ 9,557
Increase in unearned premiums ..... (109,566) (1,154) (322,750) (2,359)
------------ ------------ ------------ ------------
Net premiums earned ............... 113,459 5,565 180,986 7,198
Net investment income ............. 11,611 3,078 20,778 6,238
Net realized investment gains ..... 2,476 9,605 1,011 18,609
Equity in net income of investees . 778 33 1,576 921
Fee income ........................ 4,131 3,711 7,705 5,426
Net commission income ............. -- 1,199 -- 1,681
Net foreign exchange gains ........ 3,352 -- 3,244 --
------------ ------------ ------------ ------------
TOTAL REVENUES .................... 135,807 23,191 215,300 40,073
EXPENSES
Losses and loss adjustment expenses 80,304 5,526 130,844 7,071
Acquisition expenses .............. 17,755 -- 25,065 --
Other operating expenses .......... 14,854 4,761 28,178 8,440
Non-cash compensation ............. 8,636 275 12,764 634
------------ ------------ ------------ ------------
TOTAL EXPENSES .................... 121,549 10,562 196,851 16,145
INCOME BEFORE INCOME TAXES ........ 14,258 12,629 18,449 23,928
Income tax (benefit) expense ...... (4,968) 4,229 (4,743) 7,535
------------ ------------ ------------ ------------
NET INCOME ........................ $ 19,226 $ 8,400 $ 23,192 $ 16,393
============ ============ ============ ============
NET INCOME PER SHARE DATA
Basic ............................. $ 0.95 $ 0.65 $ 1.39 $ 1.28
Diluted ........................... $ 0.33 $ 0.65 $ 0.42 $ 1.28
AVERAGE SHARES OUTSTANDING
Basic ............................. 20,323,114 12,832,261 16,691,051 12,809,572
Diluted ........................... 58,877,515 12,844,000 54,981,185 12,818,160
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See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2002 2001
----------- -----------
PREFERENCE SHARES
Balance at beginning of year ..................................................... $ 357 --
Preference shares issued ......................................................... 9 --
----------- -----------
Balance at end of period ......................................................... 366 --
----------- -----------
COMMON SHARES
Balance at beginning of year ..................................................... 135 $ 127
Common shares issued ............................................................. 103 2
----------- -----------
Balance at end of period ......................................................... 238 129
----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ..................................................... 1,039,887 288,016
Common shares issued ............................................................. 242,514 2,360
----------- -----------
Balance at end of period ......................................................... 1,282,401 290,376
----------- -----------
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Balance at beginning of year ..................................................... (8,230) (341)
Restricted common shares issued .................................................. (63,615) (1,772)
Deferred compensation expense recognized ......................................... 12,604 634
----------- -----------
Balance at end of period ......................................................... (59,241) (1,479)
----------- -----------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year, as previously reported ............................. (11,610) (30,916)
Adjustment to retroactively adopt the equity method of accounting for the original
investment in ART Services ...................................................... -- (2,710)
----------- -----------
Balance at beginning of year, as adjusted ........................................ (11,610) (33,626)
Net income ....................................................................... 23,192 16,393
----------- -----------
Balance at end of period ......................................................... 11,582 (17,233)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME
UNREALIZED APPRECIATION (DECLINE) IN VALUE OF INVESTMENTS, NET OF INCOME TAX
Balance at beginning of year ..................................................... (170) 18,432
Adjustment to retroactively adopt the equity method of accounting for the original
investment in ART Services ...................................................... -- (309)
----------- -----------
Balance at beginning of year, as adjusted ........................................ (170) 18,123
Change in unrealized appreciation (decline) in value of investments .............. 10,871 (18,264)
----------- -----------
Balance at end of period ......................................................... 10,701 (141)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ....................................................... $ 1,246,047 $ 271,652
=========== ===========
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See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2002 2001
-------- --------
COMPREHENSIVE INCOME (LOSS)
Net income ............................................................... $ 23,192 $ 16,393
Other comprehensive income (loss), net of income tax
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period .............. 10,098 (6,427)
Reclassification of net realized losses (gains) included in net income 773 (11,837)
-------- --------
Other comprehensive income (loss) ...................................... 10,871 (18,264)
-------- --------
COMPREHENSIVE INCOME (LOSS) .............................................. $ 34,063 ($ 1,871)
======== ========
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See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income ......................................................................... $ 23,192 $ 16,393
Adjustments to reconcile net income to net cash provided
by operating activities:
Net realized investment gains ................................................. (1,011) (18,610)
Non-cash compensation ......................................................... 12,764 634
Net unrealized foreign exchange gains ......................................... (3,263) --
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss
adjustment expenses recoverable .............................................. 106,430 (253)
Unearned premiums, net of prepaid reinsurance premiums ....................... 322,458 5,163
Premiums receivable .......................................................... (267,316) (5,971)
Accrued investment income .................................................... (5,894) (326)
Reinsurance recoverables ..................................................... (2,436) (2,668)
Reinsurance balances payable ................................................. (9,490) 205
Deferred acquisition costs ................................................... (56,391) (473)
Deferred income tax asset .................................................... (4,626) 302
Other liabilities ............................................................ 16,801 (3,017)
Loan to Chairman ............................................................. (13,530) --
Other items, net ............................................................. (3,983) 8,329
--------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ............................... 113,705 (292)
--------- ---------
INVESTING ACTIVITIES
Purchases of fixed maturity investments ............................................ (885,654) (112,225)
Release of escrowed assets ......................................................... (18,833) --
Sales of fixed maturity investments ................................................ 300,277 65,899
Purchases of equity securities ..................................................... -- (19)
Sales of equity securities ......................................................... 13,802 44,468
Net sales of short-term investments ................................................ 329,843 37,500
Acquisition of Arch Specialty Insurance Company, net of cash and investments ....... (2,513) --
Acquisition of ART Services, net of cash ........................................... -- (34,159)
Acquisition of American Independent Insurance Holding Company, net of cash ......... -- 224
Purchases of furniture, equipment and other ........................................ (2,073) (633)
--------- ---------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES ............................... (265,151) 1,055
--------- ---------
FINANCING ACTIVITIES
Common stock issued ................................................................ 179,154 --
Purchase of treasury shares ........................................................ -- (48)
Debt retirement and other .......................................................... (37) (73)
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ............................... 179,117 (121)
--------- ---------
Increase in cash ................................................................... 27,671 642
Cash beginning of year ............................................................. 9,970 11,481
--------- ---------
CASH END OF PERIOD ................................................................. $ 37,641 $ 12,123
========= =========
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See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Arch Capital Group Ltd. ("ACGL") and its subsidiaries (together with ACGL, the "Company"), including Arch Reinsurance Ltd. ("Arch Re Bermuda"), Arch Capital Group (U.S.) Inc. ("Arch-U.S."), Arch Reinsurance Company ("Arch Re U.S."), Arch Insurance Company ("Arch Insurance"), formerly known as First American Insurance Company, Arch Excess & Surplus Insurance Company ("Arch E&S"), formerly known as Cross River Insurance Company, Arch Specialty Insurance Company ("Arch Specialty"), formerly known as Rock River Insurance Company, Arch Risk Transfer Services Ltd. ("ART Services"), American Independent Insurance Holding Company ("AIHC"), and Hales & Company Inc. ("Hales"). All significant intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments necessary (consisting only of normal recurring accruals) for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2001, including the Company's audited consolidated financial statements and related notes and the section entitled "Risk Factors." Many events, such as natural catastrophes such as earthquakes, hurricanes, tornados and hailstorms, can have a significant impact on the results of any one or more reporting periods.
In October 2001, the Company launched an underwriting initiative to meet current and future demand in the global insurance and reinsurance markets that included the recruitment of new management teams and an equity capital infusion of $763.2 million. In April 2002, the Company completed an offering of 7,475,000 of its common shares and received net proceeds of $179.2 million. Due to the significant changes in the Company's business and operations resulting from the new underwriting initiative and related capital infusions, comparisons of 2002 to 2001 results are not meaningful.
2. ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which was adopted by the Company on January 1, 2002. SFAS No. 144 addresses the accounting and reporting for impairment of long-lived assets to be held and used, as well as long-lived assets to be disposed of. The standard requires that long-lived assets to be held and used will be written down to fair value when they are considered impaired. Long-lived assets to be disposed of are required to be carried at the lower of carrying amount or fair value less estimated cost to sell. SFAS No. 144 also broadens the presentation of discontinued operations on the income statement to include a component of an entity (rather than a segment of a business). The adoption of this standard did not have a material effect on the Company's results of operations for the three month and six month periods ended June 30, 2002 or its financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 will be applied prospectively to exit or disposal activities initiated after December 31, 2002 and requires companies to recognize costs associated with exit activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. The Company is currently evaluating this standard.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECLASSIFICATIONS
To facilitate period to period comparisons, certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation. Such reclassifications had no effect on the Company's net income, shareholders' equity or cash flows.
4. GOODWILL
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which became effective for the Company on January 1, 2002. In adopting SFAS No. 142, the Company discontinued amortizing goodwill and will test goodwill at least annually for impairment. SFAS No. 142 also requires that, upon adoption, the Company complete a transitional goodwill impairment test six months from the date of adoption. The Company tested its goodwill for impairment at each reporting unit as of January 1, 2002 in accordance with SFAS No. 142 and, based on such evaluation, it was determined that goodwill was not impaired. Goodwill will be tested for impairment on an annual basis and between annual tests in certain circumstances.
The carrying amount of goodwill at June 30, 2002 was $28.8 million, consisting of $23.1 million relating to the Company's insurance subsidiaries ($13.6 million, $6.7 million and $2.8 million relating to the acquisitions of AIHC, ART Services and Arch Specialty, respectively) and $5.7 million relating to the acquisition of Hales.
The following table provides the pro forma effect on net income and basic and diluted earnings per share for the three and six month periods ended June 30, 2002 and 2001, as if the amortization of goodwill had ceased at the beginning of 2001 (net of taxes):
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
(in thousands, except per share data) 2002 2001 2002 2001
---------- --------- ---------- ----------
Reported net income ................. $ 19,226 $ 8,400 $ 23,192 $ 16,393
Add back: goodwill amortization ..... -- 284 -- 454
---------- --------- ---------- ----------
Adjusted net income ................. $ 19,226 $ 8,684 $ 23,192 $ 16,847
---------- --------- ---------- ----------
Basic earnings per share:
Reported net income ................. $ 0.95 $ 0.65 $ 1.39 $ 1.28
Add back: goodwill amortization ..... -- 0.03 -- 0.04
---------- --------- ---------- ----------
Adjusted net income ................. $ 0.95 $ 0.68 $ 1.39 $ 1.32
---------- --------- ---------- ----------
Diluted earnings per share:
Reported net income ................. $ 0.33 $ 0.65 $ 0.42 $ 1.28
Add back: goodwill amortization ..... -- 0.03 -- 0.04
---------- --------- ---------- ----------
Adjusted net income ................. $ 0.33 $ 0.68 $ 0.42 $ 1.32
---------- --------- ---------- ----------
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CONTINGENCIES RELATING TO THE SALE OF PRIOR REINSURANCE OPERATION
On May 5, 2000, the Company sold the prior reinsurance operations of Arch Re U.S. pursuant to an agreement entered into as of January 10, 2000 with Folksamerica Reinsurance Company and Folksamerica Holding Company (collectively, "Folksamerica"). The Folksamerica transaction was structured as a transfer and assumption agreement (and not reinsurance), and, accordingly, the loss reserves (and any related reinsurance recoverables) relating to the transferred business are not included as assets or liabilities on the Company's balance sheet. Folksamerica assumed Arch Re U.S.'s rights and obligations under the reinsurance agreements transferred in the asset sale. The reinsureds under such agreements were notified that Folksamerica had assumed Arch Re U.S.'s obligations and that, unless the reinsureds object to the assumption, Arch Re U.S. will be released from its obligations to those reinsured. None of such reinsureds objected to the assumption. However, Arch Re U.S. will continue to be liable under those reinsurance agreements if the notice is found not to be an effective release by the reinsureds. Folksamerica has agreed to indemnify the Company for any losses arising out of the reinsurance agreements transferred to Folksamerica Reinsurance Company in the asset sale. However, in the event that Folksamerica refuses or is unable to perform its obligations to the Company, Arch Re U.S. may incur losses relating to the reinsurance agreements transferred in the asset sale. Folksamerica has an A.M. Best rating of "A-" (Excellent).
Under the terms of the agreement, $20 million of the purchase price had been placed in escrow for a period of five years. Such amounts represented restricted funds that appeared under a separate caption entitled "Securities held in escrow" on the Company's consolidated balance sheet at December 31, 2001. These funds were to be used to reimburse Folksamerica if the loss reserves (which were $32.3 million at the closing of the asset sale) transferred to it in the asset sale relating to business produced on behalf of Arch Re U.S. by a certain managing underwriting agency were deficient as measured at the end of such five-year period or to satisfy certain indemnity claims Folksamerica may have had during such period. On February 25, 2002, the Company reached a definitive settlement agreement with Folksamerica pursuant to which the Company satisfied its obligations under the escrow agreement for consideration of $17.0 million, plus accrued interest income of $1.8 million. Accordingly, during the 2001 fourth quarter, the Company recorded an after-tax benefit of $0.4 million, which consisted of a charge of $2.5 million, offset by a reversal of a related reserve in the amount of $2.9 million. The related reserve had been provided for the purchase of reinsurance, which was no longer required due to the fact that the escrow arrangements have been terminated under the above settlement agreement.
Under the terms of the agreement, the Company had also purchased in 2000 reinsurance protection covering the Company's transferred aviation business to reduce the net financial loss to Folksamerica on any large commercial airline catastrophe to $5.4 million, net of reinstatement premiums. Although the Company believes that any such net financial loss will not exceed $5.4 million, the Company has agreed to reimburse Folksamerica if a loss is incurred that exceeds $5.4 million for aviation losses under certain circumstances prior to May 5, 2003. The Company also made representations and warranties to Folksamerica about the Company and the business transferred to Folksamerica for which the Company retains exposure for certain periods, and made certain other agreements, including that the Company would not compete with Folksamerica to acquire or reinsure any treaties included in the assumed business until May 5, 2004. Although Folksamerica has not asserted that any amount is currently due under any of the indemnities provided by the Company under the asset purchase agreement, Folksamerica has indicated a potential indemnity claim under the agreement in the event of the occurrence of certain future events. Based on all available information, the Company has denied the validity of any such potential claim. In addition, the Company retained its tax and employee benefit liabilities and other liabilities not assumed by Folksamerica, including all liabilities not arising under reinsurance agreements transferred to Folksamerica in the asset sale and all liabilities (other than liabilities arising under reinsurance agreements) arising out of or relating to the managing underwriting agency referred to above.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION
The Company classifies its businesses into two underwriting segments - reinsurance and insurance - and a corporate segment (non-underwriting). Segment performance is evaluated based on underwriting income or loss. Other revenue and expense items are not evaluated by segment. In addition, the Company does not manage its assets by segment and, accordingly, investment income is not allocated to each segment. The accounting policies of the segments are the same as those used for the consolidated financial statements. Inter-segment insurance business is allocated to the segment accountable for the underwriting results in accordance with SFAS No. 131.
The reinsurance segment consists of the Company's reinsurance underwriting subsidiaries, Arch Re Bermuda, based in Bermuda, and Arch Re U.S., based in the United States. The reinsurance segment's strategy is to write significant portions of business on a select number of specialty property and casualty treaties. Classes of business focused on include property catastrophe reinsurance, other property business (losses on a single risk, both excess of loss and pro rata), casualty, other specialty business, marine, aviation and space, casualty clash and non-traditional business.
The insurance segment includes the Company's primary underwriting subsidiaries, which include Arch Insurance, Arch Specialty, Arch E&S and American Independent. The insurance segment is comprised of six profit centers including property, casualty, executive assurance, healthcare, professional liability insurance and program business, and other (currently identified as the non-standard auto business of American Independent and the lenders business of Arch Insurance).
The corporate segment (non-underwriting) includes net investment income and net realized gains or losses and other corporate expenses incurred by the Company. The corporate segment also includes the results of Hales, the Company's merchant banking subsidiary. Due to the significant changes in the Company's business and operations resulting from the new underwriting initiative and related capital infusions, comparisons of 2002 and 2001 results are not meaningful. Accordingly, segment information provided below relates solely to 2002 periods. The following tables set forth an analysis of the Company's underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income for the three month and six month periods ended June 30, 2002.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30, 2002
-------------------------------------
OPERATING INFORMATION BY SEGMENT (in thousands) REINSURANCE INSURANCE TOTAL
----------- --------- ---------
Net premiums written (1) ...................... $ 176,619 $ 46,406 $ 223,025
Net premiums earned ........................... 96,330 17,129 113,459
Fee income .................................... -- 2,767 2,767
Losses and loss adjustment expenses ........... (67,100) (13,204) (80,304)
Acquisition expenses .......................... (16,226) (1,529) (17,755)
Operating expenses ............................ (2,615) (8,588) (11,203)
----------- --------- ---------
Underwriting income (loss) .................... $ 10,389 $ (3,425) $ 6,964
=========== ========= =========
Net investment income ......................... 11,611
Net realized gains on investments ............. 2,476
Equity in net income of investees ............. 778
Net foreign exchange gains .................... 3,352
Other fee income .............................. 1,364
Other corporate expenses ...................... (3,651)
Non-cash compensation ......................... (8,636)
Income tax benefit ............................ . 4,968
---------
NET INCOME .................................... $ 19,226
=========
UNDERWRITING RATIOS (2)
Loss ratio .................................... 69.7% 77.1% 70.8%
Acquisition expense ratio (3) ................. 16.8% (7.2%) 13.2%
Other operating expense ratio ................. 2.7% 50.1% 9.9%
----------- --------- ---------
Combined ratio ................................ 89.2% 120.0% 93.9%
----------- --------- ---------
|
(1) Reflects $18.2 million of net premiums written assumed by the reinsurance
segment from the insurance segment.
(2) Underwriting ratios are calculated based on net premiums earned.
(3) The acquisition expense ratio is adjusted to include certain policy-related
fee income.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 2002
-----------------------------------------
OPERATING INFORMATION BY SEGMENT (in thousands) REINSURANCE INSURANCE TOTAL
----------- --------- ---------
Net premiums written (1) ...................... $ 441,480 $ 62,256 $ 503,736
Net premiums earned ........................... 151,863 29,123 180,986
Fee income .................................... -- 3,935 3,935
Losses and loss adjustment expenses ........... (108,005) (22,839) (130,844)
Acquisition expenses .......................... (23,487) (1,578) (25,065)
Operating expenses ............................ (6,133) (12,090) (18,223)
----------- --------- ---------
Underwriting income (loss) .................... $ 14,238 $ (3,449) $ 10,789
=========== =========
Net investment income ......................... 20,778
Net realized gains on investments ............. 1,011
Equity in net income of investees ............. 1,576
Net foreign exchange gains .................... 3,244
Other fee income .............................. 3,770
Other corporate expenses ...................... (9,955)
Non-cash compensation ......................... (12,764)
Income tax benefit ............................ 4,743
---------
NET INCOME .................................... $ 23,192
=========
UNDERWRITING RATIOS (2)
Loss ratio .................................... 71.1% 78.4% 72.3%
Acquisition expense ratio (3) ................. 15.5% (8.1%) 11.7%
Other operating expense ratio ................. 4.0% 41.5% 10.0%
----------- --------- ---------
Combined ratio ................................ 90.6% 111.8% 94.0%
----------- --------- ---------
|
(1) Reflects $37.0 million of net premiums written assumed by the reinsurance
segment from the insurance segment.
(2) Underwriting ratios are calculated based on net premiums earned.
(3) The acquisition expense ratio is adjusted to include certain policy-related
fee income.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION (CONTINUED)
Set forth below is summary information regarding net premiums written by client location and by line of business for the reinsurance and insurance segments for the three and six month periods ended June 30, 2002:
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
---------------------------- ---------------------------
PREMIUMS % OF PREMIUMS % OF
(in thousands) WRITTEN TOTAL WRITTEN TOTAL
----------- ------- ---------- -------
REINSURANCE SEGMENT
Net Premiums Written by
Client Location (1):
United States ............ $ 97,103 55.0% $ 208,850 47.3%
United Kingdom ........... 28,689 16.2% 107,072 24.3%
Germany .................. 3,021 1.7% 26,724 6.1%
France ................... 4,778 2.7% 20,119 4.6%
Bermuda .................. 6,448 3.7% 18,772 4.2%
Canada ................... 9,978 5.6% 17,909 4.0%
Japan .................... 12,005 6.8% 12,056 2.7%
Other .................... 14,597 8.3% 29,978 6.8%
----------- ------- ---------- -------
Total .................... $ 176,619 100.0% $ 441,480 100.0%
=========== ======= ========== =======
Net Premiums Written by
Class of Business (1):
Property catastrophe ..... $ 28,315 16.0% $ 79,030 17.9%
Other property business .. 41,203 23.3% 83,875 19.0%
Casualty ................. 16,128 9.1% 56,868 12.9%
Other specialty business . 71,194 40.3% 101,449 23.0%
Marine, aviation and space 9,639 5.5% 28,598 6.5%
Casualty clash ........... 1,779 1.0% 12,929 2.9%
Non-traditional business . 8,361 4.8% 78,731 17.8%
----------- ------- ---------- -------
Total .................... $ 176,619 100.0% $ 441,480 100.0%
=========== ======= ========== =======
INSURANCE SEGMENT
Net Premiums Written by
Client Location (1):
United States ............ $ 45,300 97.6% $ 61,150 98.2%
United Kingdom ........... 880 1.9% 880 1.4%
Canada ................... 226 0.5% 226 0.4%
----------- ------- ---------- -------
Total .................... $ 46,406 100.0% $ 62,256 100.0%
=========== ======= ========== =======
Net Premiums Written by
Class of Business (1):
Executive assurance ...... $ 10,871 23.4% $ 12,783 20.5%
Casualty ................. 10,579 22.8% 10,579 17.0%
Program business ......... 6,429 13.8% 8,696 14.0%
Property ................. 5,130 11.1% 5,130 8.3%
Professional liability ... 2,138 4.6% 2,138 3.4%
Other .................... 11,259 24.3% 22,930 36.8%
----------- ------- ---------- -------
Total .................... $ 46,406 100.0% $ 62,256 100.0%
=========== ======= ========== =======
|
(1) Reflects $18.2 million and $37.0 million of net premiums written, respectively, for the three month and six month periods ended June 30, 2002 assumed by the reinsurance segment from the insurance segment.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. REINSURANCE
In the normal course of business, the Company's insurance subsidiaries cede a portion of their premium through quota share, surplus, excess of loss and facultative reinsurance agreements. The Company's reinsurance subsidiaries are currently retaining substantially all of their assumed reinsurance premiums written. Reinsurance recoverables are recorded as assets, predicated on the reinsurers' ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company's insurance subsidiaries would be liable for such defaulted amounts.
With respect to 2002 and 2001 results reflected below, the following table sets forth the effects of reinsurance on the Company's reinsurance and insurance subsidiaries to unaffiliated reinsurers. With respect to 2001 results, the table sets forth the effects of reinsurance on American Independent only, which was acquired by the Company in February 2001.
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
(in thousands) 2002 2001 2002 2001
--------- --------- --------- ---------
PREMIUMS WRITTEN:
Direct .......................... $ 88,925 $ 22,152 $ 147,672 $ 31,332
Assumed ......................... 164,730 -- 410,779 --
Ceded ........................... (30,630) (15,433) (54,715) (21,775)
--------- --------- --------- ---------
Net ............................. $ 223,025 $ 6,719 $ 503,736 $ 9,557
========= ========= ========= =========
PREMIUMS EARNED:
Direct .......................... $ 49,574 $ 19,759 $ 93,070 $ 26,169
Assumed ......................... 92,146 -- 145,160 --
Ceded ........................... (28,261) (14,194) (57,244) (18,971)
--------- --------- --------- ---------
Net ............................. $ 113,459 $ 5,565 $ 180,986 $ 7,198
========= ========= ========= =========
LOSSES AND LOSS ADJUSTMENT EXPENSES
INCURRED:
Direct .......................... $ 85,542 $ 15,790 $ 127,249 $ 21,244
Assumed ......................... 62,763 -- 101,726 --
Ceded ........................... (68,001) (10,264) (98,131) (14,173)
--------- --------- --------- ---------
Net ............................. $ 80,304 $ 5,526 $ 130,844 $ 7,071
========= ========= ========= =========
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENT INFORMATION
The following tables reconcile estimated fair value and carrying value to the amortized cost of fixed maturities and equity securities at June 30, 2002 and December 31, 2001:
(UNAUDITED)
JUNE 30, 2002
--------------------------------------------------------
ESTIMATED
FAIR VALUE GROSS GROSS
AND CARRYING UNREALIZED UNREALIZED AMORTIZED
(in thousands) VALUE GAINS (LOSSES) COST
------------ ---------- ---------- ------------
Fixed maturities ...................... $ 1,056,780 $ 19,296 $ (6,216) $ 1,043,700
Privately held securities.............. 31,571 34 -- 31,537
------------ ---------- --------- ------------
Total ................................. $ 1,088,351 $ 19,330 $ (6,216) $ 1,075,237
============ ========== =========== ============
(AUDITED)
DECEMBER 31, 2001
--------------------------------------------------------
ESTIMATED
FAIR VALUE GROSS GROSS
AND CARRYING UNREALIZED UNREALIZED AMORTIZED
(in thousands) VALUE GAINS (LOSSES) COST
------------ ---------- ---------- ------------
Fixed maturities....................... $ 468,269 $ 3,761 $ (2,646) $ 467,154
Publicly traded equity securities...... 235 -- (725) 960
Privately held securities.............. 41,608 21 -- 41,587
------------ ---------- ---------- ------------
Total.................................. $ 510,112 $ 3,782 $ (3,371) $ 509,701
============ ========== ========== ============
|
Privately held securities consisted of the following at June 30, 2002 and December 31, 2001:
(UNAUDITED) (AUDITED)
PERCENTAGE JUNE 30, DECEMBER 31,
(in thousands) OWNERSHIP 2002 2001
---------- ----------- ------------
CARRIED UNDER THE EQUITY METHOD:
The ARC Group, LLC .................... -- -- $ 8,725
Arx Holding Corp. ..................... 35.2% $ 4,441 3,714
Island Heritage Insurance Company, Ltd. 33.4% 5,407 4,950
New Europe Insurance Ventures ......... 14.6% 420 609
Sunshine State Holding Corporation .... 23.3% 1,820 1,838
----------- ------------
12,088 19,836
----------- ------------
CARRIED AT FAIR VALUE:
Stockton Holdings Limited ............. 1.7% 10,000 10,000
Trident II, L.P. ...................... 2.0% 8,563 10,876
Distribution Investors, LLC ........... 2.8% 920 896
----------- ------------
19,483 21,772
----------- ------------
Total ................................... $ 31,571 $ 41,608
=========== ============
|
During the six months ended June 30, 2002, the Company received distributions from The ARC Group, LLC ("ARC") totaling $1.4 million. On April 12, 2002, the Company sold its investment in ARC to Trident II, L.P. and two limited partnerships associated with Marsh & McLennan Companies, Inc. for consideration of $14.5 million. The realized gain of $5.8 million on the sale of the Company's investment in ARC is net of certain
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENT INFORMATION (CONTINUED)
transaction expenses and was recorded in the 2002 second quarter. During the six months ended June 30, 2002, the Company also received aggregate distributions of $2.7 million from Trident II, L.P. including (1) a return of capital of $2.3 million which reduced the Company's carrying value in Trident II, L.P. and (2) net realized gains of $434,000. In August 2002, the Company received a return of capital of approximately $392,000 from New Europe Insurance Ventures ("NEIV"), which reduced the Company's carrying value in NEIV at such date.
At June 30, 2002, the Company had investment commitments relating to its privately held securities totaling approximately $3.6 million, and the Company had funded a total of $1.1 million of its $1.5 million capital commitment to Distribution Investors, LLC.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
(In thousands, except share data) 2002 2001 2002 2001
----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE:
Net income ............................ $ 19,226 $ 8,400 $ 23,192 $ 16,393
Divided by:
Weighted average shares outstanding for
the period ........................... 20,323,114 12,832,261 16,691,051 12,809,572
=========== =========== =========== ===========
Basic earnings per share .............. $ 0.95 $ 0.65 $ 1.39 $ 1.28
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Net income ............................ $ 19,226 $ 8,400 $ 23,192 $ 16,393
Divided by:
Weighted average shares outstanding for
the period ........................... 20,323,114 12,832,261 16,691,051 12,809,572
Effect of dilutive securities:
Preference shares ................... 35,716,606 -- 35,702,250 --
Warrants ............................ 1,236,741 -- 1,313,030 --
Nonvested restricted shares ......... 651,323 -- 429,234 --
Stock options ....................... 949,731 11,739 845,620 8,588
----------- ----------- ----------- -----------
Total shares .......................... 58,877,515 12,844,000 54,981,185 12,818,160
=========== =========== =========== ===========
Diluted earnings per share ............ $ 0.33 $ 0.65 $ 0.42 $ 1.28
=========== =========== =========== ===========
|
On April 8, 2002, ACGL issued 7,475,000 of its common shares and received net proceeds of approximately $179.2 million. In addition, in April 2002, 446,608 newly issued common shares of ACGL were issued upon the exercise of 1,559,257 Class A warrants on a cashless basis. On June 28, 2002, ACGL issued 875,753 additional Series A convertible preference shares pursuant to a post-closing purchase price adjustment mechanism under the subscription agreement entered into in connection with the capital infusion completed in November 2001.
10. INCOME TAXES
ACGL is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. The Company has received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to ACGL or any of its operations until March 28, 2016. This undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda.
ACGL will be subject to U.S. federal income tax only to the extent that it derives U.S. source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the U.S. and is not exempt from U.S. tax under an applicable income tax treaty with the U.S. ACGL will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. taxpayers. ACGL does not consider itself to be engaged in a trade or business within the U.S. and, consequently, does not expect to be subject to direct U.S. income taxation. However, because there is uncertainty as to the activities which constitute being engaged in a trade or business within the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that ACGL or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If ACGL or any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGL's shareholders' equity and earnings could be materially adversely affected. ACGL's U.S. subsidiaries are subject to U.S. income taxes on their worldwide income.
ACGL changed its legal domicile from the United States to Bermuda in November 2000. Legislation has been introduced which (if enacted) could eliminate the tax benefits available to companies that have changed their legal domiciles to Bermuda, and such legislation may apply to ACGL. In addition, some U.S. insurance companies have been lobbying Congress to pass legislation intended to eliminate certain perceived tax advantages of U.S. insurance companies with Bermuda affiliates resulting principally from reinsurance between or among U.S. insurance companies and their Bermuda affiliates. This legislation, if passed, and other changes in U.S. tax laws, regulations and interpretations thereof to address these issues could materially adversely affect the Company.
For the six months ended June 30, 2002, the Company's income tax provision resulted in an effective tax rate of 14.5%, excluding the reversal of a $7.4 million valuation allowance on certain of the Company's deferred tax assets during the 2002 second quarter. The Company's remaining valuation allowance is $2.1 million at June 30, 2002. The effective tax rate will fluctuate based on the relative amounts of the Company's U.S.-sourced income and its worldwide income. The valuation allowance reversal was based on the Company's recently completed restructuring of its U.S.-based insurance underwriting operations and its business plan.
11. RELATED PARTY TRANSACTIONS
In April 2002, pursuant to agreements entered into in November 2001 in connection with the Company's new underwriting initiative, a subsidiary of ACGL made a non-recourse loan of $13.5 million to Robert Clements, the Chairman of ACGL's Board of Directors, which was used to pay income and self employment taxes, payable in April 2002, on 1,668,157 restricted shares granted to him on October 23, 2001. The loan is secured by such shares, and bears interest at a rate of 4.6% per annum and will mature on the October 23, 2006. If the Company terminates Mr. Clements' service as Chairman for cause, the loan will become immediately payable. Mr. Clements will receive additional compensation in cash in an amount sufficient to defray the interest cost. In addition, the Company has agreed to make gross-up payments to him in the event of certain tax liabilities.
In connection with the Company's information technology initiative in 2002, the Company has entered into arrangements with two software companies, which provide document management systems and information and research tools to insurance underwriters, in which Mr. Clements and John Pasquesi, the Vice Chairman of ACGL's Board of Directors, each own minority ownership interests. The Company will pay fees under such arrangements based on usage. Under one of these agreements, fees payable are subject to a minimum of approximately $575,000 for the two-year period ending July 2004.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS (CONTINUED)
Since January 2002, the Company has leased temporary office space from Tri-City Brokerage Inc. (together with its affiliates, "Tri-City"), a company in which Peter Appel, President and Chief Executive Officer of ACGL, Mr. Clements and Distribution Investors, LLC hold ownership interests, for aggregate rental expense of approximately $110,000 through June 30, 2002. In addition, Tri-City, as broker, has placed business with the Company's insurance operations and the Company has incurred commission expenses of approximately $200,000 under such arrangements through June 30, 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
.
GENERAL
THE COMPANY
We are a Bermuda public limited liability company with over $1.2 billion in equity capital and, through operations in Bermuda and the United States, are positioned to write insurance and reinsurance on a worldwide basis. While we are positioned to provide a full range of property and casualty insurance and reinsurance lines, we are focusing on writing specialty lines of insurance and reinsurance.
NEW UNDERWRITING INITIATIVE
In October 2001, we launched an underwriting initiative to meet current and future demand in the global insurance and reinsurance markets that included the recruitment of new insurance and reinsurance management teams and an equity capital infusion of $763.2 million. It is our belief that our existing Bermuda and U.S.-based underwriting platform, our strong management team and our $1.2 billion in capital that is unencumbered by significant exposure to pre-2002 risks have enabled us both to establish an immediate presence in an attractive insurance and reinsurance marketplace. In April 2002, we completed an offering of 7,475,000 of our common shares and received net proceeds of $179.2 million, which were contributed to the surplus of Arch Re Bermuda, our Bermuda-based reinsurance and insurance subsidiary.
This discussion and analysis contains forward-looking statements which involve inherent risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. These statements are based on our current assessment of risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed in this report, including the section entitled "--Cautionary Note Regarding Forward Looking Statements," and the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS
The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities (including reserves), revenues and expenses, and related disclosures of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, intangible assets, bad debts, income taxes, pensions, contingencies and litigation. We base our estimates on historical experience, where possible, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and such differences may be material. As a relatively new insurance and reinsurance company, very limited historical information has been reported to us as of June 30, 2002. We believe that the following critical accounting policies require our more significant judgments and estimates used in the preparation of our consolidated financial statements.
PREMIUM REVENUES AND RELATED EXPENSES
Insurance premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums assumed are recognized as income on a straight line basis over the terms of the related reinsurance contracts. For business written on a pro rata basis, premiums written are recorded as the underlying policies are written, generally over a twelve-month period. For excess of loss treaties, the minimum annual premium is recorded as written as of the date of the treaty. These amounts are based on reports received from ceding companies, supplemented by our own estimates of premiums for which ceding company reports have not been received. Subsequent differences arising on such estimates are recorded in the period they are determined. Unearned premium reserves represent the portion of premiums written that relates to the unexpired terms of contracts in force. Certain of our contracts included provisions that adjust premiums or acquisition expenses
based upon the experience under the contracts. Premiums written and earned as well as related acquisition expenses under those contracts are recorded based upon the projected ultimate experience under these contracts.
We also write non-traditional reinsurance business that is intended to provide insurers with risk management solutions that complement traditional reinsurance. Under these contracts, we assume a measured amount of insurance risk in exchange for a specified margin. Coverages may include a combination of sublimits and caps. Examples of such non-traditional business include aggregate stop-loss coverages and financial quota share coverages.
Certain contracts included in our non-traditional reinsurance business, which pursuant to Statement of Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," issued by the Financial Accounting Standards Board ("FASB"), are deemed, for financial reporting purposes, not to transfer insurance risk, are accounted for using the deposit method of accounting as prescribed in Statement of Position 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." For those contracts that contain an element of underwriting risk, non-refundable fees are deferred and amortized over the contract period. Such fees are included in our underwriting results. For those contracts that do not transfer an element of underwriting risk, the expected profit is reflected in earnings over the estimated settlement period using the interest method. Such profit is included in investment income.
Under generally accepted accounting principles ("GAAP"), acquisition expenses and other expenses that vary with and are directly related to the acquisition of business related to our underwriting operations are deferred and amortized over the period in which the related premiums are earned. Under statutory accounting principles, underwriting expenses are recognized immediately as premiums are written.
Acquisition expenses consist principally of commissions and brokerage expenses. Other operating expenses also include expenses that vary with and are directly related to the acquisition of business. Acquisition expenses for the insurance segment are reflected net of ceding commissions from third party reinsurers. Deferred acquisition costs are carried at their estimated realizable value based on the related unearned premiums and take into account anticipated losses and loss adjustment expenses, based on historical and current experience, and anticipated investment income.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Insurance reserves are inherently subject to uncertainty. The reserves for losses and loss adjustment expenses represent estimates involving actuarial and statistical projections at a given point in time of our expectations of the ultimate settlement and administration costs of losses incurred and it is likely that the ultimate liability may exceed or be less than such estimates. We utilize actuarial models as well as available historical insurance and reinsurance industry loss development patterns to assist in the establishment of appropriate loss reserves. Even actuarially sound methods can lead to subsequent adjustments to reserves that are both significant and irregular due to the nature of the risks written, potentially by a material amount. If our reserves for losses and loss adjustment expenses are determined to be inadequate, we will be required to increase the reserves with a corresponding reduction in net income in the period in which the deficiency is determined.
For reinsurance assumed, the reserves are based on reports received from ceding companies, supplemented by our estimates of reserves for which ceding company reports have not been received, and our own historical experience. For our insurance operations, claims personnel determine whether to establish a case reserve for the estimated amount of the ultimate settlement, if any. The estimate reflects the judgment of claims personnel based on general corporate reserving practices, and on the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. Our insurance operations also contract with a number of outside third party administrators and managing general agents in the claims process, and the work of such parties is reviewed by our claims personnel. Reserves are also established to provide for the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. Periodically, adjustments to the case reserves may be made as additional information regarding the claims is reported or payments are made.
In accordance with industry practice, we maintain incurred but not reported ("IBNR") reserves. Such reserves are established to provide for future case reserves and loss payments on incurred claims which have not
yet been reported to an insurer or reinsurer. In calculating its IBNR reserves, we use generally accepted actuarial reserving techniques that take into account quantitative loss experience data, together, where appropriate, with qualitative factors. IBNR reserves are based on loss experience of the company and the industry, and are grouped both by class of business and by accident year. IBNR reserves are also adjusted to take into account certain factors such as changes in the volume of business written, reinsurance contract terms and conditions, the mix of business, claims processing and inflation that can be expected to affect our liability for losses over time.
Even though most insurance contracts have policy limits, the nature of property and casualty insurance and reinsurance is that losses can exceed policy limits for a variety of reasons and could very significantly exceed the premiums received on the underlying policies. We will attempt to limit our risk of loss through reinsurance and may also use retrocessional arrangements. The availability and cost of reinsurance and retrocessional protection is subject to market conditions, which are beyond our control.
In establishing the reserves for losses and loss adjustment expenses, we have made various assumptions relating to the pricing of our reinsurance contracts and insurance policies, available historical industry experience and current industry conditions. Our reserving process reflects that there is a possibility that the assumptions made could prove to be inaccurate due to several factors primarily relating to our start-up nature, including the fact that very limited historical information has been reported to us through June 30, 2002, although there can be no assurances that our reserves will prove to be adequate. It is possible that claims in respect of events that have occurred could exceed our reserves and have a material adverse effect on our results of operations in a particular period or our financial condition in general.
COLLECTION OF INSURANCE-RELATED BALANCES
We maintain allowances for doubtful accounts for probable losses resulting from our inability to collect premiums. We are subject to credit risk with respect to our reinsurance ceded because the ceding of risk to reinsurers does not relieve us of our liability to the clients or companies we insure. If the financial condition of our reinsurers or retrocessionaires were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
We are also subject to credit risk from our alternative market products, such as rent-a-captive risk-sharing programs which allow a client to retain a significant portion of its loss exposure without the administrative costs and capital commitment required to establish and operate its own captive. In certain of these programs, we participate in the operating results by providing excess reinsurance coverage and earn commissions and management fees. We also write program business on a risk-sharing basis with agents or brokers which is achieved with a contingent commission structure based upon the program underwriting results. While we attempt to obtain sufficient collateral from managing general agents or other clients to guarantee their projected financial obligations to us, there is no guarantee that such collateral will be sufficient to secure their actual ultimate obligations.
VALUATION ALLOWANCE
We record a valuation allowance to reduce certain of our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. In addition, if we subsequently assessed that the valuation allowance was no longer needed, then a benefit would be recorded to income in the period such determination was made.
INVESTMENTS
We currently classify all of our publicly traded fixed maturity, short-term investments and equity securities as "available for sale" and, accordingly, they are carried at estimated fair value. The fair value of publicly traded fixed maturity securities and publicly traded equity securities is estimated using quoted market prices or dealer quotes. Investments included in our private portfolio include securities issued by privately held companies that are generally restricted as to resale or are otherwise illiquid and do not have readily ascertainable market values. Our investments in privately held equity securities, other than those carried under the equity method of
accounting, are carried at estimated fair value. Fair value is initially considered to be equal to the cost of such investment until the investments are revalued based on substantive events or other factors which could indicate a diminution or appreciation in value. In accordance with Accounting Principles Board ("APB") Opinion No. 18 for privately held equity investments accounted for under the equity method, we review the facts and circumstances surrounding our ownership for each investment to determine the appropriate accounting method for such investment and we record our percentage share of the investee company's net income. The risk of investing in such securities is generally greater than the risk of investing in securities of widely held, publicly traded companies. Lack of a secondary market and resale restrictions may result in an inability by us to sell a security at a price that would otherwise be obtainable if such restrictions did not exist and may substantially delay the sale of a security we seek to sell.
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," we review our investments to determine whether a decline in fair value below the amortized cost basis is other than temporary. If such decline in fair value is judged to be other than temporary, we would write down the investment to fair value as a new cost basis and the amount of the write-down would be charged to income as a realized loss. The new cost basis would not be changed for subsequent recoveries in fair value.
STOCK ISSUED TO EMPLOYEES
We follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for employee stock options. Accordingly, under APB No. 25, compensation expense for stock option grants is recognized only to the extent that the fair value of the underlying stock exceeds the exercise price of the option at the measurement date. In addition, under APB No. 25, we do not recognize compensation expense for stock issued to employees under our stock purchase plan. See "Other Revenue and Expenses--Non Cash Compensation."
For restricted shares granted, we record deferred compensation equal to the market value of the shares at the measurement date, which is amortized and charged to income as non-cash compensation over the vesting period. These restricted shares are recorded as outstanding upon issuance (regardless of any vesting period). See "Other Revenue and Expenses--Non-Cash Compensation."
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which we adopted on January 1, 2002. SFAS No. 144 addresses the accounting and reporting for impairment of long-lived assets to be held and used, as well as long-lived assets to be disposed of. The standard requires that long-lived assets to be held and used will be written down to fair value when they are considered impaired. Long-lived assets to be disposed of are to be carried at the lower of carrying amount or fair value less estimated cost to sell. SFAS No. 144 also broadens the presentation of discontinued operations on the income statement to include a component of an entity (rather than a segment of a business). The adoption of this standard did not have a material effect on our financial position at June 30, 2002 or results of operations for the six months ended June 30, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 will be applied prospectively to exit or disposal activities initiated after December 31, 2002 and requires companies to recognize costs associated with exit activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. We are currently evaluating this standard.
RESULTS OF OPERATIONS
Comparisons of our 2002 and 2001 results of operations to each other and to prior year periods are not relevant due to the changes in our business during 2001 and 2002, including (1) our 2001 acquisition activity, (2) our new underwriting initiatives in insurance and reinsurance and (3) the capital infusions in November 2001 and April 2002. In addition, because of these factors, as well as the other factors described in this report, including those noted below under the caption "--Cautionary Note Regarding Forward-Looking Statements" and in the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2001, our historical financial results do not provide you with a meaningful expectation of our future results.
The following table presents the after-tax components of net income for the three and six month periods ended June 30, 2002 and 2001. Certain prior period information has been reclassified to conform to the current presentation.
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SUMMARY OF RESULTS JUNE 30, JUNE 30,
---------------------------- ----------------------------
(in thousands except per share data) 2002 2001 2002 2001
------------ ------------ ------------ ------------
Components of Net Income:
Operating income ....................... $ 15,514 $ 3,079 $ 23,882 $ 4,635
Net realized investment gains (losses) . 389 5,633 (773) 11,837
Non-cash compensation .................. (8,094) (270) (11,766) (577)
Reversal of deferred tax asset valuation
allowance ............................. 7,421 -- 7,421 --
Net foreign exchange gains ............. 3,352 -- 3,244 --
Equity in net income (loss) of investees 644 (42) 1,184 498
------------ ------------ ------------ ------------
Net income ............................. $ 19,226 $ 8,400 $ 23,192 $ 16,393
============ ============ ============ ============
Per Share Results:
Operating income ....................... $ 0.27 $ 0.24 $ 0.43 $ 0.37
Net realized investment gains (losses) . 0.01 0.43 (0.01) 0.92
Non-cash compensation .................. (0.14) (0.02) (0.21) (0.05)
Reversal of deferred tax asset valuation
allowance ............................. 0.12 -- 0.13 --
Net foreign exchange gains ............. 0.06 -- 0.06 --
Equity in net income (loss) of investees 0.01 (0.00) 0.02 0.04
------------ ------------ ------------ ------------
Net income ............................. $ 0.33 $ 0.65 $ 0.42 $ 1.28
============ ============ ============ ============
Diluted average shares outstanding ....... 58,877,515 12,844,000 54,981,185 12,818,160
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The increase in diluted average shares outstanding from 2001 to 2002 was primarily due to the issuance of convertible preference shares and Class A warrants in connection with our capital infusion in November 2001 and the issuance of 7,475,000 common shares in connection with an offering completed by us in April 2002. Pursuant to a post-closing purchase price adjustment mechanism under the subscription agreement entered into in connection with the capital infusion in November 2001 (the "Subscription Agreement"), we issued 875,753 additional Series A convertible preference shares on June 28, 2002. Such issuance did not result in a significant increase in our average shares for the three or six month periods ended June 30, 2002.
Under SFAS No. 128, "Earnings Per Share," upon the satisfaction of all the conditions necessary for the issuance of contingent shares, such shares are required to be included in the denominator of the diluted earnings per share calculation as of the beginning of the interim period in which the conditions are satisfied. If the contingency provisions with respect to our contingently issuable common shares described below under the caption "--Potential Adjustments to Book Value Per Share" had been met as of January 1, 2002, pro forma diluted weighted average shares outstanding for the three and six month periods ended June 30, 2002 would have been 62,601,966 shares and 58,715,535 shares, respectively, and pro forma diluted net income per share for the three and six month periods ended June 30, 2002 would have been $0.31 and $0.39, respectively. Under SFAS No. 128, once such shares have been issued following the satisfaction of such conditions, those shares are required to be included in the computation of basic earnings per share.
After-tax operating income is defined as net income, excluding net realized investment gains or losses on investment sales, non-cash compensation charges, foreign exchange gains or losses and equity in net income or loss of investees. As set forth in the above table, for the three months ended June 30, 2002, after-tax operating income was $15.5 million, or $0.27 per share, and for the six months ended June 30, 2002, after-tax operating income was $23.9 million, or $0.43 per share. Net income for the 2002 second quarter was $19.2 million, or $0.33 per share, and for the six months ended June 30, 2002, net income was $23.2 million, or $0.42 per share.
Operating income for the 2002 second quarter and six months ended June 30, 2002 reflect the underwriting results of our rinsurance and insurance segments, as disused below.
SEGMENT INFORMATION
We classify our businesses into two underwriting segments, reinsurance and insurance. For a description of our underwriting segments, please refer to note 6 under the caption "Segment Information" of the notes accompanying our consolidated financial statements.
REINSURANCE SEGMENT
OPERATING RESULTS. The following table sets forth an analysis of the underwriting results for the reinsurance segment for the three and six month periods ended June 30, 2002. Due to the significant changes in our business and operations resulting from the new underwriting initiative, comparisons of 2002 to 2001 results are not meaningful.
(UNAUDITED) (UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
OPERATING INFORMATION (in thousands) JUNE 30, 2002 JUNE 30, 2002
------------------- -------------------
Net premiums written (1)..................................... $ 176,619 $ 441,480
Net premiums earned.......................................... 96,330 151,863
Losses and loss adjustment expenses.......................... (67,100) (108,005)
Acquisition expenses......................................... (16,226) (23,487)
Operating expenses........................................... (2,615) (6,133)
------------------- -------------------
GAAP underwriting income..................................... $ 10,389 $14,238
=================== ===================
STATUTORY BASIS (2)
Loss ratio................................................... 69.7% 71.1%
Acquisition expense ratio.................................... 19.0% 15.5%
Other operating expense ratio................................ 3.8% 2.8%
------------------- -------------------
Combined ratio............................................... 92.5% 89.4%
------------------- -------------------
GAAP BASIS (2)
Loss ratio.................................................. 69.7% 71.1%
Acquisition expense ratio................................... 16.8% 15.5%
Other operating expense ratio............................... 2.7% 4.0%
------------------- -------------------
Combined ratio.............................................. 89.2% 90.6%
------------------- -------------------
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(1) Reflects $18.2 million and $37.0 million of net premiums written,
respectively, for the three month and six month periods ended June 30, 2002
assumed by the reinsurance segment from the insurance segment.
(2) The loss ratios for statutory and GAAP are based on earned premiums. The
statutory expense ratios are based on net premiums written, while the GAAP
expense ratios are based on net premiums earned.
UNDERWRITING INCOME (LOSS). Underwriting income or loss equals net premiums earned less losses and loss adjustment expenses incurred and underwriting expenses incurred. The components are discussed below.
GROSS AND NET PREMIUMS WRITTEN. During the period from January 1 to July 31, 2002, our reinsurance subsidiaries have entered into reinsurance treaties and other reinsurance arrangements that are expected to provide approximately $800 million of annualized net reinsurance premiums, a substantial portion of which will be recorded in calendar year 2002. Approximately 67% of the annualized premiums written were generated from pro rata contracts and 33% were derived from excess of loss treaties. The quarterly and year-to-date net premiums written differs from the annualized net reinsurance premiums due to the timing of recording premiums for contracts written on a pro rata and excess of loss basis. A significant portion of amounts included as premiums receivable, which represent estimated premiums, net of commissions, are not yet due based on the terms of the underlying contracts.
We are currently retaining substantially all of our reinsurance premiums written. We may purchase reinsurance on both a facultative and treaty basis primarily to reduce net liability on individual risks and, if deemed necessary, to reduce our exposure to catastrophic losses.
Set forth below is summary information regarding net premiums written produced by geographic location and by line of business for the reinsurance segment for the three and six month periods ended June 30, 2002:
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
---------------------------------- ----------------------------------
PREMIUMS % OF PREMIUMS % OF
(in thousands) WRITTEN TOTAL WRITTEN TOTAL
--------------- --------------- ---------------- --------------
Net Premiums Written by
Client Location (1):
United States............................. $ 97,103 55.0% $ 208,850 47.3%
United Kingdom............................ 28,689 16.2% 107,072 24.3%
Germany................................... 3,021 1.7% 26,724 6.1%
France.................................... 4,778 2.7% 20,119 4.6%
Bermuda................................... 6,448 3.7% 18,772 4.2%
Canada.................................... 9,978 5.6% 17,909 4.0%
Japan..................................... 12,005 6.8% 12,056 2.7%
Other..................................... 14,597 8.3% 29,978 6.8%
--------------- --------------- ---------------- --------------
Total..................................... $ 176,619 100.0% $ 441,480 100.0%
=============== =============== ================ ==============
Net Premiums Written by
Class of Business (1):
Property catastrophe...................... $ 28,315 16.0% $ 79,030 17.9%
Other property business................... 41,203 23.3% 83,875 19.0%
Casualty.................................. 16,128 9.1% 56,868 12.9%
Other specialty business.................. 71,194 40.3% 101,449 23.0%
Marine, aviation and space................ 9,639 5.5% 28,598 6.5%
Casualty clash............................ 1,779 1.0% 12,929 2.9%
Non-traditional business.................. 8,361 4.8% 78,731 17.8%
--------------- --------------- ---------------- --------------
Total..................................... $ 176,619 100.0% $ 441,480 100.0%
=============== =============== ================ ==============
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(1) Reflects $18.2 million and $37.0 million of net premiums written, respectively, for the three month and six month periods ended June 30, 2002 assumed by the reinsurance segment from the insurance segment.
NET PREMIUMS EARNED. Reinsurance premiums written are recognized as earned on a pro rata basis over the terms of the related reinsurance contracts. Unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of policies in force. When a company is growing rapidly, there will be a significant difference
between written and earned premiums. For the six months ended June 30, 2002, approximately 34% of the reinsurance segment net premiums written were earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses incurred for the three and six month periods ended June 30, 2002 were 69.7% and 71.1%, respectively, of net premiums earned. For a discussion of the reserves for losses and loss adjustment expenses, please refer to the section above entitled "Critical Accounting Policies, Estimates and Recent Accounting Pronouncements - Reserves for Losses and Loss Adjustment Expenses."
UNDERWRITING EXPENSES. For the three and six month periods ended June 30, 2002, acquisition expenses were 16.8% and 15.5%, respectively, of net premiums earned. As a percentage of net premiums earned, acquisition expenses for the 2002 second quarter are higher compared to the six month period due primarily to an increase in the percentage of pro rata business earned during the 2002 second quarter. Typically, pro rata business is written at a higher expense ratio and lower loss ratio than excess of loss business. For the three and six month periods ended June 30, 2002, other operating expenses were 2.7% and 4.0%, respectively, of net premiums earned.
INSURANCE SEGMENT
OPERATING RESULTS. The following table sets forth an analysis of the underwriting results for the insurance segment for the three and six month periods ended June 30, 2002. Due to the significant changes in our business and operations resulting from the new underwriting initiative, comparisons of 2002 to 2001 results are not meaningful.
(UNAUDITED) (UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
OPERATING INFORMATION (in thousands) JUNE 30, 2002 JUNE 30, 2002
------------------- ----------------
Net premiums written (1)..................................... $ 46,406 $ 62,256
Net premiums earned.......................................... 17,129 29,123
Fee income................................................... 2,767 3,935
Losses and loss adjustment expenses.......................... (13,204) (22,839)
Acquisition expenses......................................... (1,529) (1,578)
Operating expenses........................................... (8,588) (12,090)
------------------- ----------------
GAAP underwriting loss....................................... $ (3,425) $ (3,449)
=================== ================
STATUTORY BASIS (2)
Loss ratio................................................... 77.1% 78.4%
Acquisition expense ratio (3)................................ 0.6% (2.9%)
Other operating expense ratio................................ 26.8% 27.0%
------------------- ----------------
Combined ratio............................................... 104.5% 102.5%
------------------- ----------------
GAAP BASIS (2)
Loss ratio.................................................. 77.1% 78.4%
Acquisition expense ratio (3)............................... (7.2%) (8.1%)
Other operating expense ratio............................... 50.1% 41.5%
------------------- ----------------
Combined ratio.............................................. 120.0% 111.8%
------------------- ----------------
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(1) Reflects $18.2 million and $37.0 million of net premiums written,
respectively, for the three month and six month periods ended June 30, 2002
assumed by the reinsurance segment from the insurance segment.
(2) The loss ratios for statutory and GAAP are based on earned premiums. The
statutory expense ratios are based on net premiums written, while the GAAP
expense ratios are based on net premiums earned.
(3) The acquisition expense ratio is adjusted to include certain policy-related
fee income.
Set forth below is summary information regarding net premiums written produced by geographic location and by line of business for the insurance segment for the three and six month periods ended June 30, 2002:
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
---------------------------------- ---------------- --------------
(in thousands) PREMIUMS PREMIUMS % OF
WRITTEN % OF TOTAL WRITTEN TOTAL
---------------- -------------- ---------------- --------------
INSURANCE SEGMENT
Net Premiums Written by
Client Location (1):
United States............................. $ 45,300 97.6% $ 61,150 98.2%
United Kingdom............................ 880 1.9% 880 1.4%
Canada.................................... 226 0.5% 226 0.4%
---------------- -------------- ---------------- --------------
Total..................................... $ 46,406 100.0% $ 62,256 100.0%
================ ============== ================ ==============
Net Premiums Written by
Class of Business (1):
Executive assurance....................... $ 10,871 23.4% $ 12,783 20.5%
Casualty.................................. 10,579 22.8% 10,579 17.0%
Program business.......................... 6,429 13.8% 8,696 14.0%
Property.................................. 5,130 11.1% 5,130 8.3%
Professional liability.................... 2,138 4.6% 2,138 3.4%
Other..................................... 11,259 24.3% 22,930 36.8%
---------------- ---------------- ---------------- --------------
Total..................................... $ 46,406 100.0% $ 62,256 100.0%
================ ================ ================ ==============
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(1) Reflects $18.2 million and $37.0 million of net premiums written, respectively, for the three month and six month periods ended June 30, 2002 assumed by the reinsurance segment from the insurance segment.
GROSS AND NET PREMIUMS WRITTEN. Our insurance segment commenced writing business in a number of specialty lines in the 2002 second quarter. We expect that the amount of premiums written will continue to increase in the remainder of 2002 as this operation continues to build its infrastructure and increase its participation in the insurance marketplace.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses incurred for the three and six month periods ended June 30, 2002 were 77.1% and 78.4%, respectively, of net premiums earned. For a discussion of the reserves for losses and loss adjustment expenses, please refer to the section above entitled "Critical Accounting Policies, Estimates and Recent Accounting Pronouncements - Reserves for Losses and Loss Adjustment Expenses."
UNDERWRITING EXPENSES. The acquisition expense ratios for the three month and six month periods ended June 30, 2002 were calculated net of certain policy-related fee income, which is earned primarily by American Independent, and resulted in expense ratios of (7.2%) and (8.1%), respectively. Operating expenses included "start-up" expenses of $2.1 million and $3.7 million, respectively, for the three and six month periods ended June 30, 2002. In addition, such periods also include a charge of $1.1 million recorded during the second quarter of 2002 as a result of the establishment of a reserve related to a receivable from a managing general agent. We expect that we will incur a significant amount of additional costs in 2002 in connection with the continued expansion of our insurance operations.
OTHER REVENUE AND EXPENSES
NET INVESTMENT INCOME
The increase in net investment income was due to the significant increase in our invested assets resulting from (i) the capital infusion completed in November 2001, (ii) the proceeds received from the public offering of our common shares in April 2002 and (iii) cash flow from operations. The pre-tax investment yields on our fixed income securities for the three and six month periods ended June 30, 2002 were 4.1% and 3.6%, respectively.
CORPORATE EXPENSES AND OTHER FEE INCOME
Corporate expenses represent certain holding company and infrastructure costs necessary to support our growing worldwide reinsurance and insurance operations. Other fee income represents revenues provided by our non-underwriting operations.
NET REALIZED INVESTMENT GAINS (LOSSES)
For the three and six month periods ended June 30, 2002 and 2001, our sources of net realized investment gains (losses) were as follows:
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- ----------------------------------
(in thousands) 2002 2001 2002 2001
---------------- ---------------- --------------- --------------
Fixed maturities......................... $ (3,731) $ (2,160) $ (4,477) $ (2,107)
Privately held securities................ 6,207 (250) 6,216 (250)
Publicly traded equity securities........ -- 12,015 (728) 20,966
---------------- ---------------- --------------- --------------
Total.................................... $ 2,476 $ 9,605 $ 1,011 $ 18,609
================ ================ =============== ==============
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The net realized gains of $6.2 million for the three and six month periods ended June 30, 2002 on our privately held securities resulted primarily from the disposition of our investment in The ARC Group, LLC in April 2002 and the sale of certain underlying holdings included in our Trident II, L.P. interest. The net realized losses of $3.7 million and $4.5 million for the three and six month periods ended June 30, 2002, respectively, on our fixed maturity portfolio resulted from the sale of certain securities to reduce credit exposure, and sales related to rebalancing the portfolio which is managed on a total return basis.
NON-CASH COMPENSATION
During 2001 and 2002, we made certain grants (primarily of restricted shares) to new employees and the chairman of our board of directors under our stock incentive plans and other arrangements. These grants were made primarily in connection with our new underwriting initiative and resulted in a pre-tax provision for non-cash compensation of $8.6 million and $12.8 million, respectively, for the three and six month periods ended June 30, 2002. As a result of the grants referred to above, we expect to record a significant increase in non-cash compensation in the remainder of 2002 as compared to 2001.
As provided under SFAS No. 123, "Accounting for Stock-Based Compensation," we have elected to continue to account for stock-based compensation in accordance with APB No. 25. If we had elected to expense employee stock options under the fair value method of SFAS No. 123, our basic net income per share for the three and six months ended June 30, 2002 would have been reduced by $0.20 and $0.53, respectively, and our diluted net income per share would have been reduced by $0.07 and $0.16, respectively.
NET FOREIGN EXCHANGE GAINS
In the 2002 second quarter, net foreign exchange gains of $3,352,000 consisted of an unrealized gain of $3,263,000 and a realized gain of $89,000. Net foreign exchange gains for the six months ended June 30, 2002 of $3,244,000 consisted of an unrealized gain of $3,263,000 and a realized loss of $19,000. The net unrealized gain resulted from the translation of foreign denominated monetary assets and liabilities at June 30, 2002 as required by GAAP. Under GAAP, accounts that are classified as monetary assets and liabilities, such as premiums receivable and the reserve for losses and loss adjustment expenses, are revalued at each balance sheet
date. Accounts that are classified as non-monetary are not revalued. Pursuant to GAAP, the unearned premium reserve is classified as non-monetary and, accordingly, was not revalued at June 30, 2002. If the unearned premium reserve was considered a monetary asset under GAAP, the unrealized foreign exchange gain would have been reduced by $3.3 million for the three and six month periods ended June 30, 2002.
Foreign exchange gains and losses vary with fluctuations in currency rates. As such, these gains and losses could add significant volatility to our net income in future periods.
EQUITY IN NET INCOME OF INVESTEES
At June 30, 2002, we held seven investments in privately held securities, including four investments held under the equity method of accounting. Under the equity method, we record a proportionate share of the net income or loss based on our ownership percentage. Of the $1.6 million of pre-tax equity in net income of investees for the six months ended June 30, 2002, approximately $557,000 was generated from our investment in ARC, which was sold in April 2002.
INCOME TAXES
During the 2002 second quarter, we reversed a $7.4 million valuation allowance on certain of our deferred tax assets. The valuation allowance reversal was based on our recently completed restructuring of our U.S.-based insurance underwriting operations and our business plan.
For the six months ended June 30, 2002, our income tax provision resulted in an effective tax rate of 14.5%, excluding the reversal of a $7.4 million valuation allowance. Our remaining valuation allowance at June 30, 2002 is $2.1 million. Our effective tax rate will fluctuate based on the relative amounts of our U.S.-sourced income and our worldwide income. The effective tax rate on our net operating income for the six months ended June 30, 2002 was 5.9%, which was lower than our overall effective tax rate due to the relative amounts of our U.S.-sourced income and our worldwide income. See note 10 under the caption "Income Taxes" of the notes accompanying our consolidated financial statements.
ACGL will be subject to U.S. federal income tax only to the extent that it derives U.S. source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the U.S. and is not exempt from U.S. tax under an applicable income tax treaty with the U.S. ACGL will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. taxpayers. ACGL does not consider itself to be engaged in a trade or business within the U.S. and, consequently, does not expect to be subject to direct U.S. income taxation. However, because there is uncertainty as to the activities which constitute being engaged in a trade or business within the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that ACGL or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If ACGL or any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGL's shareholders' equity and earnings could be materially adversely affected. ACGL's U.S. subsidiaries are subject to U.S. income taxes on their worldwide income.
ACGL changed its legal domicile from the United States to Bermuda in November 2000. Legislation has been introduced which (if enacted) could eliminate the tax benefits available to companies that have changed their legal domiciles to Bermuda, and such legislation may apply to ACGL. In addition, some U.S. insurance companies have been lobbying Congress to pass legislation intended to eliminate certain perceived tax advantages of U.S. insurance companies with Bermuda affiliates resulting principally from reinsurance between or among U.S. insurance companies and their Bermuda affiliates. This legislation, if passed, and other changes in U.S. tax laws, regulations and interpretations thereof to address these issues could materially adversely affect us.
LIQUIDITY AND CAPITAL RESOURCES
ACGL is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally, we depend on our available cash resources, liquid investments and dividends or other distributions from our subsidiaries to make payments, including the payment of operating expenses we may incur and for any dividends our board of directors may determine. ACGL does not currently intend to declare any dividends.
Pursuant to a shareholders agreement that we entered into in connection with the November 2001 capital infusion, we have agreed not to declare any dividend or make any other distribution on our common shares, and not to repurchase any common shares, until we have repurchased from the Warburg Pincus funds, the Hellman & Friedman funds and the other holders of our preference shares, pro rata, on the basis of the amount of each of these shareholders' investment in us at the time of such repurchase, preference shares having an aggregate value of $250.0 million, at a per share price acceptable to these shareholders.
The ability of our regulated insurance and reinsurance subsidiaries to pay dividends or make distributions is dependent on their ability to meet applicable regulatory standards. Arch Re Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year's statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the Bermuda Monetary Authority an affidavit stating that it will continue to meet the required margins. In addition, Arch Re Bermuda is prohibited, without prior approval of the Bermuda Monetary Authority, from reducing by 15% or more its total statutory capital, as set out in its previous year's financial statements. At December 31, 2001 and June 30, 2002, Arch Re Bermuda had statutory capital and surplus (as determined under Bermuda law) of $508 million and $667 million, respectively. As of December 31, 2001, our U.S. insurance and reinsurance subsidiaries may not pay any significant dividends or distributions during 2002 without prior regulatory approval. In addition, the ability of our insurance and reinsurance subsidiaries to pay dividends could be constrained by our dependence on financial strength ratings from independent rating agencies. Our ratings from these agencies depend to a large extent on the capitalization levels of our insurance and reinsurance subsidiaries.
Our aggregate invested assets, including cash and short-term investments, totaled $1.3 billion and $1.0 billion at June 30, 2002 and December 31, 2001, respectively. As of June 30, 2002, our readily available cash, short-term investments and marketable securities, excluding amounts held by our regulated insurance and reinsurance subsidiaries, totaled $41.2 million. Such amount consisted of $16.5 million of cash and short-term investments and $24.7 million of fixed maturity investments. As of that date, investments that are restricted or generally unavailable for liquidity purposes (other than our ownership interests in our subsidiaries and the invested assets of our regulated insurance and reinsurance subsidiaries) included $24.9 million of privately held securities. In addition, at June 30, 2002, we had investment commitments relating to our privately held investments of approximately $3.6 million.
Cash flows on a consolidated basis are provided by premiums collected, fee income, investment income and collected reinsurance recoverables, offset by losses and loss adjustment expense payments, reinsurance premiums payable and operating costs. Consolidated cash flows provided by (used for) operating activities for the six months ended June 30, 2002 and 2001 were approximately $113.7 million and ($292,000), respectively.
Our expanded underwriting activities will initially be supported by our capital, and we expect that our other operational needs for the foreseeable future will be met by our balance of cash and short-term investments, as well as by funds generated from premiums and investment income and proceeds on the sale or maturity of our investments.
We have an effective shelf registration statement with the Securities and Exchange Commission. It permits us to issue various types of securities, including unsecured debt securities, preference shares and common shares, from time to time, up to an aggregate of $500 million. During April, we issued 7,475,000 of our common shares and received net proceeds of approximately $179 million, net of transaction costs. The net proceeds of the offering were principally used to increase the surplus of our insurance and reinsurance subsidiaries. The unused portion of our shelf registration is approximately $309 million following the offering in April. Any additional issuance of common shares by us could have the effect of diluting our earnings and our book value per share.
In addition, the Warburg Pincus funds and the Hellman & Friedman funds together control a majority of our voting power on a fully-diluted basis and have the right to nominate a majority of directors to our board under the shareholders agreement entered into in connection with the November 2001 capital infusion. The shareholders agreement also provides that we cannot engage in transactions including mergers and acquisitions and transactions in excess of certain amounts, without the consent of a designee of the Warburg Pincus funds and a designee of the Hellman & Friedman funds. These provisions could have an effect on the operation of our business and, to the extent these provisions discourage takeover attempts, they could deprive our shareholders of opportunities to realize takeover premiums for their shares or could depress the market price of our common shares. By reason of their ownership and the shareholders agreement, the Warburg Pincus funds and the Hellman & Friedman funds are able to strongly influence or effectively control actions to be taken by us. The
interests of these shareholders may differ materially from the interests of the holders of our common shares, and these shareholders could take actions that are not in the interests of the holders of our common shares.
CERTAIN MATTERS WHICH MAY MATERIALLY AFFECT OUR RESULTS OF OPERATIONS AND/OR FINANCIAL CONDITION
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
We establish reserves for losses and loss adjustment expenses which represent estimates involving actuarial and statistical projections, at a given point in time, of our expectations of the ultimate settlement and administration costs of losses incurred. We utilize actuarial models as well as available historical insurance industry loss development patterns to assist in the establishment of appropriate loss reserves. Actual losses and loss adjustment expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. See "--Critical Accounting Polices, Estimates and Recent Accounting Pronouncements - Reserves for Losses and Loss Adjustment Expenses."
REINSURANCE PROTECTION AND RECOVERABLES
For purposes of limiting our risk of loss, we reinsure a portion of our exposures, paying to reinsurers a part of the premiums received on the policies we write, and we may also use retrocessional protection. For the three and six month periods ended June 30, 2002, ceded premiums written represented approximately 12% and 10%, respectively, of gross written premium. In 2002, we are retaining a greater amount of our insurance premiums written as compared to 2001 as a result of the new underwriting initiative and our improved financial position.
The availability and cost of reinsurance and retrocessional protection
is subject to market conditions, which are beyond our control. Currently, the
market for these arrangements is experiencing high demand for various
products and it is not certain that we will be able to obtain adequate
protection at cost effective levels. As a result of such market conditions
and other factors, we may not be able successfully to alleviate risk through
reinsurance and retrocessional arrangements. Further, we are subject to
credit risk with respect to our reinsurance and retrocessions because the
ceding of risk to reinsurers and retrocessionaires does not relieve us of our
liability to the clients or companies we insure or reinsure. Our failure to
establish adequate reinsurance or retrocessional arrangements or the failure
of our existing reinsurance or retrocessional arrangements to protect us from
overly concentrated risk exposure could adversely affect our financial
condition and results of operations. We monitor the financial condition of
our reinsurers and attempt to place coverages only with substantial,
financially sound carriers. At June 30, 2002, approximately 91% of our
reinsurance recoverables were due from carriers which had an A.M. Best rating
of "A-" or better. We had no amounts recoverable from a single entity or
group of entities that exceeded 5% of our total shareholders' equity. At June
30, 2002, amounts due from the following reinsurers represented approximately
47% of our reinsurance recoverables (with A.M. Best ratings in parentheses):
Hartford Fire Insurance Company ("A+"); Folksamerica Reinsurance Company
("A-"); GMAC Insurance Group ("A+"); Swiss Re America Group ("A++"); Odyssey
Reinsurance Corporation ("A"); GE Reinsurance Corporation ("A++"); PMA
Capital Insurance Company ("A u"; under review by A.M. Best with negative
implications); and St. Paul Fire and Marine Insurance Company ("A"). We also
have reinsurance recoverables from Lloyd's of London syndicates (group rating
of "A-") aggregating approximately 10% of our total. In addition, in
connection with our acquisition of Arch Specialty in February 2002, the
seller, Sentry Insurance a Mutual Company, which has an A.M. Best rating of
"A+" (Superior), agreed to reinsure or otherwise assume all liabilities
arising out of Arch Specialty's business prior to the closing of the
acquisition. The amount of recoverables from Sentry under such arrangements
represents approximately 25% of our total recoverables.
NATURAL AND MAN-MADE CATASTROPHIC EVENTS
We have large aggregate exposures to natural and man-made catastrophic events. Catastrophes can be caused by various events, including but not limited to hurricanes, floods, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires, and we may have losses which may result from acts of war or acts of terrorism and political instability. Catastrophes can also cause losses in non-property lines of business such as workers' compensation or general liability. In addition to the nature of property business, we believe that economic and geographic trends affecting insured property, including inflation, property value appreciation and geographic concentration tend to generally increase the size of losses from catastrophic events over time. Therefore, claims for natural and man-made catastrophic events could expose us to large losses and cause
substantial volatility in our results of operations, which could cause the value of our common shares to fluctuate widely.
We have substantial exposure to unexpected, large losses resulting from future man-made catastrophic events, such as acts of war, acts of terrorism and political instability. These risks are inherently unpredictable and recent events may lead to increased frequency and severity of losses. It is difficult to predict the timing of such events with statistical certainty or estimate the amount of loss any given occurrence will generate. It is not possible to eliminate completely our exposure to unforecasted or unpredictable events, and to the extent that losses from such risks occur, our financial condition and results of operations could be materially adversely affected.
We specifically insure and reinsure risks resulting from terrorism. Although we may attempt to exclude losses from terrorism and certain other similar risks from some coverages written by us, we may not be successful in doing so. Moreover, irrespective of the clarity and inclusiveness of policy language, there can be no assurance that a result-oriented court or arbitration panel favoring the insured or ceding company will enforce the language as written; such a tribunal may adopt a strained interpretation of the policy language, invoke public policy to limit enforceability of policy language, ignore policy language, make factual findings unwarranted by the evidence or otherwise seek to justify a ruling adverse to us.
For our catastrophe exposed reinsurance business, we seek to limit the amount of exposure we will assume from any one reinsured and the amount of the exposure to catastrophe losses in any geographic zone. In our reinsurance business, we monitor our exposure to catastrophic events, including earthquake, wind and specific terrorism exposures, and continuously reevaluate the estimated probable maximum pre-tax loss for such exposures. With respect to our reinsurance business, our estimated probable maximum pre-tax loss is determined through the use of modeling techniques, but such estimate does not represent our total potential loss for such exposures. In our reinsurance business, we seek to limit the probable maximum pre-tax loss to a percentage of our total shareholders' equity for severe catastrophic events. Currently, for our reinsurance business, we generally seek to limit the probable maximum pre-tax loss to approximately 25% of total shareholders' equity for severe catastrophic events that could be expected to occur once in every 250 years, which 25% does not include, for such purposes, business assumed directly from our insurance subsidiaries. There can be no assurances that we will not suffer pre-tax losses greater than 25% of our total shareholders' equity from a catastrophic event due to several factors, including the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies in the data provided by clients and brokers, the modeling techniques and the application of such techniques. In addition, depending on business opportunities and the mix of business that may comprise our reinsurance portfolio, we may seek to limit the probable maximum pre-tax loss to a higher percentage of our total shareholders' equity for our catastrophe exposed reinsurance business.
Further, for our insurance business, which began operating in its new specialty areas of focus in the 2002 second quarter, we also intend to monitor and limit the amount of our exposure to catastrophic losses and, in that connection, may seek to purchase catastrophe reinsurance protection. The availability and cost of such reinsurance protection is subject to market conditions, which are beyond our control. As a result of market conditions and other factors, we may not be successful in obtaining such protection. See "--Reinsurance Protection and Recoverables" above.
FOREIGN CURRENCY EXCHANGE RATE FLUCTUATION
We write business on a worldwide basis, and our results of operations may be affected by fluctuations in the value of currencies other than the U.S. dollar. Changes in foreign currency exchange rates can reduce our revenues and increase our liabilities and costs, as measured in the dollar as our functional currency. We have not attempted and currently do not expect to attempt to reduce our exposure to these exchange rate risks by using hedging transactions. We may therefore suffer losses solely as a result of exchange rate fluctuations.
MANAGEMENT AND OPERATIONS
As a relatively new insurance and reinsurance company, our success will depend on our ability to integrate new management and operating personnel and to establish and maintain operating procedures and internal controls to effectively support our business and our regulatory and reporting requirements, and no assurances can be given as to the success of these endeavors.
CONTINGENCIES RELATING TO THE SALE OF PRIOR REINSURANCE OPERATIONS
See note 5 under the caption "Contingencies Relating to the Sale of Prior Reinsurance Operations" of the notes accompanying our consolidated financial statements.
RESTRUCTURING OF U.S.-BASED INSURANCE OPERATIONS
In April 2002, we completed a restructuring of our U.S. insurance subsidiaries after receiving all applicable regulatory approvals. As a result of the restructuring, the statutory capital of Arch Re U.S. was increased to approximately $350 million (as determined under U.S. statutory accounting policies) and Arch Re U.S. has become the parent of our U.S.-based insurance group. The names of our U.S.-based insurers were changed as follows: First American Insurance Company was renamed Arch Insurance Company; Rock River Insurance Company was renamed Arch Specialty Insurance Company; and Cross River Insurance Company was renamed Arch Excess & Surplus Insurance Company. The name changes have been approved by the companies' respective states of domicile; however, the name change approvals have not yet been obtained from all the other states.
INDUSTRY; RATINGS
We operate in a highly competitive environment, and since the September 11, 2001 events, new capital has entered the market. These factors may mitigate the benefits that the financial markets may perceive for the property and casualty insurance industry, and we cannot offer any assurances that we will be able to compete successfully in our industry or that the intensity of competition in our industry will not erode profitability for insurance and reinsurance companies generally, including us. In addition, we can offer no assurances that we will participate at all or to the same extent as more established or other companies in any price increases or increased profitability in our industry. If we do not share in such price increases or increased profitability, our financial condition and results of operations could be materially adversely affected.
Financial strength and claims paying ratings from third party rating
agencies are instrumental in establishing the competitive positions of companies
in our industry. Periodically, rating agencies evaluate us to confirm that we
continue to meet their criteria for the ratings assigned to us by them. Our
reinsurance subsidiaries, Arch Re U.S. and Arch Re Bermuda, and our insurance
subsidiaries, Arch Insurance and Arch Specialty, each currently have financial
strength ratings of "A-" (Excellent) from A.M. Best. Arch E&S currently is rated
"NR-2" (Insufficient Size and/or Operating Experience) from A.M. Best and
American Independent has a financial strength rating of "C++" (Marginal) from
A.M. Best. We do not believe that American Independent's non-standard automobile
business is particularly ratings sensitive because its insureds purchase
insurance primarily to satisfy state and local insurance and financial reporting
requirements.
Recently, rating agencies have been coming under increasing pressure as a result of high-profile corporate bankruptcies and may, as a result, increase their scrutiny of rated companies, revise their rating policies or take other action. We can offer no assurances that our ratings will remain at their current levels. A ratings downgrade, or the potential for such a downgrade, could adversely affect both our relationships with agents, brokers, wholesalers and other distributors of our existing products and services and new sales of our products and services.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
In April 2002, we established a letter of credit facility for up to $200 million with Fleet National Bank. This facility expires April 16, 2003. The principal purpose of this facility is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which we have entered into reinsurance arrangements. Such letters of credit when issued will be secured by a portion of our investment portfolio. In addition, the letter of credit facility also requires that the net worth of ACGL be at least $750 million and that we maintain certain levels of collateral in order for letters of credit to be issued. At June 30, 2002, we had approximately $31.9 million in outstanding letters of credit. In addition to letters of credit, we have and may establish insurance trusts in the U.S. and Canada to secure our reinsurance amounts payable as required.
It is anticipated that the letter of credit facility will be renewed on expiry, but such renewals are subject to the availability of credit from banks which we utilize. In the event such support is insufficient, we could be required to provide alternative security to cedents. This could take the form of additional insurance trusts supported by our investment portfolio or funds withheld using our cash resources. The value of letters of credit is driven by,
among other things, loss development of existing reserves, the payment pattern of such reserves, the further expansion of our business and the loss experience of such business. If we are unable to post security in the form of letters of credit or trust funds when required, our operations could be significantly and negatively affected.
INVESTMENTS
At June 30, 2002, consolidated cash and invested assets totaled approximately $1.3 billion, consisting of $213.4 million of cash and short-term investments, $1.1 billion of publicly traded fixed maturity investments and $31.6 million of privately held securities. Our fixed income portfolio had an average Standard & Poor's Corporation quality rating of "AA-" and an average duration of 2.8 years at June 30, 2002.
The following table provides information on the composition of our fixed maturity investments at June 30, 2002:
(UNAUDITED)
JUNE 30, 2002
--------------------------------------
ESTIMATED
FAIR VALUE NET
AND CARRYING UNREALIZED AMORTIZED
(in thousands) VALUE GAINS COST
------------ ---------- ----------
Fixed Maturities:
Corporate bonds ........................... $ 711,112 $ 7,221 $ 703,891
Mortgage-backed and asset-backed securities 229,548 3,858 225,690
U.S. government and government agencies ... 106,284 1,796 104,488
Municipal bonds ........................... 9,836 205 9,631
------------ ---------- ----------
Total ..................................... $ 1,056,780 $ 13,080 $1,043,700
============ ========== ==========
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The following table presents the credit quality (using Standard & Poor's ratings) distribution of our fixed maturity securities at June 30, 2002:
(UNAUDITED)
JUNE 30, 2002
------------------------------
(in thousands) ESTIMATED
FAIR VALUE
AND CARRYING
VALUE % OF TOTAL
-------------- -----------
Fixed Maturities:
AAA............................... $ 370,357 35.0%
AA................................ 112,128 10.6%
A................................. 308,309 29.2%
BBB............................... 265,986 25.2%
------------ -----------
Total............................. $ 1,056,780 100.0%
============ ===========
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As part of our investment strategy, we seek to establish a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed by us to be adequate to meet our foreseeable payment obligations. Our investment portfolio is managed on a total return basis. The total return approach may result in realized gains or losses in any given period as the portfolio is adjusted to reflect perceived changes in relative value.
Our current investment guidelines stress preservation of capital, market liquidity and diversification of risk. To achieve this objective, our current fixed income investment guidelines provide for an average credit quality of "Aa3" and "AA-" as measured by Moody's Investors Services and Standard & Poor's, respectively. Notwithstanding the foregoing, our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities.
At June 30, 2002, our private equity portfolio consisted of seven investments, with additional investment portfolio commitments in an aggregate amount of approximately $3.6 million. We do not currently intend to make any significant investments in privately held securities over and above our current commitments. See note 8, "Investment Information," of the notes accompanying our consolidated financial statements.
BOOK VALUE PER SHARE
On a diluted basis, the per share book value at June 30, 2002 was $20.27, compared with $19.59 at December 31, 2001. The increase in diluted book value per share was primarily attributable to the net effects of issuing 7,475,000 common shares at $25.50 per share in the stock offering which was completed in April 2002, and an increase in unrealized appreciation of investments of $10.9 million. These increases were partially offset by the effects of the issuance on June 28, 2002 of 875,753 additional Series A convertible preference shares pursuant to a post-closing purchase price adjustment mechanism under the Subscription Agreement. The diluted per share book value reflects our outstanding convertible preference shares and Class A warrants, but does not take into account certain potential adjustments. If such potential adjustments were triggered, the diluted pro forma book value at June 30, 2002 would have been reduced by $0.91 per share. The calculation of our book value per share amounts and the potential adjustments to book value per share are described below.
CALCULATION OF BOOK VALUE PER SHARE
The following actual book value per share calculations are based on shareholders' equity of $1,246,047 at June 30, 2002 (unaudited) and $1,020,369 at December 31, 2001 (audited).
(UNAUDITED)
JUNE 30, 2002 DECEMBER 31, 2001
--------------------------------- -------------------------------
COMMON COMMON
SHARES AND SHARES AND
POTENTIAL CUMULATIVE POTENTIAL CUMULATIVE
COMMON BOOK VALUE COMMON BOOK VALUE
SHARES PER SHARE SHARES PER SHARE
----------- ---------- ------------- ----------
Per common share (1)...................... 23,795,740 $ 20.10 13,513,538 $ 20.05
Series A convertible preference shares (2) 36,563,488 $ 20.64 35,687,735 $ 20.74
Dilutive Class A warrants (3)............. 1,112,468 $ 20.27 1,206,206 $ 20.24
Restricted common shares (4).............. -- 1,689,629 $ 19.59
----------- -------------
Common shares and potential common shares. 61,471,696 52,097,108
=========== =============
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(1) Book value per common share at June 30, 2002 and December 31, 2001 was determined by dividing (i) the difference between total shareholders' equity and the aggregate liquidation preference of the Series A convertible preference shares of $767.8 million and $749.4 million, respectively, by (ii) the number of common shares outstanding.
(2) Includes preference shares that were issued on November 20, 2001 in exchange for $763.1 million of cash. The number of preference shares issued was based on the estimated per share price of $21.38. The estimated per share price was based on (i) total shareholders' equity as of June 30, 2001 (adjusted for certain amounts as described in the Subscription Agreement entered into in connection with the November 2001 capital infusion), divided by (ii) the total number of common shares outstanding as of June 30, 2001, which was 12,863,079. In addition, the amount of preference shares at June 30, 2002 includes 875,753 preference shares that were issued by us on June 28, 2002 pursuant to a post-closing purchase price adjustment mechanism under the Subscription Agreement. Each preference share is convertible at any time and from time to time at the option of the holder thereof into one fully paid and nonassessable common share, subject to possible adjustment.
(3) Includes the net number of common shares that would be issued under the Class A warrants, primarily issued in connection with the capital infusion transaction, calculated using the treasury stock method. Class A warrants to purchase an aggregate of 3,842,450 and 5,401,707 common shares were outstanding as of June 30, 2002 and
December 31, 2001, respectively. Class A warrants are immediately exercisable at $20 per share and expire September 19, 2002. In April 2002, 446,608 common shares were issued upon the exercise of 1,559,257 Class A warrants on a cashless basis.
(4) Represents restricted common shares issued in connection with the November 2001 capital infusion transaction. These restricted common shares are included in common shares at June 30, 2002.
POTENTIAL ADJUSTMENTS TO BOOK VALUE PER SHARE
The following are potential adjustments to book value per share at June 30, 2002 and December 31, 2001, excluding the effects of stock options, that could be made if certain future events described below occur.
(UNAUDITED)
JUNE 30, 2002 DECEMBER 31, 2001
----------------------------- -----------------------------
CUMULATIVE CUMULATIVE
POTENTIAL POTENTIAL
CONTINGENTLY ADJUSTMENTS CONTINGENTLY ADJUSTMENTS
ISSUABLE TO BOOK ISSUABLE TO BOOK
COMMON VALUE PER COMMON VALUE PER
SHARES SHARE SHARES SHARE
------------ ----------- ------------ ------------
Contingently issuable:
Series A convertible preference
shares (1).......................... -- -- 875,765 $ (0.33)
Series A convertible preference
shares (2).......................... 2,831,174 $ (0.89) 2,831,174 $ (1.31)
Class B warrants (3)................ 43,428 $ (0.91) 33,495 $ (1.32)
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(1) Amount at December 31, 2001 represents an estimate of the amount of additional Series A convertible preference shares that will be issued to the new investors during the second quarter of 2002 pursuant to a post-closing purchase price adjustment mechanism under the Subscription Agreement. The per share price was based on (i) total shareholders' equity as of June 30, 2001 as set forth on the audited balance sheet, adjusted for certain items as described in the Subscription Agreement, divided by (ii) the total number of common shares outstanding as of June 30, 2001. Consistent with such estimate, 875,753 preference shares were issued to the new investors on June 28, 2002 and are reflected in the amount of preference shares at June 30, 2002.
(2) Represents an estimate of the amount of additional Series A preference shares that would be issued under the Subscription Agreement in the event that on or prior to September 19, 2005 (1) the closing price of our common shares is at least $30 per share for at least 20 out of 30 consecutive trading days or (2) a change in control occurs (either case, a "Triggering Event"). Pursuant to the Subscription Agreement, we have agreed to issue to the new investors additional Series A preference shares such that the audited per share price is adjusted downward by $1.50 per preference share.
(3) Includes the number of common shares that would be issued under the Class B warrants for purposes of calculating diluted book value per share under the treasury stock method. Class B warrants to purchase an aggregate of 150,000 common shares were outstanding as of June 30, 2002 and December 31, 2001 and expire September 19, 2005. Class B warrants are exercisable at $20 per share when (1) the closing price of our common shares is at least $30 per share for at least 20 out of 30 consecutive trading days or (2) a change in control occurs.
Pursuant to the Subscription Agreement, a post-closing purchase price adjustment will be calculated in November 2003 (or such earlier date as agreed upon by us and the investors) based on an adjustment basket. The adjustment basket will be equal to (1) the difference between value realized upon sale and the GAAP book value at the closing of the capital infusion (November 2001) (as adjusted based on a pre-determined growth rate) of agreed upon non-core businesses; plus (2) the difference between GAAP net book value of the insurance balances attributable to our core insurance operations with respect to any policy or contract written or having an effective date prior to November 20, 2001 at the time of the final adjustment and those balances at the closing; minus (3) reductions in book value arising from costs and expenses relating to the transaction provided under
the Subscription Agreement, actual losses arising out of breach of representations under the Subscription Agreement and certain other costs and expenses. If the adjustment basket, which will be calculated by our independent auditors, is less than zero, we will issue additional preference shares to the investors based on the decrease in value of the components of the adjustment basket. If the adjustment basket is greater than zero, we are allowed to use cash in an amount based on the increase in value of the components of the adjustment basket to repurchase common shares (other than any common shares issued upon conversion of the preference shares or exercise of the Class A warrants). If the adjustment basket is less than zero and in the event that a Triggering Event occurs, we agreed to issue additional preference shares to the investors as a further adjustment. In addition, on the fourth anniversary of the closing, there will be a calculation of a further adjustment basket based on (1) liabilities owed to Folksamerica (if any) under the Asset Purchase Agreement, dated as of January 10, 2000, between us and Folksamerica, and (2) specified tax and ERISA matters under the Subscription Agreement.
MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
In accordance with the SEC's Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of December 31, 2001. (See section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Sensitive Instruments and Risk Management" included in our 2001 Annual Report on Form 10-K.) Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks. At June 30, 2002, there have been no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented as of December 31, 2001.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this report are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below, elsewhere in this report and in the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2001, and include:
- our management's ability to successfully implement its business strategy, including implementing procedures and internal controls to support the value of our business and our regulatory and reporting requirements;
- acceptance of our products and services and security by brokers and insureds;
- acceptance of our business strategy, security and financial condition by rating agencies and regulators;
- general economic and market conditions (including as to inflation and foreign currency exchange rates) and conditions specific to the reinsurance and insurance markets in which we operate;
- competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
- our ability to successfully integrate new management and operating personnel and to establish and maintain operating procedures to effectively support our new underwriting initiatives and to develop accurate actuarial data and develop and implement actuarial models and procedures;
- the loss of key personnel;
- the integration of businesses we have acquired or may acquire into our existing operations;
- greater than expected loss ratios on business written by us and adverse development on losses and/or loss adjustment expense liabilities related to business written by us;
- severity and/or frequency of losses;
- claims for natural or man-made catastrophic events in our insurance or reinsurance business could cause large losses and substantial volatility in our results of operations;
- acts of terrorism, other hostilities or other unforecasted and unpredictable events;
- losses relating to aviation business and business produced by a certain managing underwriting agency for which we may be liable to the purchaser of our prior reinsurance business or to others in connection with the May 5, 2000 asset sale;
- availability to us of reinsurance to manage our gross and net exposures;
- the failure of reinsurers, managing general agents or others to meet their obligations to us;
- the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
- changes in the financial environment, including interest rates;
- changes in accounting principles or the application of such principles by accounting firms or regulators;
- statutory or regulatory developments, including as to tax policy and matters and insurance and other regulatory matters (such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers) and government provision or back-stopping of insurance (including for acts of terrorism); and
- rating agency policies and practices.
In addition to the risks discussed in the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2001, other general factors could affect our results, including: (a) developments in the world's financial and capital markets and our access to such markets; (b) changes in regulation or tax laws applicable to us, our subsidiaries, brokers or customers; and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing above under the subheading "Market Sensitive Instruments and Risk Management" under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," which information is hereby incorporated by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. As of June 30, 2002, we were not a party to any material litigation or arbitration other than as a part of the ordinary course of business in relation to claims activity, none of which is expected by management to have a significant adverse effect on our results of operation and financial condition and liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 7, 2002, at a special meeting of shareholders, our shareholders approved amendments to bye-laws 45 and 75, and on June 27, 2002, at our annual shareholders meeting, our shareholders approved an amendment to bye-law 20. These amendments were made in connection with the November 2001 capital infusion by investors led by Warburg Pincus investment funds, Hellman & Friedman investment funds and certain members of management. These amendments are described in more detail in our proxy statements for those meetings filed with the Securities and Exchange Commission on January 23, 2002 and June 3, 2002.
BYE-LAW 45
Before the amendment, bye-law 45 limited the voting rights of any person that owned (directly, indirectly or constructively under the Internal Revenue Code (the "Code")) ACGL shares with more than 9.9% of the total voting power of all ACGL shares entitled to vote generally at an election of directors to 9.9% of such voting power. This provision was intended to prevent ACGL from being characterized as a controlled foreign corporation under the Code. Bye-law 45 also limited the rights of any group within the meaning of the Exchange Act of 1934, as amended (the "Exchange Act"), that owned ACGL shares with more than 9.9% of the total voting power of all ACGL shares entitled to vote generally at an election of directors to 9.9% of such voting power.
The amendment to bye-law 45 changed these voting limitations so that the limitation now applies only to votes conferred (directly or indirectly or by attribution) by ACGL shares directly, indirectly or constructively owned (within the meaning of section 958 of the Code) by any U.S. person, as defined in section 7701(a)(30) of the Code. If the votes so conferred on such U.S. person would represent more than 9.9% of the voting power of all ACGL shares entitled to vote generally at an election of directors, the votes so conferred would, in general, be reduced by whatever amount is necessary so that after the reduction the votes so conferred on such U.S. person constitutes 9.9% of the total voting power of all ACGL shares entitled to vote generally at any election of directors.
The amendment allows non-U.S. persons, including the Warburg Pincus investment funds and the Hellman & Friedman investment funds, to have more than 9.9% of the total voting power of ACGL shares. This change resulted in ACGL being characterized as a controlled foreign corporation.
There may be circumstances in which the votes conferred on a U.S. person are reduced to less than 9.9% as a result of the operation of bye-law 45 as amended, because of shares, including shares of the Warburg Pincus investment funds and the Hellman & Friedman investment funds, that may be attributed to that person under the Code.
BYE-LAW 75
Before the amendment, the boards of directors of any of our subsidiaries
that are incorporated in Bermuda, and any other subsidiary designated by our
board of directors, was required to consist of persons who have been elected by
our shareholders either as (1) alternate directors of our board of directors or
(2) designated company directors.
The amendment to bye-law 75 made the provisions of bye-law 75 expressly applicable to subsidiaries incorporated under the laws of the Cayman Islands and Barbados, as well as Bermuda. In addition, the
references to alternate directors were deleted, since our shareholders have elected specified individuals to serve as directors of our existing and future Bermuda, Barbados and other non-U.S. subsidiaries, making the concept of alternate directors unnecessary.
BYE-LAW 20
Before the amendment, bye-law 20 provided that special meetings of ACGL's board of directors may be called by the chairman of the board or by the president, or by a majority of the total number of directors of ACGL.
As amended, bye-law 20 provides that a special meeting of the ACGL board of directors may be called by three directors or a majority of the total number of directors (whichever is fewer), in addition to the chairman of the board and the president of ACGL. We were required to submit this amendment for approval by the shareholders under the shareholders agreement with the investors in the capital infusion. Although the Warburg Pincus investment funds and the Hellman & Friedman investment funds are entitled to designate nominees that, in the aggregate, constitute a majority of the ACGL board, they have elected not to do so. Bye-law 20, as amended, provides protection to these investors by allowing three of their designees on the board, or any group of three directors, to call a special meeting of the board of directors
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders (the "Annual Meeting") of ACGL was held on June 27, 2002.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Exchange Act. There was no solicitation in opposition to management's nominees as listed in ACGL's proxy statement, dated June 4, 2002 (the "Proxy Statement").
(c) The shareholders of ACGL (1) elected the following Class I Directors to
hold office until the 2005 annual meeting of shareholders or until their
successors are elected and qualified: Paul B. Ingrey, Kewsong Lee, David R.
Tunnell and Robert F. Works, (2) adopted an amendment to ACGL's bye-law 20
as set forth and described in the Proxy Statement, (3) approved the
share-based awards to the Chairman and the Vice-Chairman of the Board of
Directors of ACGL in connection with the capital fusion in November 2001,
(4) approved the ACGL 2002 Long Term Incentive and Share Award Plan, (5)
elected certain individuals as Designated Company Directors of certain of
ACGL's non-U.S. subsidiaries, and (6) ratified the selection of
PricewaterhouseCoopers LLP as independent auditors for the fiscal year
ending December 31, 2002. Set forth below are the voting results for these
proposals:
ELECTION OF CLASS I DIRECTORS OF ACGL
FOR AGAINST ABSTAIN ---------- -------- ------- 52,390,161 465,816 0 |
ADOPTION OF AMENDMENT TO BYE-LAW 20
FOR AGAINST ABSTAIN ---------- ------- ------- 49,999,300 97,831 7,150 |
APPROVAL OF SHARE-BASED AWARDS MADE TO THE CHAIRMAN AND THE VICE CHAIRMAN
OF THE BOARD OF DIRECTORS OF ACGL
FOR AGAINST ABSTAIN ---------- --------- ------- 49,139,430 3,709,796 6,751 |
APPROVAL OF THE ACGL 2002 LONG TERM INCENTIVE AND SHARE AWARD PLAN
FOR AGAINST ABSTAIN ---------- --------- -------- 45,975,811 4,120,345 8,125 |
ELECTION OF DESIGNATED COMPANY DIRECTORS OF NON-U.S. SUBSIDIARIES
FOR AGAINST ABSTAIN ---------- ------- ------- 52,724,348 48,654 82,975 |
RATIFICATION OF SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS
FOR AGAINST ABSTAIN ---------- ------- ------- 52,817,631 36,496 1,850 |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------------
3 Bye-Laws of ACGL.
10.1 ACGL 2002 Long Term Incentive and Share Award Plan.
10.2 Letter of Credit and Reimbursement Agreement, dated as of April 17,
2002, by and among Arch Re Bermuda, Arch Re U.S., Alternative Re
Limited, Arch Insurance (formerly known as First American Insurance
Company) and Fleet National Bank.
15 Accountants' Awareness Letter (regarding unaudited interim financial
information).
|
(b) REPORTS ON FORM 8-K.
ACGL filed a report on Form 8-K during the three-month period ended June 30, 2002 on April 3, 2002 to report that it had entered into a purchase agreement covering the issue and sale by ACGL of 6,500,000 common shares (plus an additional 975,000 common shares to cover over-allotments) of ACGL under ACGL's registration statement on Form S-3.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Peter A. Appel
-----------------------------------------------------
Date: August 14, 2002 Peter A. Appel
President and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ John D. Vollaro
-----------------------------------------------------
Date: August 14, 2002 John D. Vollaro
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------
3 Bye-Laws of ACGL.
10.1 ACGL 2002 Long Term Incentive and Share Award Plan.
10.2 Letter of Credit and Reimbursement Agreement, dated as of April 17,
2002, by and among Arch Re Bermuda, Arch Re U.S., Alternative Re
Limited, Arch Insurance (formerly known as First American Insurance
Company) and Fleet National Bank.
15 Accountants' Awareness Letter (regarding unaudited interim
financial information).
|
Exhibit 3
[Reflecting Amendments Through June 27, 2002]
BYE-LAWS
OF
ARCH CAPITAL GROUP LTD.,
A BERMUDA COMPANY
TABLE OF CONTENTS
Bye-Law Page ------- ---- 1. Interpretation..........................................................................................1 2. Management of the Company...............................................................................2 3. Power to appoint managing director or chief executive officer...........................................3 4. Power to appoint manager................................................................................3 5. Power to authorize specific actions.....................................................................3 6. Power to appoint attorney...............................................................................3 7. Power to delegate to a committee........................................................................3 8. Power to appoint and dismiss employees..................................................................4 9. Power to borrow and charge property.....................................................................4 10. Exercise of power to purchase shares of or discontinue the Company......................................4 11. Election of Directors...................................................................................4 12. Defects in appointment of Directors.....................................................................5 13. Notification of nominations.............................................................................5 14. Alternate Directors.....................................................................................5 15. Vacancies on the Board; Removal of Directors, Etc.......................................................5 16. Notice of meetings of the Board; Adjournment............................................................6 17. Quorum at meetings of the Board.........................................................................6 18. Meetings of the Board...................................................................................6 19. Regular Board meetings..................................................................................6 20. Special Board meetings..................................................................................7 21. Chairman of meetings....................................................................................7 22. Unanimous written resolutions...........................................................................7 23. Contracts and disclosure of Directors' interests........................................................7 24. Remuneration of Directors...............................................................................7 25. Register of Directors and Officers......................................................................7 26. Principal Officers......................................................................................8 27. Other Officers..........................................................................................8 28. Remuneration of Officers................................................................................8 29. Duties of Officers......................................................................................8 30. Obligations of Board to keep minutes....................................................................8 31. Right to indemnification................................................................................8 32. Waiver of claims........................................................................................9 33. Indemnification of employees............................................................................9 34. Place of meeting........................................................................................9 35. Annual meeting.........................................................................................10 36. Special general meeting................................................................................10 37. Accidental omission of notice of general meeting.......................................................10 38. Business to be conducted at meetings...................................................................10 39. Notice of general meeting..............................................................................11 40. Postponement of meetings...............................................................................11 41. Quorum for general meeting.............................................................................11 42. Adjournment of meetings................................................................................11 43. Written resolutions....................................................................................11 44. Attendance of Directors................................................................................12 45. Limitation on voting rights of Controlled Shares.......................................................12 |
Bye-Law Page ------- ---- 46. Voting at meetings.....................................................................................13 47. Presiding Officer......................................................................................13 48. Conduct of meeting; Decision of chairman...............................................................13 49. Seniority of joint holders voting......................................................................14 50. Proxies................................................................................................14 51. Representation of corporations at meetings.............................................................14 52. Rights of shares.......................................................................................14 53. Power to issue shares..................................................................................16 54. Variation of rights, alteration of share capital and purchase of shares of the Company.................16 55. Registered holder of shares............................................................................16 56. Death of a joint holder................................................................................17 57. Share certificates.....................................................................................17 58. Determination of record dates..........................................................................17 59. Instrument of transfer.................................................................................17 60. Restriction on transfer................................................................................18 61. Transfers by joint holders.............................................................................18 62. Representative of deceased Member......................................................................18 63. Registration on death or bankruptcy....................................................................18 64. Declaration of dividends by the Board..................................................................18 65. Unclaimed dividends....................................................................................19 66. Undelivered payments...................................................................................19 67. Interest on dividends..................................................................................19 68. Issue of bonus shares..................................................................................19 69. Financial year end.....................................................................................19 70. Appointment of Auditor.................................................................................19 71. Remuneration of Auditor................................................................................19 72. Notices to Members of the Company......................................................................20 73. Notices to joint Members...............................................................................20 74. Service and delivery of notice.........................................................................20 75. Certain Subsidiaries...................................................................................20 76. The seal...............................................................................................20 77. Winding-up/distribution by liquidator..................................................................20 78. Business Combinations..................................................................................21 79. Alteration of Bye-laws, Etc............................................................................25 |
1. INTERPRETATION
(1) In these Bye-laws the following words and expressions shall, where not inconsistent with the context, have the following meanings respectively:
"ACT" means the Bermuda Companies Act 1981 as amended from time to time.
"ALTERNATE DIRECTOR" means an alternate Director appointed in accordance with these Bye-laws and the Act.
"AUDITOR" includes any individual or partnership.
"BOARD" means the board of Directors appointed or elected pursuant to these Bye-laws and acting by resolution in accordance with the Act and these Bye-laws or the Directors present at a meeting of Directors at which there is a quorum.
"COMPANY" means the company for which these Bye-laws are approved and confirmed.
"CONTROLLED SHARES" has the meaning set forth in Bye-law 45.
"DIRECTOR" means a director of the Company and shall include an Alternate Director.
"EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
"FAIR MARKET VALUE" means, with respect to a repurchase of any shares of any class or series of the Company in accordance with Bye-law 10:
(i) if shares of such class or series are listed on a securities exchange (or quoted in a securities quotation system), the average closing sale price of such shares on such exchange (or in such quotation system), or, if shares of such class or series are listed on (or quoted in) more than one exchange (or quotation system), the average closing sale price of such shares on the principal securities exchange (or quotation system) on which such shares are then traded, or, if shares of such class or series are not then listed on a securities exchange (or quotation system) but are traded in the over-the-counter market, the average of the latest bid and asked quotations for such shares in such market, in each case for the last five trading days immediately preceding the day on which notice of the repurchase of such shares is sent pursuant to these Bye-laws, or
(ii) if no such closing sales prices or quotations are available because shares of such class or series are not publicly traded or otherwise, the fair value of such shares as determined by one independent internationally recognized investment banking firm chosen in good faith by the Board, provided that the calculation of the Fair Market Value of the shares made by such appointed investment banking firm (x) shall not include any discount relating to the absence of a public trading market for, or any transfer restrictions on, such shares, and (y) such calculation shall be final and the fees and expenses stemming from such calculation shall be borne by the Company or its assignee, as the case may be.
"GENERAL MEETING" means either an annual general meeting or a special general meeting of the Members.
"MEMBER" means the person registered in the Register of Members as the holder of shares in the Company and, when two or more persons are so registered as joint holders of shares, means the person
whose name stands first in the Register of Members as one of such joint holders or all of such persons as the context so requires.
"NOTICE" means written notice as further defined in these Bye-laws unless otherwise specifically stated.
"OFFICER" means any person appointed by the Board to hold an office in the Company.
"PERSON" means any individual, partnership, limited liability company, joint venture, firm, corporation, association, trust, fund or other enterprise.
"REGISTER OF DIRECTORS AND OFFICERS" means the Register of Directors and Officers referred to in these Bye-laws.
"REGISTER OF MEMBERS" means the Register of Members referred to in these Bye-laws.
"RESIDENT REPRESENTATIVE" means any person appointed to act as resident representative and includes any deputy or assistant resident representative.
"SECRETARY" means the person appointed to perform any or all the duties of secretary of the Company and includes any deputy or assistant secretary.
(2) In these Bye-laws, where not inconsistent with the context:
(a) words denoting the plural number include the singular number and vice versa;
(b) words denoting the masculine gender include the feminine gender;
(c) words importing persons include companies, associations or bodies of persons whether corporate or not;
(d) the word:
(i) "may" shall be construed as permissive;
(ii) "shall" shall be construed as imperative; and
(e) unless otherwise provided herein words or expressions defined in the Act shall bear the same meaning in these Bye-laws.
(3) Expressions referring to writing or written shall, unless the contrary intention appears, include facsimile, printing, lithography, photography, e-mail and other modes of representing words in a visible form.
(4) Headings used in these Bye-laws are for convenience only and are not to be used or relied upon in the construction hereof.
BOARD OF DIRECTORS
2. MANAGEMENT OF THE COMPANY
(1) The business of the Company shall be managed and conducted by the Board. In managing the business of the Company, the Board may exercise all corporate and other powers of the Company as are not, by
statute or by these Bye-laws, required to be exercised by the Company in general meeting, and the business and affairs of the Company shall be so controlled by the Board. The Board may also present any petition and make any application in connection with the liquidation or reorganization of the Company.
(2) No regulation or alteration to these Bye-laws made by the Company in general meeting shall invalidate any prior act of the Board.
(3) The Board may procure that the Company pays all expenses incurred in promoting and incorporating the Company.
3. POWER TO APPOINT MANAGING DIRECTOR OR CHIEF EXECUTIVE OFFICER
The Board may from time to time appoint one or more persons to the office of managing director or chief executive officer of the Company who shall, subject to the control of the Board, supervise and administer all of the general business and affairs of the Company.
4. POWER TO APPOINT MANAGER
The Board may appoint a person to act as manager of the Company's day to day business and may entrust to and confer upon such manager such powers and duties as it deems appropriate for the transaction or conduct of such business.
5. POWER TO AUTHORIZE SPECIFIC ACTIONS
The Board may from time to time and at any time authorize any person to act on behalf of the Company for any specific purpose and in connection therewith to execute any agreement, document or instrument on behalf of the Company.
6. POWER TO APPOINT ATTORNEY
The Board may from time to time and at any time by power of attorney appoint any company, firm, person or body of persons, whether nominated directly or indirectly by the Board, to be an attorney of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board) and for such period and subject to such conditions as it may think fit and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board may think fit and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions so vested in the attorney. Such attorney may, if so authorised under the seal of the Company, execute any deed or instrument under such attorney's personal seal with the same effect as the affixation of the seal of the Company.
7. POWER TO DELEGATE TO A COMMITTEE
(1) The Board may appoint Board Committees from among its members to consist of not less than one (1) Director for each Board Committee. The Board may designate one or more Directors as alternate members of any Board Committee, who may replace any absent or disqualified members at a meeting of such Board Committee. The Board Committees shall have such of the powers and authority of the Board in the management of the business and affairs of the Company as shall, from time to time, so be delegated to them by the Board.
(2) The Board may appoint other committees to consist of such number of members as may be fixed by the Board, none of whom need be a member of the Board, and may prescribe the powers and authority of such committees.
(3) Meetings and actions of Board Committees and other committees of the Company shall be governed by, held and taken in accordance with these Bye-laws, with such changes in the context of those Bye-laws as are necessary to substitute the committee and its members for the Board and its members, except that the time of regular meetings of committees may also be determined by resolution of the Board and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. Further, the Board or the committee may adopt rules for the governance of any committee not inconsistent with the provisions of these Bye-laws.
8. POWER TO APPOINT AND DISMISS EMPLOYEES
The Board may appoint, suspend or remove any manager, secretary, clerk, agent or employee of the Company and may fix their remuneration and determine their duties.
9. POWER TO BORROW AND CHARGE PROPERTY
The Board may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and may issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the Company or any third party.
10. EXERCISE OF POWER TO PURCHASE SHARES OF OR DISCONTINUE THE COMPANY
(1) The Board may exercise all the powers of the Company to purchase all or any part of its own shares pursuant to Section 42A of the Act.
(2) The Board may exercise all the powers of the Company to discontinue the Company to a named country or jurisdiction outside Bermuda pursuant to Section 132G of the Act.
11. ELECTION OF DIRECTORS
(1) The Board shall consist of not less than three Directors nor more than eighteen Directors with the exact number of Directors to be determined from time to time by resolution adopted by the affirmative vote of a majority of the Board.
(2) The Directors shall be divided into three classes designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of Directors constituting the entire
Board. At the date these Bye-laws become effective, (i) the Class I directors,
with a term ending in 2002, are Thomas V. A. Kelsey, Robert F. Works and Philip
L. Wroughton, (ii) the Class II directors, with a term ending in 2003, are Peter
A. Appel, Lewis L. Glucksman and Ian R. Heap and (iii) the Class III directors,
with a term ending in 2001, are Robert Clements, Michael P. Esposito, Jr. and
Mark D. Mosca. At each succeeding annual general meeting beginning in 2001,
successors to the class of directors whose term expires at that annual general
meeting shall be elected for a three-year term. If the number of Directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of Directors in each class as nearly equal as possible,
and any additional Director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of Directors shorten the term of any incumbent Director. A Director shall
hold office until the annual general meeting for the year in which his term
expires and until his successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office.
(3) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preference Shares issued by the Company shall have the right, voting separately by class or series, to elect Directors
at an annual or special general meeting, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Board resolution creating such classes or series of Preference Shares, and such directors so elected shall not be divided into classes pursuant to this Bye-law 11 unless expressly provided by such terms.
12. DEFECTS IN APPOINTMENT OF DIRECTORS
All acts done bona fide by any meeting of the Board or by a committee of the Board or by any person acting as a Director shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any Director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director.
13. NOTIFICATION OF NOMINATIONS
Subject to the rights of the holders of any class or series of Preference Shares, nominations for the election of Directors may be made by the Board or by any Member entitled to vote for the election of Directors. Any Member entitled to vote for the election of Directors may nominate persons for election as Directors only if written notice of such Member's intent to make such nomination is delivered to the Secretary of the Company not later than (i) with respect to an election to be held at an annual general meeting, 50 days prior to the date of the meeting at which such nominations are proposed to be voted upon (or if less than 55 days' notice of the meeting is given, not later than the close of business on the seventh day following the day notice of the meeting is first given to Members) and (ii) with respect to an election to be held at a special general meeting for the election of Directors, the close of business on the seventh day following the date on which notice of such meeting is first given to Members. Each such notice shall set forth: (a) the name and address of the Member who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the Member is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the Member and each such nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the Member; (d) such other information regarding each nominee proposed by such Member as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the United States Securities and Exchange Commission had each such nominee been nominated, or intended to be nominated, by the Board; and (e) the consent of each such nominee to serve as a director of the Company if so elected. The Chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.
14. ALTERNATE DIRECTORS
An individual may be appointed an Alternate Director by or in accordance with a resolution of the members. Unless otherwise determined by the Board (and subject to such limitations as may be set by the Board), no Director shall have the right to appoint another person to act as his Alternate Director.
15. VACANCIES ON THE BOARD; REMOVAL OF DIRECTORS, ETC.
(1) Except in the case of vacancies on the Board that under applicable law must be filled by the Members, any vacancy on the Board that results from an increase in the number of directors shall be filled by a majority of the Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board shall be filled by a majority of the Directors then in office, even if less than a quorum, or a sole remaining director and the Board shall have the power to appoint an Alternate Director for any Director appointed to fill a vacancy. Any Director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. If the number of Directors is changed, any increase or decrease shall be apportioned among the three classes so as to make all classes as nearly equal in number as possible. No decrease in the number of Directors shall shorten the term of any incumbent Director.
(2) A Director may be removed only for cause as determined by the affirmative vote of the holders of at least a majority of the shares then entitled to vote generally in an election of Directors, which vote may only be taken at a special general meeting of the Members called expressly for that purpose. Cause for removal shall be deemed to exist only if the Director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such Director's duty to the Company and such adjudication is no longer subject to direct appeal.
16. NOTICE OF MEETINGS OF THE BOARD; ADJOURNMENT
(1) Notice of the time and place of each meeting of the Board shall be served upon or telephoned or telegraphed or transmitted by facsimile or e-mail to each Director at his residence or usual place of business, at least two (2) business days before the time fixed for the meeting, or so mailed at least five (5) business days before the time fixed for the meeting.
(2) A majority of the Directors present, whether or not a quorum is present, may adjourn any Directors meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned.
(3) Notice of any meeting or any irregularity in any notice may be waived by any Director before the meeting is held. Attendance of a Director at a meeting shall constitute a waiver of notice of such meeting by such Director.
17. QUORUM AT MEETINGS OF THE BOARD
At all meetings of the Board, one half (1/2) of the Directors then in office (but not less than two (2) Directors) if present in person at such meeting shall be sufficient to constitute a quorum a meeting of Directors.
18. MEETINGS OF THE BOARD
(1) All meetings of the Directors shall be held at the registered office of the Company or at such other place either within or without Bermuda as shall be designated by the Board.
(2) The Board may meet for the transaction of business, adjourn and otherwise regulate its meetings as it sees fit.
(3) Directors may participate in a meeting of the Board through use of conference telephone or similar communications equipment, so long as all Directors participating in such meeting can hear one another. Participation in a meeting of the Board by this means constitutes presence in person at such meeting.
(4) Unless a greater number is otherwise expressly required by statute or these Bye-laws, every act or decision done or made by a majority of the Directors present at a meeting duly held, at which a quorum is present, shall be regarded as the act of the Board.
19. REGULAR BOARD MEETINGS
The next meeting of the Board subsequent to the annual general meeting shall be held for the purpose of organizing the Board, electing officers and transacting such other business as may come before the meeting. Thereafter regular meetings of the Board shall be held at such time as may be designated by the Board. If the day fixed for any regular meeting shall fall on a holiday, the meeting shall take place on the next business day, unless otherwise determined by the Board.
20. SPECIAL BOARD MEETINGS
Special meetings of the Board may be called by the Chairman of the Board, or by the President, or by three Directors or a majority of the total number of Directors (whichever is fewer), upon the notice specified in Bye-law 16(1).
21. CHAIRMAN OF MEETINGS
The Chairman of the Board, or in the Chairman's absence, any Director selected by the Directors present, shall preside as chairman at meetings of the Board.
22. UNANIMOUS WRITTEN RESOLUTIONS
Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall consent thereto in writing. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. For the purposes of this Bye-law, "Director" shall not include an Alternate Director.
23. CONTRACTS AND DISCLOSURE OF DIRECTORS' INTERESTS
(1) Any Director, or any Director's firm, partner or any company with whom any Director is associated, may act in a professional capacity for the Company and such Director or such Director's firm, partner or such company shall be entitled to remuneration for professional services as if such Director were not a Director.
(2) A Director who is directly or indirectly interested in a contract or proposed contract or arrangement with the Company shall declare the nature of such interest.
(3) Following a declaration being made pursuant to this Bye-law, and unless disqualified by the chairman of the relevant Board meeting, a Director may vote in respect of any contract or proposed contract or arrangement in which such Director is interested and may be counted in the quorum at such meeting.
24. REMUNERATION OF DIRECTORS
(1) The remuneration (if any) of the Directors shall be as determined by the Directors and shall be deemed to accrue from day to day. The Directors shall also be paid all travel, hotel and other expenses properly incurred by them in attending and returning from meetings of the Board, any committee appointed by the Board, general meetings of the Company, or in connection with the business of the Company or their duties as Directors generally.
(2) The Directors may by resolution award special remuneration to any Director of the Company undertaking any special work or services for, or undertaking any special mission on behalf of, the Company other than his ordinary routine work as a Director. Any fees paid to a Director who is also counsel or solicitor to the Company, or otherwise serves it in a professional capacity, shall be in addition to his remuneration as a Director.
25. REGISTER OF DIRECTORS AND OFFICERS
The Board shall cause to be kept in one or more books at the registered office of the Company a Register of Directors and Officers and shall enter therein the particulars required by the Act.
OFFICERS
26. PRINCIPAL OFFICERS
The principal Officers of the Company shall be a President, one or more Vice Presidents, a Secretary and such officers as the Board may determine. Any two or more of such offices, except those of President and Secretary, may be held by the same person except as prohibited by the Act. The Chairman of the Board need not be an executive officer of the Company.
27. OTHER OFFICERS
The Board, the Chairman of the Board or the President may appoint such other Officers as the conduct of the business of the Company may require, each of whom shall hold office for such period as the Board, the Chairman of the Board or the President may from time to time determine.
28. REMUNERATION OF OFFICERS
The Officers shall receive such remuneration as the Board may from time to time determine.
29. DUTIES OF OFFICERS
Each Officer shall have such powers and perform such duties in the management, business and affairs of the Company as may be delegated to him by the Board, or, if such Officer was appointed by the Chairman of the Board or the President, as may be delegated to him by either such person, from time to time.
MINUTES
30. OBLIGATIONS OF BOARD TO KEEP MINUTES
(1) The Board shall cause minutes to be duly entered in books provided for the purpose:
(a) of all elections and appointments of Officers;
(b) of the names of the Directors present at each meeting of the Board and of any committee appointed by the Board; and
(c) of all resolutions and proceedings of general meetings of the Members, meetings of the Board and meetings of committees appointed by the Board.
(2) Minutes prepared in accordance with the Act and these Bye-laws shall be kept by the Secretary at the registered office of the Company.
INDEMNITY
31. RIGHT TO INDEMNIFICATION
(1) The Company shall indemnify its officers and directors to the fullest extent possible except as prohibited by the Act. Without limiting the foregoing, the Directors, Secretary and other Officers (such term to include, for the purposes of this Bye-law, any Alternate Director or any person appointed to any committee by the Board or any person who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan)) and every one of them, and their heirs, executors and administrators, shall be indemnified
and secured harmless out of the assets of the Company from and against all actions, costs, charges, losses, damages and expenses which they or any of them, their heirs, executors or administrators, shall or may incur or sustain by or by reason of any act done, concurred in or omitted (actual or alleged) in or about the execution of their duty, or supposed duty, or in their respective offices or trusts, and none of them shall be answerable for the acts, receipts, neglects or defaults of the others of them or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall or may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company shall be placed out on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto, provided that this indemnity shall not extend to any matter in respect of which such person is, or may be, found guilty of fraud or dishonesty.
(2) The Company may purchase and maintain insurance to protect itself and any Director, Officer or other person entitled to indemnification pursuant to this Bye-law to the fullest extent permitted by law.
(3) All reasonable expenses incurred by or on behalf of any person entitled to indemnification pursuant to Bye-law 31(1) in connection with any proceeding shall be advanced to such person by the Company within twenty (20) business days after the receipt by the Company of a statement or statements from such person requesting such advance or advances from time to time, whether prior to or after final disposition of such proceeding. Such statement or statements shall reasonably evidence the expenses incurred by such person and, if required by law or requested by the Company at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of such person to repay the amounts advanced if it should ultimately be determined that such person is not entitled to be indemnified against such expenses pursuant to this Bye-law.
(4) The right of indemnification and advancement of expenses provided in this Bye-law shall not be exclusive of any other rights to which those seeking indemnification may otherwise be entitled, and the provisions of this Bye-law shall inure to the benefit of the heirs and legal representatives of any person entitled to indemnity under this Bye-law and shall be applicable to proceedings commenced or continuing after the adoption of this Bye-law, whether arising from acts or omissions occurring before or after such adoption. Any repeal or modification of the foregoing provisions of this section shall not adversely affect any right or protection existing at the time of such repeal or modification.
32. WAIVER OF CLAIMS
The Company and each Member agrees to waive any claim or right of action it might have, whether individually or by or in the right of the Company, against any Director or Officer, and no Director or Officer shall have any liability for monetary damages, on account of any action taken by such Director or Officer, or the failure of such Director or Officer to take any action in the performance of his duties with or for the Company, provided that such waiver shall not extend to any matter in respect of which such person is, or may be, found guilty of fraud or dishonesty.
33. INDEMNIFICATION OF EMPLOYEES
The Board may provide indemnification and advancement of expenses to the employees of the Company for their acts or omissions as the Board may, from time to time, determine.
MEMBERS MEETINGS
34. PLACE OF MEETING
All meetings of Members shall be held either at the registered office of the Company or at any other place within or without Bermuda as may be designated by the Board.
35. ANNUAL MEETING
The annual general meeting shall be held on such date, at such time and at such place as shall be designated by the Board and any annual general meeting may be adjourned as provided by law or pursuant to these Bye-laws. At each annual general meeting there shall be elected Directors to serve for the designated term, and such other business shall be transacted as shall properly come before the meeting.
36. SPECIAL GENERAL MEETING
(1) Special general meetings for any purpose or purposes may be called only (i) by the Chairman of the Board; (ii) by the President; (iii) by a majority of the Directors in office or (iv) as required by the Act.
(2) Only such business as is specified in the notice of any special general meeting shall come before such meeting.
37. ACCIDENTAL OMISSION OF NOTICE OF GENERAL MEETING
The accidental omission to give notice of a general meeting to, or the non-receipt of notice of a general meeting by, any person entitled to receive notice shall not invalidate the proceedings at that meeting.
38. BUSINESS TO BE CONDUCTED AT MEETINGS
(1) At any general meeting, only such business shall be conducted as shall have been properly brought before such meeting.
(2) To be properly brought before an annual general meeting, business must be (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (2) otherwise properly brought before the meeting by or at the direction of the Board or (3) otherwise properly brought before the meeting by a Member. For business to be properly brought before an annual general meeting by a Member, the Member must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a Member's notice must be received not later than 50 days prior to the date of the meeting (or if less than 55 days' notice of the meeting is given, not later than the close of business on the seventh day following the day notice of the meeting is first given to Members).
(3) To be properly brought before a special general meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the person or persons calling such meeting in accordance with Bye-law 36 or (ii) otherwise properly brought before the meeting by or at the direction of such person or persons. Members may not bring matters before a special general meeting except as specified under the Act. To the extent any Member or Members are specifically permitted under the Act to bring matters before a special meeting, such Member or Members must give timely notice thereof in writing to the Secretary of the Company to properly bring business before a special general meeting and satisfy applicable requirements of the Act. To be timely, a Member's notice must be received no later than the close of business on the seventh day following the date notice of the meeting is first given to Members.
(4) Each such notice shall set forth as to each matter the Member proposes to bring before the meeting: (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Company's books, of the Member proposing such business, (c) a representation that the Member is a holder of record of stock of the Company entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to bring such business before the meeting, (d) the class, series and number of shares of the Company which are beneficially owned by the Member, (e) any material interest of the Member in such business, and (f) such other information
regarding the business to be brought before the meeting by such Member as would be required to be included in a proxy statement filed pursuant to the proxy rules of the United States Securities and Exchange Commission.
(5) No business shall be conducted at any meeting of the Members except in accordance with the procedures set forth in the preceding paragraph. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of these Bye-laws and applicable law, and if he or she should so determine, any such business not properly brought before the meeting shall not be transacted.
39. NOTICE OF GENERAL MEETING
Notice of each general meeting, whether annual or special, shall be
given in writing to the Members entitled to vote thereat, not less than then
(10) nor more than sixty (60) days before such meeting. Notice of any meeting of
Members shall specify the place, the day, and the hour of the meeting, as well
as the general nature of the business to be transacted. A notice may be given by
the Company to any Member either personally or by mail or other means of written
communication addressed to the Member at his address appearing on the Register
of Members.
40. POSTPONEMENT OF MEETINGS
The Secretary may postpone any general meeting called in accordance with the provisions of these Bye-laws (other than a meeting requisitioned under these Bye-laws) provided that notice of postponement is given to each Member before the time for such meeting. Fresh notice of the date, time and place for the postponed meeting shall be given to each Member in accordance with the provisions of these Bye-laws.
41. QUORUM FOR GENERAL MEETING
The presence of two or more persons representing, in person or by proxy, not less than a majority of the voting power represented by the shares entitled to vote thereat shall constitute a quorum for the transaction of business at any general meeting.
42. ADJOURNMENT OF MEETINGS
(1) Any general meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the voting power represented by the shares represented at the meeting, either in person or by proxy, but in the absence of a quorum no other business may be transacted at that meeting.
(2) When any general meeting, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the date, time and place are announced at a meeting at which the adjournment occurs, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than thirty (30) days from the date set for the original meeting, in which case the Board shall set a new record date. Notice of any such adjourned meeting, if required, shall be given to each Member of record entitled to vote at the adjourned meeting in accordance with the provisions of Bye-law 37. At any adjourned meeting the Company may transact any business that might have been transacted at the original meeting.
43. WRITTEN RESOLUTIONS
Subject to applicable law, the Members shall have the power to consent in writing, without a meeting, to the taking of any action.
44. ATTENDANCE OF DIRECTORS
The Directors of the Company shall be entitled to receive notice of and to attend and be heard at any general meeting.
45. LIMITATION ON VOTING RIGHTS OF CONTROLLED SHARES
(1) Except as provided in the other paragraphs of this Bye-law 45, every Member of record owning shares conferring the right to vote present in person or by proxy shall have one vote, or such other number of votes as may be specified in the terms of the issue and rights and privileges attaching to such shares or in these Bye-laws, for each such share registered in such Member's name.
(2) If, as a result of giving effect to the foregoing provisions of this Bye-law 45 or otherwise, the votes conferred by the Controlled Shares, directly or indirectly or by attribution, to any U.S. Person would otherwise represent more than 9.9% of the voting power of all shares entitled to vote generally at an election of Directors, the votes conferred by the Controlled Shares on such U.S. Person shall be reduced by whatever amount is necessary so that after any such reduction the votes conferred by the Controlled Shares to such U.S. Person shall constitute 9.9% of the total voting power of all shares of the Company entitled to vote generally at any election of Directors (provided, however, that (a) votes shall be reduced only (i) in shares of the Company, if any, held by such U.S. Person within the meaning of Section 958(a) of the Internal Revenue Code of 1986, as amended (the "CODE") and (ii) in shares of the Company if any (other than shares held directly by the H&F Funds or the WP Funds) held by such U.S. Person within the meaning of Section 958(b) of the Code, (b) votes shall be reduced in shares of the Company held directly by the H&F Funds and the WP Funds only if and to the extent that reductions in the vote of other shares do not result in satisfaction of the 9.9% threshold set forth in this paragraph (2), (c) such reduction (or portion thereof) in votes conferred by shares held directly by an H&F Fund shall not be effective on or after such date, if any, as such H&F Fund reasonably objects in writing to such reduction (or portion thereof) after reasonable notice given to such H&F Fund in advance (to the extent feasible) of any meeting of shareholders (which notice the Company shall provide in writing) and (d) such reduction (or portion thereof) in votes conferred by shares held directly by a WP Fund shall not be effective on or after such date, if any, as such WP Fund reasonably objects in writing to such reduction (or portion thereof) after reasonable notice given to such WP Fund in advance (to the extent feasible) of any meeting of shareholders (which notice the Company shall provide in writing)).
(3) (a) "CONTROLLED SHARES" in reference to any person means all shares of the Company directly, indirectly or constructively owned by such person within the meaning of Section 958 of the Code;
(b) "U.S. PERSON" means a United States person as defined in
Section 7701(a)(30) of the Code;
(c) "H&F FUND" means the Hellman & Friedman parties to the Shareholders Agreement by and among the Company and certain investors dated as of November 20, 2001 (the "Shareholders Agreement"); and
(d) "WP FUND" means the Warburg Pincus parties to the Shareholders Agreement.
(4) Upon written notification by a Member to the Board, the number of votes conferred by the total number of shares held directly by such Member shall be reduced to that percentage of the total voting power of the Company, as so designated by such Member (subject to acceptance of such reduction by the Board in its sole discretion), so that (and to the extent that) such Member may meet any applicable insurance or other regulatory requirement or voting threshold or limitation that may be applicable to such Member or to evidence that such person's voting power is no greater than such threshold.
(5) Notwithstanding the foregoing provisions of this Bye-law 45, after having applied such provisions as best as they consider reasonably practicable, the Board may make such final adjustments to the aggregate number of votes conferred, directly or indirectly or by attribution, by the Controlled Shares on any U.S. Person that they consider fair and reasonable in all the circumstances to ensure that such votes represent 9.9% (or the percentage designated by a Member pursuant to paragraph (4) of this Bye-law 45) of the aggregate voting power of the votes conferred by all the shares of the Company entitled to vote generally at any election of Directors. Such adjustments intended to implement the 9.9% limitation set forth in paragraph (2) of this Bye-law 45 shall be subject to the proviso contained in such paragraph (2), but adjustments intended to implement the limitation set forth in a notification pursuant to paragraph (4) of this Bye-law 45 shall not be subject to the proviso contained in paragraph (2).
(6) Each Member shall provide the Company with such information as the Company may reasonably request so that the Company and the Board may make determinations as to the ownership (direct or indirect or by attribution) of Controlled Shares to such Member or to any person to which Shares may be attributed as a result of the ownership of Shares by such Member.
46. VOTING AT MEETINGS
(1) Unless a different number is otherwise expressly required by statute (without modification of these Bye-laws) or these Bye-laws, every act or decision (including any act or resolution regarding any amalgamation, scheme of arrangement, merger, consolidation or sale or transfer of assets that has been approved by the affirmative vote of at least two-thirds of the Directors in office) done or made by a majority of the voting power held by the Members present in person or by proxy at a meeting duly held, at which a quorum is present, shall be regarded as the act or resolution of the Members. At any election of Directors, nominees shall be elected by a plurality of the votes cast.
(2) No Member shall be entitled to vote at any general meeting unless he or she is a Member on the record date for such meeting.
(3) No objection shall be raised to the qualification of any voter except at the general meeting or adjourned general meeting at which the vote objected to is given or tendered and every vote not disallowed at such general meeting shall be valid for all purposes. Any such objection made in due time shall be referred to the Chairman of the general meeting whose decisions shall be final and conclusive. Notwithstanding, however, the foregoing or any other provision in these Bye-laws, the Chairman of the general meeting may, in his discretion, whether or not an objection has been raised, and if the Chairman considers that such action is necessary to determine accurately the vote count, defer until after the conclusion of the general meeting a decision as to the proper application of Bye-law 45 to any vote at such meeting. If the decision has been so deferred, then the Chairman of the general meeting or, failing such decision within ninety (90) days of the general meeting, the Board, shall make such decision and such decision shall be final and conclusive.
47. PRESIDING OFFICER
The Chairman of the Board, the President, or another person selected by the Board shall act as chairman of general meetings. The Secretary of the Company, or, in the Secretary's absence, an Assistant Secretary of the Company, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the Board shall choose any person present to act as secretary of the meeting.
48. CONDUCT OF MEETING; DECISION OF CHAIRMAN
(1) The chairman shall conduct each general meeting in a manner consistent with the Act and these Bye-laws, but shall not be obligated to follow any technical, formal or parliamentary rules or principles of procedure.
Except as otherwise provided by law, the chairman's rulings on procedural matters shall be conclusive and binding on all Members.
(2) At any general meeting if an amendment shall be proposed to any resolution under consideration but shall be ruled out of order by the chairman of the meeting the proceedings on the substantive resolution shall not be invalidated by any error in such ruling.
(3) At any general meeting a declaration by the chairman of the meeting that a question proposed for consideration has, on a show of hands, been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in a book containing the minutes of the proceedings of the Company shall, subject to the provisions of these Bye-laws, be conclusive evidence of that fact.
49. SENIORITY OF JOINT HOLDERS VOTING
In the case of joint holders the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register of Members.
50. PROXIES
Every person entitled to vote shares has the right to do so either in person or by one or more persons authorized by a written proxy executed by such Member and filed with the Secretary. Any proxy duly executed shall continue in full force and effect unless revoked by the person executing it by a writing delivered to the Company stating that the proxy is revoked or by a subsequent proxy executed by such Member presented to the meeting or by attendance at a meeting and voting in person by such Member. However, no proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless otherwise provided in the proxy. The decision of the chairman of any general meeting as to the validity of any instrument of proxy shall be final.
51. REPRESENTATION OF CORPORATIONS AT MEETINGS
A corporation which is a Member may, by written instrument, authorize such person as it thinks fit to act as its representative at any general meeting and the person so authorized shall be entitled to exercise the same powers on behalf of the corporation which such person represents as that corporation could exercise if it were an individual Member. Notwithstanding the foregoing, the chairman of the meeting may accept such assurances as he or she thinks fit as to the right of any person to attend and vote at general meetings on behalf of a corporation which is a Member.
SHARE CAPITAL AND SHARES
52. RIGHTS OF SHARES
(1) At the date these Bye-laws become effective, the total number of authorized common shares is two hundred million (200,000,000) common shares having a par value of U.S. $0.01 per share (the "COMMON SHARES"), and the total number of authorized preference shares is fifty million (50,000,000) preference shares having a par value of U.S. $0.01 per share (the "PREFERENCE SHARES").
(2) The holders of Common Shares shall, subject to the provisions of these Bye-laws:
(a) be entitled (subject to Bye-law 45) to one vote per share;
(b) be entitled to such dividends as the Board may from time to time declare;
(c) in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for the purpose of a reorganisation or otherwise or upon any distribution of capital, be entitled to the surplus assets of the Company; and
(d) generally be entitled to enjoy all of the rights attaching to shares.
(3) The Board shall have the full power to issue any unissued shares of the Company on such terms and conditions as it may, in its absolute discretion, determine. The Board is authorized to provide for the issuance of the Preference Shares in one or more series, and to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive designation of that series;
(b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;
(c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion or exchange privileges (including, without limitation, conversion into Common Shares), and, if so, the terms and conditions of such conversion or exchange, including provision for adjustment of the conversion or exchange rate in such events as the Board shall determine;
(e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the manner of selecting shares for redemption if less than all shares are to be redeemed, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;
(g) The right of the shares of that series to the benefit of conditions and restrictions upon the creation of indebtedness of the Company or any subsidiary, upon the issue of any additional shares (including additional shares of such series or any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Company or any subsidiary of any outstanding shares of the Company;
(h) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, and the relative rights of priority, if any, of payment of shares of that series; and
(i) Any other relative participating, optional or other special rights, qualifications, limitations or restrictions of that series.
53. POWER TO ISSUE SHARES
(1) The issuance of any authorized Common Shares or Preference Shares and any other actions permitted to be taken by the Board pursuant to Bye-law 52 must be authorized by the Board.
(2) Any Preference Shares of any series which have been redeemed (whether through the operation of a sinking fund or otherwise) or which, if convertible or exchangeable, have been converted into or exchanged for shares of any other class or classes shall have the status of authorized and unissued Preference Shares of the same series and may be reissued as a part of the series of which they were originally a part or may be reclassified and reissued as part of a new series of Preference Shares to be created by resolution or resolutions of the Board or as part of any other series of Preference Shares, all subject to the conditions and the restrictions on issuance set forth in the resolution or resolutions adopted by the Board providing for the issue of any series of Preference Shares.
(3) At the discretion of the Board, whether or not in connection with the issuance and sale of any of its shares or other securities, the Company may issue securities, contracts, warrants or other instruments evidencing any shares, option rights, securities having conversion or option rights, or obligations on such terms, conditions and other provisions as are fixed by the Board, including, without limiting the generality of this authority, conditions that preclude or limit any person or persons owning or offering to acquire a specified number or percentage of the outstanding Common Shares, other shares, option rights, securities having conversion or option rights, or obligations of the company or transferee of the person or persons from exercising, converting, transferring or receiving the shares, option rights, securities having conversion or option rights, or obligations.
54. VARIATION OF RIGHTS, ALTERATION OF SHARE CAPITAL AND PURCHASE OF SHARES OF THE COMPANY
(1) If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound-up, be varied with the consent in writing of the holders of a majority of the voting power represented by the issued shares of that class or with the sanction of a resolution passed by a majority of the voting power represented by the votes cast at a separate general meeting of the holders of the shares of the class in accordance with Section 47(7) of the Act. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
(2) The Company may from time to time if authorized by resolution of the Members change the currency denomination of, increase, alter or reduce its share capital in accordance with the provisions of Sections 45 and 46 of the Act. Where, on any alteration of share capital, fractions of shares or some other difficulty would arise, the Board may deal with or resolve the same in such manner as it thinks fit including, without limiting the generality of the foregoing, the issue to Members, as appropriate, of fractions of shares and/or arranging for the sale or transfer of the fractions of shares of Members.
(3) The Company may from time to time, acting through the Board, purchase its own shares in accordance with the provisions of Section 42A of the Act.
55. REGISTERED HOLDER OF SHARES
(1) The Company shall be entitled to treat the registered holder of any share as the absolute owner thereof and accordingly shall not be bound to recognise any equitable or other claim to, or interest in, such share on the part of any other person.
(2) Any dividend, interest or other moneys payable in cash in respect of shares may be paid by cheque or draft sent through the post directed to the Member at such Member's address in the Register of Members or, in the case of joint holders, to such address of the holder first named in the Register of Members, or to such person and to such address as the holder or joint holders may in writing direct. If two or more persons are registered as joint holders of any shares any one can give an effectual receipt for any dividend paid in respect of such shares.
56. DEATH OF A JOINT HOLDER
Where two or more persons are registered as joint holders of a share or shares then in the event of the death of any joint holder or holders the remaining joint holder or holders shall be absolutely entitled to the said share or shares and the Company shall recognise no claim in respect of the estate of any joint holder except in the case of the last survivor of such joint holders.
57. SHARE CERTIFICATES
(1) Share certificates shall be in such form as shall be required by law and as shall be approved by the Board. Each certificate shall have the corporate seal affixed thereto by impression or in facsimile and shall be signed by the Chairman of the Board, the President, or any Vice President, and countersigned by the Secretary or any Assistant Secretary; provided that certificates may be signed, countersigned or authenticated by facsimile signatures as provided by law.
(2) Except as provided in this Bye-law 57, new certificates for shares shall not be issued to replace an old certificate unless the latter is surrendered to the Company and cancelled at the same time. The Board may, in case any share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the Board may require, including provision for indemnification of the Company secured by a bond or other adequate security which the Board deems sufficient to protect the Company against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate.
RECORD DATES
58. DETERMINATION OF RECORD DATES
Notwithstanding any other provision of these Bye-laws, the Board may fix any date as the record date for:
(a) determining the Members entitled to receive any dividend; and
(b) determining the Members entitled to receive notice of and to vote at any general meeting of the Company.
TRANSFER OF SHARES
59. INSTRUMENT OF TRANSFER
(1) An instrument of transfer shall be in such common form as the Board may accept. Such instrument of transfer shall be signed by or on behalf of the transferor. The transferor shall be deemed to remain the holder of such share until the same has been transferred to the transferee in the Register of Members.
(2) The Board may refuse to recognize any instrument of transfer unless it is accompanied by the certificate in respect of the shares to which it relates and by such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer.
60. RESTRICTION ON TRANSFER
(1) The Board shall refuse to register a transfer unless all applicable consents, authorisations and permissions of any governmental body or agency in Bermuda have been obtained.
(2) If the Board refuses to register a transfer of any share the Secretary shall, within three months after the date on which the transfer was lodged with the Company, send to the transferor and transferee notice of the refusal.
61. TRANSFERS BY JOINT HOLDERS
The joint holders of any share or shares may transfer such share or shares to one or more of such joint holders, and the surviving holder or holders of any share or shares previously held by them jointly with a deceased Member may transfer any such share to the executors or administrators of such deceased Member.
TRANSMISSION OF SHARES
62. REPRESENTATIVE OF DECEASED MEMBER
In the case of the death of a Member, the survivor or survivors where the deceased Member was a joint holder, and the legal personal representatives of the deceased Member where the deceased Member was a sole holder, shall be the only persons recognized by the Company as having any title to the deceased Member's interest in the shares. Nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by such deceased Member with other persons. Subject to the provisions of Section 52 of the Act, for the purpose of this Bye-law, legal personal representative means the executor or administrator of a deceased Member or such other person as the Board may in its absolute discretion decide as being properly authorized to deal with the shares of a deceased Member.
63. REGISTRATION ON DEATH OR BANKRUPTCY
Any person becoming entitled to a share in consequence of the death or bankruptcy of any Member may be registered as a Member upon such evidence as the Board may deem sufficient or may elect to nominate some person to be registered as a transferee of such share, and in such case the person becoming entitled shall execute in favour of such nominee an instrument of transfer satisfactory to the Board. On the presentation thereof to the Board, accompanied by such evidence as the Board may require to prove the title of the transferor, the transferee shall be registered as a Member but the Board shall, in either case, have the same right to decline or suspend registration as it would have had in the case of a transfer of the share by that Member before such Member's death or bankruptcy, as the case may be.
DIVIDENDS AND OTHER DISTRIBUTIONS
64. DECLARATION OF DIVIDENDS BY THE BOARD
The Board may declare and make such dividends or other distributions (in each case in cash or in specie, as valued by the Board, or a combination thereof) to the Members as may be lawfully made out of the assets of the Company.
65. UNCLAIMED DIVIDENDS
Any dividend or other monies payable in respect of a share which has remained unclaimed for 5 years from the date when it became due for payment shall, if the Board so resolves, be forfeited and cease to remain owing by the Company. The payment of any unclaimed dividend or other moneys payable in respect of a share may (but need not) be paid by the Company into an account separate from the Company's own account. Such payment shall not constitute the Company a trustee in respect thereof.
66. UNDELIVERED PAYMENTS
The Company shall be entitled to cease sending dividend payments and cheques by post or otherwise to a Member if those instruments have been returned undelivered to, or left uncashed by, that Member on at least two consecutive occasions, or, following one such occasion, reasonable enquiries have failed to establish the Member's new address. The entitlement conferred on the Company by this Bye-law in respect of any Member shall cease if the Member claims a dividend or cashes a dividend warrant or cheque.
67. INTEREST ON DIVIDENDS
No dividend or distribution shall bear interest against the Company.
CAPITALIZATION
68. ISSUE OF BONUS SHARES
The Board may resolve to capitalize any part of the amount for the time being standing to the credit of any of the Company's share premium or other reserve accounts or to the credit of the profit and loss account or otherwise available for distribution by applying such sum in paying up unissued shares to be allotted as fully paid bonus shares to the Members.
FISCAL YEAR
69. FINANCIAL YEAR END
The financial year end of the Company may be determined by resolution of the Board and failing such resolution shall be 31st December in each year.
AUDIT
70. APPOINTMENT OF AUDITOR
Subject to Section 88 of the Act, at the annual general meeting or at a subsequent special general meeting in each year, an independent representative of the Members shall be appointed by them as Auditor of the accounts of the Company.
71. REMUNERATION OF AUDITOR
The Board may fix the remuneration of the Auditor as it may determine.
NOTICES
72. NOTICES TO MEMBERS OF THE COMPANY
A notice may be given by the Company to any Member either by delivering it to such Member in person or by sending it to such Member's address in the Register of Members or to such other address given for the purpose. For the purposes of this Bye-law, a notice may be sent by mail, courier service, cable, telex, telecopier, facsimile, e-mail or other mode of representing words in a legible and non-transitory form.
73. NOTICES TO JOINT MEMBERS
Any notice required to be given to a Member shall, with respect to any shares held jointly by two or more persons, be given to whichever of such persons is named first in the Register of Members and notice so given shall be sufficient notice to all the holders of such shares.
74. SERVICE AND DELIVERY OF NOTICE
Any notice shall be deemed to have been served at the time when the same would be delivered in the ordinary course of transmission and, in proving such service, it shall be sufficient to prove that the notice was properly addressed and prepaid, if posted, and the time when it was posted, delivered to the courier or to the cable company or transmitted by telex, facsimile or other method as the case may be.
CERTAIN SUBSIDIARIES
75. CERTAIN SUBSIDIARIES
With respect to any company incorporated under the laws of Bermuda, Barbados or the Cayman Islands all of the voting shares of which are owned (directly or indirectly through subsidiaries) by the Company, and any other subsidiary of the Company designated by the Board of the Company (together, the "DESIGNATED COMPANIES"), the board of directors of each such Designated Company shall consist of the persons who have been elected by the Members as Designated Company Directors. Notwithstanding the general authority set out in Bye-law 2(1), the Board shall vote all shares owned by the Company in each Designated Company to ensure the constitutional documents of such Designated Company require such Designated Company Directors to be elected as the directors of such Designated Company, and to elect such Designated Company Directors as the directors of such Designated Company. The Company shall enter into agreements with each such Designated Company to effectuate or implement this Bye-law.
SEAL OF THE COMPANY
76. THE SEAL
The seal of the Company shall be in such form as the Board may from time to time determine. The Board may adopt one or more duplicate seals for use outside Bermuda.
WINDING-UP
77. WINDING-UP/DISTRIBUTION BY LIQUIDATOR
If the Company shall be wound up the liquidator may, with the sanction of a resolution of the Members, divide amongst the Members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as he or she deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried
out as between the Members or different classes of Members. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the Members as the liquidator shall think fit, but so that no Member shall be compelled to accept any shares or other securities or assets whereon there is any liability.
BUSINESS COMBINATIONS
78. BUSINESS COMBINATIONS
(1) The Company shall not engage in any business combination with any Interested Member for a period of three years following the time that such Member became an Interested Member, unless:
(a) prior to such time the Board approved either the business combination or the transaction which resulted in the Member becoming an Interested Member, or
(b) upon consummation of the transaction which resulted in the Member becoming an Interested Member, the Interested Member owned at least 85% of the voting shares of the Company outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (i) by persons who are Directors and also officers and (ii) employee share plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or
(c) at or subsequent to such time the business combination is approved by the Board and authorized at an annual or special general meeting, and not by written consent, by the affirmative vote of holders of shares representing at least 662/3% of the outstanding voting power of the shares of the Company entitled to vote generally at an election of Directors (excluding shares owned by the Interested Member).
(2) The restrictions contained in this Bye-law shall not apply if:
(a) a Member becomes an Interested Member inadvertently and (i) as soon as practicable divests itself of ownership of sufficient shares so that the Member ceases to be an Interested Member and (ii) would not, at any time within the 3 year period immediately prior to a business combination between the Company and such Member, have been an Interested Member but for the inadvertent acquisition of ownership; or
(b) the business combination is proposed prior to the
consummation or abandonment of and subsequent to the earlier
of the public announcement or the notice required hereunder
of a proposed transaction which (i) constitutes one of the
transactions described in the second sentence of this
paragraph; (ii) is with or by a person who either was not an
Interested Member during the previous 3 years or who became
an Interested Member with the approval of the Board; and
(iii) is approved or not opposed by a majority of the
members of the Board then in office (but not less than 1)
who were Directors prior to any person becoming an
Interested Member during the previous 3 years or were
recommended for election or elected to succeed such
Directors by a majority of such Directors. The proposed
transactions referred to in the preceding sentence are
limited to (x) an amalgamation, scheme of arrangement,
merger, consolidation or similar transaction involving the
Company (except for any such transaction in respect of which
no vote of the Members of the Company is required); (y) a
sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of
transactions), whether as part of a dissolution or
otherwise, of assets of the Company or of any direct or
indirect subsidiary of the Company
(other than to any direct or indirect wholly-owned subsidiary of the Company or to the Company) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding shares of the Company; or (z) a proposed tender or exchange offer for 50% or more of the outstanding voting shares of the Company. The Company shall give not less than 20 days notice to all Interested Members prior to the consummation of any of the transactions described in clauses (x) or (y) of the second sentence of this paragraph.
(3) As used in this Bye-law only, the term:
(a) "AFFILIATE" means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.
(b) "ASSOCIATE," when used to indicate a relationship with any person, means (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting shares, (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.
(c) "BUSINESS COMBINATION," when used in reference to the Company and any Interested Member of the Company, means:
(i) any amalgamation, scheme of arrangement, merger, consolidation or similar transaction involving the Company or any direct or indirect subsidiary of the Company with (A) the Interested Member, or (B) with any other corporation, partnership, unincorporated association or other entity if such transaction is caused by the Interested Member and as a result of such transaction subsection (a) of this section is not applicable to the surviving entity;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a Member of such Company, to or with the Interested Member, whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect subsidiary of the Company which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding shares of the Company;
(iii) any transaction which results in the issuance or transfer by the Company or by any direct or indirect subsidiary of the Company of any shares of the Company or of such subsidiary to the Interested Member, except (A) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into shares of the Company or any such subsidiary which securities were outstanding prior to the time that the Interested Member became such, (B) pursuant to a Subsidiary Amalgamation; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into shares of the Company or any such subsidiary which security is distributed, pro rata to all holders of a class or series of shares of the Company subsequent to the time the Interested Member became
such, (D) pursuant to an exchange offer by the Company to purchase shares made on the same terms to all holders of said shares, or (E) any issuance or transfer of shares by the Company, provided however, that in no case under (C)-(E) above shall there be an increase in the Interested Member's proportionate share of the shares of any class or series of the Company or of the voting shares of the Company;
(iv) any transaction involving the Company or any direct or indirect subsidiary of the Company which has the effect, directly or indirectly, of increasing the proportionate share of the shares of any class or series, or securities convertible into the shares of any class or series, of the Company or of any such subsidiary which is owned by the Interested Member, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the Interested Member; or
(v) any receipt by the Interested Member of the benefit,
directly or indirectly (except proportionately as a
Member of the Company) of any loans, advances,
guarantees, pledges, or other financial benefits
(other than those expressly permitted in subparagraphs
(i)-(iv) above) provided by or through the Company or
any direct or indirect subsidiary.
(d) "CONTROL," including the term "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 and policies of a person, whether through the ownership of voting stock, by contract, or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this Bye-law, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.
(e) "INTERESTED MEMBER" means any person (other than the Company
and any direct or indirect subsidiary of the Company) that
(i) is the owner of 15% or more of the outstanding voting
shares of the Company, or (ii) is an affiliate or associate
of the Company and was the owner of 15% or more of the
outstanding voting shares of the Company at any time within
the 3-year period immediately prior to the date on which it
is sought to be determined whether such person is an
Interested Member, and the affiliates and associates of such
person; provided, however, that the term "Interested Member"
shall not include any person whose ownership of shares in
excess of the 15% limitation set forth herein is the result
of action taken solely by the Company provided that such
person shall be an Interested Member if thereafter such
person acquires additional shares of voting shares of the
Company, except as a result of further corporate action not
caused, directly or indirectly, by such person. For the
purpose of determining whether a person is an Interested
Member, the voting shares of the Company deemed to be
outstanding shall include shares deemed to be owned by the
person through application of Paragraph (h) of this
subsection but shall not include any other unissued shares
of such Company which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
(f) "STOCK" means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.
(g) "VOTING STOCK" means, with respect to any corporation, stock of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity.
(h) "OWNER" including the terms "OWN" and "OWNED" when used with respect to any stock means a person that individually or with or through any of its affiliates or associates:
(i) beneficially owns such stock, directly or indirectly; or
(ii) has (A) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person's affiliates or associates until such tendered stock is accepted for purchase or exchange; or (B) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any stock because of such person's right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more persons; or
(iii) has any arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (B) of clause (ii) of this paragraph), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.
(i) "SUBSIDIARY AMALGAMATION" means an amalgamation, scheme of arrangement, merger, consolidation or similar transaction with or into a single direct or indirect wholly-owned subsidiary of the Company if: (1) the Company and the direct or indirect wholly-owned subsidiary of the Company are the only constituent companies to such transaction; (2) each share or fraction of a share of the Company outstanding immediately prior to the effective time of such transaction is converted in such transaction into a share or equal fraction of a share of shares of a holding company having the same designations, rights, powers and preferences, and the qualifications, limitations and restrictions thereof, as the share of the constituent company being converted in such transaction; (3) the holding company and each of the constituent companies to such transaction are companies incorporated in Bermuda; (4) the memorandum of association and bye-laws of the holding company immediately following the effective time of such transaction contain provisions identical to the memorandum of continuance and bye-laws of the Company immediately prior to the effective time of such transaction (other than provisions, if any, regarding the incorporator or incorporators, the corporate name, the registered office and agent, the initial board of directors and the initial subscribers for shares and such provisions contained in any amendment to the charter documents as were necessary to effect a change, exchange, reclassification or cancellation of shares, if such change, exchange, reclassification or cancellation has become effective); (5) as a result of such transaction the Company
or its successor or continuing company becomes or remains a direct or indirect wholly-owned subsidiary of the holding company; (6) the directors of the Company become or remain the directors of the holding company upon the effective time of such transaction; (7) the memorandum of association and bye-laws of the surviving or continuing company immediately following the effective time of such transaction are identical to the memorandum of association and bye-laws of the Company immediately prior to the effective time of such transaction (other than provisions, if any, regarding the incorporator or incorporators, the corporate name, the registered office and agent, the initial board of directors and the initial subscribers for shares and such provisions contained in any amendment to the charter documents as were necessary to effect a change, exchange, reclassification or cancellation of shares, if such change, exchange, reclassification or cancellation has become effective); provided, however, that (i) the memorandum of association and bye-laws of the surviving or continuing company shall be amended in such transaction to contain a provision requiring that any act or transaction by or involving the surviving or continuing company that requires for its adoption under the Act or its bye-laws the approval of the Members of the surviving or continuing company shall, by specific reference to this subsection, require, in addition, the approval of the Members of the holding company (or any successor), by the same vote as is required by the Act and/or by its bye-laws of the surviving or continuing company, and (ii) the bye-laws of the surviving or continuing company may be amended in such transaction to reduce the number of classes and shares of capital stock that the surviving or continuing company is authorized to issue; and (8) the Members of the Company do not recognize gain or loss for United States federal income tax purposes as determined by the board of directors of the constituent company.
(4) Notwithstanding any other provisions of these Bye-laws (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law or these Bye-laws), the affirmative vote of the holders of shares representing not less than sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then outstanding voting shares voting together as a single class, excluding voting shares beneficially owned by any Interested Member, shall be required to amend, alter, change, or repeal, or adopt any provision as part of these Bye-laws inconsistent with the purpose and intent of, this Bye-law 76; PROVIDED, HOWEVER, that this Bye-law 78(4) shall not apply to, and such sixty-six and two-thirds percent (66 2/3%) vote shall not be required for, any such amendment, repeal or adoption recommended by the affirmative vote of at least seventy-five percent (75%) of the Directors in office (not including Directors who are affiliates of any Interested Member).
ALTERATION OF BYE-LAWS, ETC.
79. ALTERATION OF BYE-LAWS, ETC.
(1) No Bye-law shall be rescinded, altered or amended and no new Bye-law shall be made until the same has been approved both by a resolution of the Board and by a resolution of the Members.
(2) Notwithstanding any other provisions of these Bye-laws:
(a) the affirmative vote of the holders of at least sixty-five percent (65%) of the voting power of the shares entitled to vote generally at an election of directors shall be required to amend, alter, change or repeal, or adopt any provision inconsistent with the purpose or intent of, Bye-laws 10(2), 11, 15, 31, 32, 33, 39, 45, 46(3), 52, 53, 79(1) and 79(2); and
(b) the affirmative vote set forth in Bye-law 78(4) shall be required to amend, alter, change or repeal, or adopt any provision inconsistent with the purpose or intent of, Bye-law 78.
(3) In addition to any affirmative vote required by law, by these Bye-laws or otherwise, and except as otherwise expressly provided by the last sentence of this Bye-law 79:
(i) the adoption of any agreement for, or the approval of, any amalgamation, merger or consolidation of the Company or any subsidiary with or into any person or group that is the beneficial owner of 10% or more of the then outstanding shares of voting stock of the Company ("Non-exempted Beneficial Owner") or any affiliate thereof;
(ii) the sale, lease, transfer or other disposition of all or any portion of the assets of the Company or any subsidiary (other than in the ordinary course of business) to any Non-exempted Beneficial Owner or its affiliates;
(iii) the issuance or transfer by the Company or any subsidiary of voting securities of the Company or any subsidiary to a Non-exempted Beneficial Owner or any affiliate thereof; or
(iv) any amendment of this Bye-law 79(3).
shall require the affirmative vote of the holders of at least 80% of the voting power of the shares of the Company entitled to vote generally at an election of Directors (including a majority of the voting power of such shares held by Members other than Non-exempted Beneficial Owners).
The requirements of Bye-law 79(3) shall not apply to any transaction which is approved by the Board; PROVIDED, HOWEVER, that a majority of the Directors voting in favor thereof were duly elected and acting members of the Board prior to the time such person or group or affiliate thereof became a Non-exempted Beneficial Owner.
Exhibit 10.1
ARCH CAPITAL GROUP LTD.
2002 LONG TERM INCENTIVE AND SHARE AWARD PLAN
ARCH CAPITAL GROUP LTD.
2002 LONG TERM INCENTIVE AND SHARE AWARD PLAN
1. PURPOSES. The purposes of the 2002 Long Term Incentive and Share Award Plan are to advance the interests of Arch Capital Group Ltd. and its shareholders by providing a means to attract, retain, and motivate employees and directors of the Company upon whose judgment, initiative and efforts the continued success, growth and development of the Company is dependent.
2. DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below:
"Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board or the Committee as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity.
"Award" means any Option, SAR, Restricted Share, Restricted Share Unit, Performance Share, Performance Unit, Dividend Equivalent, Other Share-Based Award, Director's Option or Director's Share granted to an Eligible Employee under the Plan.
"Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award.
"Beneficiary" means the person, persons, trust or trusts which have been designated by such Eligible Employee in his or her most recent written beneficiary designation filed with the Company to receive the benefits specified under this Plan upon the death of the Eligible Employee, or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include successor provisions thereto and regulations thereunder.
"Committee" means the Compensation Committee of the Board, or such other Board committee or subcommittee (or the entire Board) as may be designated by the Board to administer the Plan.
"Company" means Arch Capital Group Ltd., a corporation organized under the laws of Bermuda, or any successor corporation.
"Director" means a non-employee member of the Board.
"Director's Option" means a NQSO granted to a Director under
Section 7.
"Director's Shares" means Shares granted to a Director as payment of the Director's annual retainer fee pursuant to the Director's election under Section 8 of the Plan.
"Dividend Equivalent" means a right, granted under Section 5(g), to receive cash, Shares, or other property equal in value to dividends paid with respect to a specified number of Shares. Dividend
Equivalents may be awarded on a free-standing basis or in connection with another Award, and may be paid currently or on a deferred basis.
"Eligible Employee" means (i) an employee of the Company or its Subsidiaries and Affiliates, including any director who is an employee, who is responsible for or contributes to the management, growth and/or profitability of the business of the Company, its Subsidiaries or Affiliates, and (ii) any Director. Notwithstanding any provisions of this Plan to the contrary, an Award may be granted to an employee or consultant, in connection with his or her hiring or retention prior to the date the employee or consultant first performs services for the Company, a Subsidiary or an Affiliate; PROVIDED, HOWEVER, that any such Award shall not become vested prior to the date the employee or consultant first performs such services.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include successor provisions thereto and regulations thereunder.
"Fair Market Value" means, with respect to Shares or other property, the fair market value of such Shares or other property determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee in good faith, the Fair Market Value of Shares as of any given date prior to the existence of a public market for the Company's Shares shall mean the Company's book value. Thereafter, unless otherwise determined by the Committee in good faith, the Fair Market Value of Shares shall mean the mean between the high and low selling prices per Share on the immediately preceding date (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded) on the principal exchange on which the Shares are traded, as such prices are officially quoted on such exchange.
"ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code.
"NQSO" means any Option that is not an ISO.
"Option" means a right, granted under Section 5(b) or Section 7, to purchase Shares.
"Other Share-Based Award" means a right, granted under Section
5(h), that relates to or is valued by reference to Shares.
"Participant" means an Eligible Employee or Director who has been granted an Award or Director's Option under the Plan.
"Performance Share" means a performance share granted under
Section 5(f).
"Performance Unit" means a performance unit granted under Section 5(f).
"Plan" means this 2002 Long Term Incentive and Share Award Plan.
"Restricted Shares" means an Award of Shares under Section 5(d) that may be subject to certain restrictions and to a risk of forfeiture.
"Restricted Share Unit" means a right, granted under Section
5(e), to receive Shares or cash at the end of a specified deferral
period.
"Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act.
"SAR" or "Share Appreciation Right" means the right, granted under Section 5(c), to be paid an amount measured by the difference between the exercise price of the right and the Fair Market Value of Shares on the date of exercise of the right, with payment to be made in cash, Shares, or property as specified in the Award or determined by the Committee.
"Shares" means common shares, $.01 par value per share, of the Company.
"Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns shares possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.
3. ADMINISTRATION.
(a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered by the Committee, and the Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan:
(i) to select Eligible Employees to whom Awards may be granted;
(ii) to designate Affiliates;
(iii) to determine the type or types of Awards to be granted to each Eligible Employee;
(iv) to determine the type and number of Awards to be granted, the number of Shares to which an Award may relate, the terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price, or purchase price, and any bases for adjusting such exercise, grant or purchase price, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, exercisability, or settlement of an Award, and waiver or accelerations thereof, and waivers of performance conditions relating to an Award, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award;
(v) to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Shares, other Awards, or other property, or an Award may be cancelled, forfeited, exchanged, or surrendered;
(vi) to determine whether, to what extent, and under what circumstances cash, Shares, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee, or at the election of the Eligible Employee;
(vii) to prescribe the form of each Award Agreement, which need not be identical for each Eligible Employee;
(viii) to adopt, amend, suspend, waive, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan;
(ix) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award Agreement, or other instrument hereunder;
(x) to accelerate the exercisability or vesting of all or any portion of any Award or to extend the period during which an Award is exercisable; and
(xi) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. The Committee shall have sole discretion in exercising its authority under the Plan. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Company, Subsidiaries, Affiliates, Eligible Employees, any person claiming any rights under the Plan from or through any Eligible Employee, and shareholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any Subsidiary or Affiliate the authority, subject to such terms as the Committee shall determine, to perform administrative functions and, with respect to Awards granted to persons not subject to Section 16 of the Exchange Act, to perform such other functions as the Committee may determine, to the extent permitted under Rule 16b-3 (if applicable) and applicable law. Notwithstanding any provision of this Plan to the contrary, the Committee may grant Awards which are subject to the approval of the Board; provided that an Award shall be subject to Board approval only if the Committee expressly so states.
(c) LIMITATION OF LIABILITY. Each member of the Committee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or any Subsidiary or Affiliate, the Company's independent certified public accountants, or other professional retained by the Company to assist in the administration of the Plan. No member of the Committee, nor any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation.
(d) LIMITATION ON COMMITTEE'S DISCRETION. Anything in this Plan to the contrary notwithstanding, in the case of any Award which is intended to qualify as "performance-based compensation" within the meaning of Section 162(m)(4)(C) of the Code, if the Award Agreement so provides, the Committee shall have no discretion to increase the amount of compensation payable under the Award to the extent such an increase would cause the Award to lose its qualification as such performance-based compensation.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to adjustment as provided in Section 4(c) hereof, the total number of Shares reserved for issuance under the Plan shall be 3,165,830. No Award may be granted if the number of Shares to which such Award relates, when added to the number of Shares previously issued under the Plan, exceeds the number of Shares reserved under the preceding sentence. If any Awards are forfeited, cancelled, terminated, exchanged or surrendered or such Award is settled in cash or otherwise terminates without a distribution of Shares to the Participant, any Shares counted against the number of Shares reserved and available under the Plan with respect to such Award shall, to the extent of any such forfeiture, settlement, termination, cancellation, exchange or surrender, again be available for Awards under the Plan. Upon the exercise of any Award granted in tandem with any other Awards, such related Awards shall be cancelled to the extent of the number of Shares as to which the Award is exercised. Subject to adjustment as provided in Section 4(c) hereof, the maximum number
of Shares (i) with respect to which Options and SARs may be granted during a calendar year to any Eligible Employee under this Plan shall be 1,000,000 Shares and (ii) with respect to Performance Shares, Performance Units, Restricted Shares and Restricted Share Units intended to qualify as performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code shall be the equivalent of 500,000 Shares during a calendar year to any Eligible Employee under this Plan.
(b) Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or treasury Shares including Shares acquired by purchase in the open market or in private transactions.
(c) In the event that the Committee shall determine that any
dividend in Shares, recapitalization, Share split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other similar corporate transaction or event, affects the
Shares such that an adjustment is appropriate in order to prevent dilution or
enlargement of the rights of Eligible Employees under the Plan, then the
Committee shall make such equitable changes or adjustments as it deems
appropriate and, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares which may thereafter be issued under the Plan,
(ii) the number and kind of shares, other securities or other consideration
issued or issuable in respect of outstanding Awards, and (iii) the exercise
price, grant price, or purchase price relating to any Award; PROVIDED, HOWEVER,
in each case that, with respect to ISOs, such adjustment shall be made in
accordance with Section 424(a) of the Code, unless the Committee determines
otherwise. In addition, the Committee is authorized to make adjustments in the
terms and conditions of, and the criteria and performance objectives included
in, Awards in recognition of unusual or non-recurring events (including, without
limitation, events described in the preceding sentence) affecting the Company or
any Subsidiary or Affiliate or the financial statements of the Company or any
Subsidiary or Affiliate, or in response to changes in applicable laws,
regulations, or accounting principles; PROVIDED, HOWEVER, that, if an Award
Agreement specifically so provides, the Committee shall not have discretion to
increase the amount of compensation payable under the Award to the extent such
an increase would cause the Award to lose its qualification as performance-based
compensation for purposes of Section 162(m)(4)(C) of the Code and the
regulations thereunder.
5. SPECIFIC TERMS OF AWARDS.
(a) GENERAL. Awards may be granted on the terms and conditions
set forth in this Section 5. In addition, the Committee may impose on any Award
or the exercise thereof, at the date of grant or thereafter (subject to Section
9(d)), such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall determine, including terms
regarding forfeiture of Awards or continued exercisability of Awards in the
event of termination of employment by the Eligible Employee.
(b) OPTIONS. The Committee is authorized to grant Options, which may be NQSOs or ISOs, to Eligible Employees on the following terms and conditions:
(i) EXERCISE PRICE. The exercise price per Share purchasable under an Option shall be determined by the Committee, and the Committee may, without limitation, set an exercise price that is based upon achievement of performance criteria if deemed appropriate by the Committee.
(ii) OPTION TERM. The term of each Option shall be determined by the Committee, but such term shall not exceed ten years.
(iii) TIME AND METHOD OF EXERCISE. The Committee shall determine at the date of grant or thereafter the time or times at which an Option may be exercised in whole or in part (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), the methods by which such exercise price may be paid or deemed to be paid (including, without
limitation, broker-assisted exercise arrangements), the form of such payment (including, without limitation, cash, Shares, notes or other property), and the methods by which Shares will be delivered or deemed to be delivered to Eligible Employees; PROVIDED, HOWEVER, that in no event may any portion of the exercise price be paid with Shares acquired either under an Award granted pursuant to this Plan, upon exercise of a stock option granted under another Company plan or as a stock bonus or other stock award granted under another Company plan unless, in any such case, the Shares were acquired and vested more than six months in advance of the date of exercise.
(iv) ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, including but not limited to the requirement that no ISO shall be granted more than ten years after the earlier of the date of adoption or shareholder approval of the Plan. ISOs may only be granted to employees of the Company or a Subsidiary.
(c) SARs. The Committee is authorized to grant SARs (Share Appreciation Rights) to Eligible Employees on the following terms and conditions:
(i) RIGHT TO PAYMENT. A SAR shall confer on the Eligible Employee to whom it is granted a right to receive with respect to each Share subject thereto, upon exercise thereof, the excess of (1) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine in the case of any such right, the Fair Market Value of one Share at any time during a specified period before or after the date of exercise) over (2) the exercise price of the SAR as determined by the Committee as of the date of grant of the SAR (which, in the case of a SAR granted in tandem with an Option, shall be equal to the exercise price of the underlying Option).
(ii) OTHER TERMS. The Committee shall determine, at the time of grant or thereafter, the time or times at which a SAR may be exercised in whole or in part (which shall not be more than ten years after the date of grant of the SAR), the method of exercise, method of settlement, form of consideration payable in settlement, method by which Shares will be delivered or deemed to be delivered to Eligible Employees, whether or not a SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. Unless the Committee determines otherwise, a SAR (1) granted in tandem with a NQSO may be granted at the time of grant of the related NQSO or at any time thereafter or (2) granted in tandem with an ISO may only be granted at the time of grant of the related ISO.
(d) RESTRICTED SHARES. The Committee is authorized to grant Restricted Shares to Eligible Employees on the following terms and conditions:
(i) ISSUANCE AND RESTRICTIONS. Restricted Shares shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter, which restrictions, if any, may lapse separately or in combination at such times, under such circumstances (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), in such installments or otherwise, as the Committee may determine. Except to the extent restricted under the Award Agreement relating to the Restricted Shares, an Eligible Employee granted Restricted Shares shall have all of the rights of a shareholder including, without limitation, the right to vote Restricted Shares and the right to receive dividends thereon. If the lapse of restrictions is conditioned on the achievement of performance criteria, the Committee shall select the criterion or criteria from the list of criteria set forth in Section 5(f)(i). The Committee must certify in writing prior to the lapse of restrictions conditioned on the achievement of performance criteria that such performance criteria were in fact satisfied.
(ii) FORFEITURE. Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of employment during any applicable restriction period, Restricted Shares and any accrued but unpaid dividends or Dividend Equivalents that are at that time subject to restrictions shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Shares will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Shares.
(iii) CERTIFICATES FOR SHARES. Restricted Shares granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Shares are registered in the name of the Eligible Employee, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Shares, and the Company shall retain physical possession of the certificate.
(iv) DIVIDENDS. Dividends paid on Restricted Shares shall be either paid at the dividend payment date, or deferred for payment to such date as determined by the Committee, in cash or in unrestricted Shares having a Fair Market Value equal to the amount of such dividends. Shares distributed in connection with a Share split or dividend in Shares, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Shares with respect to which such Shares or other property has been distributed.
(e) RESTRICTED SHARE UNITS. The Committee is authorized to grant Restricted Share Units to Eligible Employees, subject to the following terms and conditions:
(i) AWARD AND RESTRICTIONS. Delivery of Shares or cash, as the case may be, will occur upon expiration of the deferral period specified for Restricted Share Units by the Committee (or, if permitted by the Committee, as elected by the Eligible Employee). In addition, Restricted Share Units shall be subject to such restrictions as the Committee may impose, if any (including, without limitation, the achievement of performance criteria if deemed appropriate by the Committee), at the date of grant or thereafter, which restrictions may lapse at the expiration of the deferral period or at earlier or later specified times, separately or in combination, in installments or otherwise, as the Committee may determine. If the lapse of restrictions is conditioned on the achievement of performance criteria, the Committee shall select the criterion or criteria from the list of criteria set forth in Section 5(f)(i). The Committee must certify in writing prior to the lapse of restrictions conditioned on the achievement of performance criteria that such criteria were in fact satisfied.
(ii) FORFEITURE. Except as otherwise determined by the Committee at date of grant or thereafter, upon termination of employment (as determined under criteria established by the Committee) during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award Agreement evidencing the Restricted Share Units), or upon failure to satisfy any other conditions precedent to the delivery of Shares or cash to which such Restricted Share Units relate, all Restricted Share Units that are at that time subject to deferral or restriction shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Share Units will be waived in whole or in part in the event of termination resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Share Units.
(f) PERFORMANCE SHARES AND PERFORMANCE UNITS. The Committee is authorized to grant Performance Shares or Performance Units or both to Eligible Employees on the following terms and conditions:
(i) PERFORMANCE PERIOD. The Committee shall determine a performance period (the "Performance Period") of one or more years and shall determine the performance objectives for grants of Performance Shares and Performance Units. Performance objectives may vary from Eligible Employee to Eligible Employee and shall be based upon such one or more of the following performance criteria as the Committee may deem appropriate: growth in book, economic book and/or intrinsic book value; appreciation in value of the Shares; total shareholder return; earnings per share; comprehensive income; operating income; net income; pretax earnings; pretax earnings before interest, depreciation and amortization; pro forma net income; return on equity; return on designated assets; return on capital; economic value added; earnings; revenues; expenses; operating profit margin; operating cash flow; free cash flow; cash flow return on investment; operating margin; net profit margin; or any of the above criteria as compared to the performance of a published or special index deemed applicable by the Committee, including, but not limited to, the Standard & Poor's 500 Stock Index. The performance objectives may be determined by reference to the performance of the Company, or of a Subsidiary or Affiliate, or of a division or unit of any of the foregoing. Performance Periods may overlap and Eligible Employees may participate simultaneously with respect to Performance Shares and Performance Units for which different Performance Periods are prescribed.
(ii) AWARD VALUE. At the beginning of a Performance Period, the Committee shall determine for each Eligible Employee or group of Eligible Employees with respect to that Performance Period the range of number of Shares, if any, in the case of Performance Shares, and the range of dollar values, if any, in the case of Performance Units, which may be fixed or may vary in accordance with such performance or other criteria specified by the Committee, which shall be paid to an Eligible Employee as an Award if the relevant measure of Company performance for the Performance Period is met. The Committee must certify in writing that the applicable performance criteria were satisfied prior to payment under any Performance Shares or Performance Units.
(iii) SIGNIFICANT EVENTS. If during the course of a
Performance Period there shall occur significant events as determined
by the Committee which the Committee expects to have a substantial
effect on a performance objective during such period, the Committee
may revise such objective; PROVIDED, HOWEVER, that, if an Award
Agreement so provides, the Committee shall not have any discretion to
increase the amount of compensation payable under the Award to the
extent such an increase would cause the Award to lose its
qualification as performance-based compensation for purposes of
Section 162(m)(4)(C) of the Code and the regulations thereunder.
(iv) FORFEITURE. Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of employment during the applicable Performance Period, Performance Shares and Performance Units for which the Performance Period was prescribed shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in an individual case, that restrictions or forfeiture conditions relating to Performance Shares and Performance Units will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Performance Shares and Performance Units.
(v) PAYMENT. Each Performance Share or Performance Unit may be paid in whole Shares, or cash, or a combination of Shares and cash either as a lump sum payment or in installments, all as the Committee shall determine, at the time of grant of the Performance Share or Performance Unit or otherwise, commencing as soon as practicable after the end of the relevant Performance Period. The Committee must certify in writing prior to the payment of any Performance Share or Performance Unit that the performance objectives and any other material terms were in fact satisfied.
(g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend Equivalents to Eligible Employees. The Committee may provide, at the date of grant or thereafter, that Dividend Equivalents
shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares, or other investment vehicles as the Committee may specify, provided that Dividend Equivalents (other than freestanding Dividend Equivalents) shall be subject to all conditions and restrictions of the underlying Awards to which they relate.
(h) OTHER SHARE-BASED AWARDS. The Committee is authorized,
subject to limitations under applicable law, to grant to Eligible Employees such
other Awards that may be denominated or payable in, valued in whole or in part
by reference to, or otherwise based on, or related to, Shares, as deemed by the
Committee to be consistent with the purposes of the Plan, including, without
limitation, unrestricted shares awarded purely as a "bonus" and not subject to
any restrictions or conditions, other rights convertible or exchangeable into
Shares, purchase rights for Shares, Awards with value and payment contingent
upon performance of the Company or any other factors designated by the
Committee, and Awards valued by reference to the performance of specified
Subsidiaries or Affiliates. The Committee shall determine the terms and
conditions of such Awards at date of grant or thereafter. Shares delivered
pursuant to an Award in the nature of a purchase right granted under this
Section 5(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Shares,
notes or other property, as the Committee shall determine. Cash awards, as an
element of or supplement to any other Award under the Plan, shall also be
authorized pursuant to this Section 5(h).
6. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM AND SUBSTITUTE AWARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted to Eligible Employees either alone or in addition to, in tandem with, or in exchange or substitution for, any other Award granted under the Plan or any award granted under any other plan or agreement of the Company, any Subsidiary or Affiliate, or any business entity to be acquired by the Company or a Subsidiary or Affiliate, or any other right of an Eligible Employee to receive payment from the Company or any Subsidiary or Affiliate. Awards may be granted in addition to or in tandem with such other Awards or awards, and may be granted either as of the same time as or a different time from the grant of such other Awards or awards. The per Share exercise price of any Option, grant price of any SAR, or purchase price of any other Award conferring a right to purchase Shares which is granted, in connection with the substitution of awards granted under any other plan or agreement of the Company or any Subsidiary or Affiliate or any business entity to be acquired by the Company or any Subsidiary or Affiliate, shall be determined by the Committee, in its discretion. Notwithstanding the foregoing, the exercise price of any Option, grant price of any SAR or purchase price of any other Award conferring a right to purchase Shares which is granted in exchange or substitution for an option, SAR or other award granted by the Company (other than in connection with a transaction described in Section 4(c) hereof) shall not be less than the exercise price, grant price or purchase price of the exchanged or substituted option, SAR or other award, and outstanding Awards shall not be amended (other than in connection with a transaction described in Section 4(c) hereof) to reduce the exercise price, grant price or purchase price of any such Award.
(b) TERMS OF AWARDS. The term of each Award granted to an Eligible Employee shall be for such period as may be determined by the Committee; PROVIDED, HOWEVER, that in no event shall the term of any ISO or a SAR granted in tandem therewith exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code).
(c) FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or a Subsidiary or Affiliate upon the grant, maturation, or exercise of an Award may be made in such forms as the Committee shall determine at the date of grant or thereafter, including, without limitation, cash, Shares, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The Committee may make rules relating to installment or deferred payments with respect to Awards, including the rate of interest to be credited with respect to such payments.
(d) NONTRANSFERABILITY. Except as set forth below and except for vested Shares, Awards shall not be transferable by an Eligible Employee except by will or the laws of descent and distribution (except pursuant to a Beneficiary designation) and shall be exercisable during the lifetime of an Eligible Employee only by such Eligible Employee or his guardian or legal representative. Notwithstanding the foregoing, if the Committee expressly so provides in the applicable Award agreement (at the time of grant or at any time thereafter), an Award (other than an ISO) granted hereunder may be transferred by a Participant to members of his or her "immediate family" or to a trust established for the exclusive benefit of solely one or more members of the Participant's "immediate family." Any Award held by the transferee will continue to be subject to the same terms and conditions that were applicable to the Award immediately prior to the transfer, except that the Award will be transferable by the transferee only by will or the laws of descent and distribution. For purposes hereof, "immediate family." means the Participant's children, stepchildren, grandchildren, parents, stepparents, grandparents, spouse, siblings (including half brothers and sisters), in-laws, and relationships arising because of legal adoption. An Eligible Employee's rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to claims of the Eligible Employee's creditors.
(e) NONCOMPETITION. The Committee may, by way of the Award Agreements or otherwise, establish such other terms, conditions, restrictions and/or limitations, if any, of any Award, provided they are not inconsistent with the Plan, including, without limitation, the requirement that the Participant not engage in competition with the Company.
7. DIRECTOR'S OPTIONS.
(a) ANNUAL GRANT. On January 1 of each year, each Director in office on such date shall automatically be granted a NQSO to purchase 1500 Shares with an exercise price per Share equal to 100% of the Market Value of one Share on the date of grant; provided, however, that such price shall be at least equal to the par value of a Share. Each Option granted to a Director under this paragraph (a) shall become fully exercisable on the first anniversary of the date the Option is granted, and shall expire (unless terminated earlier under paragraph (d) below) on the tenth anniversary of the date of grant.
(b) INITIAL GRANTS. Each Director will automatically be granted a NQSO on the date he or she is first elected to the Board to purchase 300 Shares with an exercise price per Share equal to 100% of the Market Value of one Share on the date of grant; PROVIDED, HOWEVER, that such price shall be at least equal to the par value of a Share. Each Option granted to a Director under this paragraph (b) shall become exercisable in three equal installments, commencing on the date of grant and annually thereafter. Each Option granted under this paragraph (b) shall expire (unless terminated earlier under paragraph (d) below) on the tenth anniversary of the date of grant.
(c) MARKET VALUE. For purposes of this Section 7, Market Value shall mean the mean between the high and low selling prices per Share on the immediately preceding date (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded) on the principal exchange on which the Shares are traded, as such prices are officially quoted on such exchange.
(d) TERMINATION OF SERVICE. If a person ceases to be a Director,
(i) due to retirement after attainment of age 65, or (ii) due to death or
disability, all of his or her outstanding Options, to the extent not already
exercisable in full, shall become immediately and fully exercisable at the time
of termination of service, and all of such Director's Options may be exercised
at any time prior to the expiration dates of such Options. If the Director's
service terminates for any other reason, all Options which are not then
exercisable shall be cancelled on the date service terminates, and Options which
are then exercisable may be exercised at any time within six months after the
date of such termination, but not later than the expiration date of the Options.
(e) TIME AND METHOD OF EXERCISE. The exercise price of a Director's Option shall be paid to the Company (including, without limitation, through broker-assisted exercise arrangements) at the time of exercise either in cash, or in Shares already owned by the optionee and having a total Market Value equal to the exercise price, or in a combination of cash and such Shares.
(f) NONTRANSFERABILITY. No Director's Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee, a Director's Option shall be exercisable only by him or her or by his or her guardian or legal representative. Notwithstanding the foregoing, if the Committee expressly so provides in the applicable Award agreement (at the time of grant or at any time thereafter), a Director's Option granted hereunder may be transferred by an optionee to members of his or her "immediate family" or to a trust established for the exclusive benefit of solely one or more members of his or her "immediate family." Any Director's Option held by the transferee will continue to be subject to the same terms and conditions that were applicable to the Director's Option immediately prior to the transfer, except that the Director's Option will be transferable by the transferee only by will or the laws of descent and distribution. For purposes hereof, "immediate family" means the Director's children, stepchildren, grandchildren, parents, stepparents, grandparents, spouse, siblings (including half brothers and sisters), in-laws, and relationships arising because of legal adoption.
(g) ADJUSTMENTS. In the event that subsequent to the Effective Date any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other such change, affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of shares, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the Director and preserve the value of the Director's Option, (i) there shall automatically be substituted for each Share subject to an unexercised Director's Option and each Share to be issued under Section 7(a) or 7(b) subsequent to such event the number and kind of shares, other securities or other consideration into which each outstanding Share shall be changed or for which each such Share shall be exchanged, and (ii) the exercise price shall be increased or decreased proportionately so that the aggregate purchase price for the Shares subject to any unexercised Director's Option shall remain the same as immediately prior to such event.
(h) EXCLUSIVE SOURCE OF FORMULA GRANTS. Unless otherwise determined by the Board, automatic grants of stock options shall be made to Directors only pursuant to this Plan, and the automatic stock option grant provisions of any plan of the Company adopted prior to the Effective Date shall be terminated upon approval of this Plan by the shareholders of the Company.
8. DIRECTOR'S SHARES. Each Director may make an election in writing
on or prior to each August 1 to receive the Director's annual retainer fees
payable thereafter in the form of Shares instead of cash. Any Shares elected
shall be payable at the time cash retainer fees are otherwise payable, and the
number of Shares distributed shall be equal to 120 percent of the amount of the
annual retainer fee otherwise payable on such payment date divided by the Fair
Market Value of a Share on such date. Notwithstanding the foregoing, a Director
who is first elected or appointed to the Board may make an election under this
Section 8 within 30 days of such election or appointment in respect of annual
retainer fees payable after the date of the election. Any election made under
this Section 8 shall remain in effect unless and until a new election is made in
accordance with the provisions of this Section 8.
9. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LEGAL AND TRADING REQUIREMENTS. The Plan, the granting and exercising of Awards thereunder, and the other obligations of the Company under the Plan and any Award Agreement, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Shares under any Award until completion of such stock exchange or market
system listing or registration or qualification of such Shares or other required action under any state or federal law, rule or regulation as the Company may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules and regulations. No provisions of the Plan shall be interpreted or construed to obligate the Company to register any Shares under federal, state or foreign law.
(b) NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the Plan nor any action taken thereunder shall be construed as giving any employee or director the right to be retained in the employ or service of the Company or any of its Subsidiaries or Affiliates, nor shall it interfere in any way with the right of the Company or any of its Subsidiaries or Affiliates to terminate any employee's or director's employment or service at any time.
(c) TAXES. The Company or any Subsidiary or Affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Shares, or any payroll or other payment to an Eligible Employee, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Eligible Employees to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of an Eligible Employee's tax obligations; PROVIDED, HOWEVER, that the amount of tax withholding to be satisfied by withholding Shares shall be limited to the minimum amount of taxes, including employment taxes, required to be withheld under applicable Federal, state and local law.
(d) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter,
suspend, discontinue, or terminate the Plan or the Committee's authority to
grant Awards under the Plan without the consent of shareholders of the Company
or Participants, except that any such amendment, alteration, suspension,
discontinuation, or termination shall be subject to the approval of the
Company's shareholders to the extent such shareholder approval is required under
Section 422 of the Code; PROVIDED, HOWEVER, that, without the consent of an
affected Participant, no amendment, alteration, suspension, discontinuation, or
termination of the Plan may impair the rights or, in any other manner, adversely
affect the rights of such Participant under any Award theretofore granted to him
or her. The Committee may waive any conditions or rights under, amend any terms
of, or amend, alter, suspend, discontinue or terminate, any Award theretofore
granted, prospectively or retrospectively; PROVIDED, HOWEVER, that, without the
consent of a Participant, no amendment, alteration, suspension, discontinuation
or termination of any Award may materially and adversely affect the rights of
such Participant under any Award theretofore granted to him or her.
(e) NO RIGHTS TO AWARDS; NO SHAREHOLDER RIGHTS. No Eligible Employee or employee shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Employees and employees. No Award shall confer on any Eligible Employee any of the rights of a shareholder of the Company unless and until Shares are duly issued or transferred to the Eligible Employee in accordance with the terms of the Award.
(f) UNFUNDED STATUS OF AWARDS. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; PROVIDED, HOWEVER, that the Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, other Awards, or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant.
(g) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of options and other awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases.
(h) NOT COMPENSATION FOR BENEFIT PLANS. No Award payable under this Plan shall be deemed salary or compensation for the purpose of computing benefits under any benefit plan or other arrangement of the Company for the benefit of its employees or directors unless the Company shall determine otherwise.
(i) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. In the case of Awards to Eligible Employees, the Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. In the case of Director's Options, cash shall be paid in lieu of such fractional shares.
(j) GOVERNING LAW. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan, and any Award Agreement shall be determined in accordance with the laws of New York without giving effect to principles of conflict of laws.
(k) EFFECTIVE DATE; PLAN TERMINATION. The Plan, as amended and restated, shall become effective as of January 1, 2002 (the "Effective Date"), subject to approval by the shareholders of the Company. The Plan shall terminate as to future awards on the date which is 10 years after the Effective Date.
(l) TITLES AND HEADINGS. The titles and headings of the sections in the Plan are for convenience of reference only. In the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
Exhibit 10.2
LETTER OF CREDIT
AND
REIMBURSEMENT AGREEMENT
among
ARCH REINSURANCE LTD., as Obligor
ARCH REINSURANCE COMPANY, as Obligor
ALTERNATIVE RE LIMITED, as Obligor
FIRST AMERICAN INSURANCE COMPANY, as Obligor
and
FLEET NATIONAL BANK, as Lender
Dated as of April 17, 2002
ARTICLE I DEFINITIONS AND INTERPRETATION....................................................................1
Section 1.1 Definitions...........................................................................1
Section 1.2 Interpretation........................................................................6
ARTICLE II TERMS OF THE LETTER OF CREDIT FACILITY............................................................6
Section 2.1 The Letters of Credit.................................................................6
Section 2.2 Reimbursement; Lender's Responsibility................................................7
Section 2.3 Obligations of Lender.................................................................7
Section 2.4 Unconditional Obligations of the Obligors.............................................7
Section 2.5 Regulatory Requirements; Additional Costs.............................................9
Section 2.6 Fees..................................................................................9
Section 2.7 Payments and Computations............................................................10
Section 2.8 Collateral Security..................................................................10
ARTICLE III CONDITIONS OF ISSUANCE OF LETTERS OF CREDIT......................................................10
Section 3.1 Conditions Precedent to Closing and Issuance of Initial Letters of Credit............10
Section 3.2 Additional Conditions Precedent to the Issuance of Letters of Credit.................11
ARTICLE IV REPRESENTATIONS AND WARRANTIES...................................................................12
Section 4.1 Corporate Existence and Power........................................................12
Section 4.2 Authority............................................................................12
Section 4.3 Binding Effect of Agreement and Other Fundamental Documents..........................13
Section 4.4 Financial Information................................................................13
Section 4.5 Material Adverse Change; No Default..................................................13
Section 4.6 Litigation...........................................................................13
Section 4.7 Compliance with laws and Agreements..................................................14
ARTICLE V COVENANTS........................................................................................14
Section 5.1 Affirmative Covenants................................................................14
Section 5.2 Negative Covenants...................................................................16
ARTICLE VI EVENTS OF DEFAULT AND REMEDIES...................................................................17
Section 6.1 Events of Default Defined............................................................17
Section 6.2 Remedies.............................................................................18
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ARTICLE VII Reserved.........................................................................................19
ARTICLE VIII MISCELLANEOUS....................................................................................19
Section 8.1 Amendments, Etc......................................................................19
Section 8.2 Addresses for Notices................................................................19
Section 8.3 No Waiver; Remedies..................................................................20
Section 8.4 Successors and Assigns...............................................................20
Section 8.5 Payment of Expenses and Taxes........................................................20
Section 8.6 Right of Set-Off.....................................................................21
Section 8.7 Governing Law........................................................................21
Section 8.8 Consent to Jurisdiction..............................................................21
Section 8.9 Waiver of Jury Trial.................................................................22
Section 8.10 Table of Contents and Captions.......................................................22
Section 8.11 Counterparts.........................................................................22
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Exhibit A -- Form of Letters of Credit Exhibit B -- Form of Security Agreement Exhibit C -- Form of Standby Letter of Credit Application |
LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT
Letter of Credit and Reimbursement Agreement dated as of April 17, 2002 (as amended and supplemented from time to time, this "Agreement") among Arch Reinsurance Ltd. ("Reinsurance"), Arch Reinsurance Company ("Arch Company"), Alternative Re Limited ("Alternative") and First American Insurance Company ("First American," each of Reinsurance, Arch Company, Alternative and First American, individually, an "Obligor" and collectively, the "Obligors") and Fleet National Bank ("Fleet" or the "Lender").
Intending to be legally bound hereby, the parties agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
Section 1.1 DEFINITIONS.
Unless the context clearly otherwise requires, the following terms shall have the following respective meanings:
ADJUSTED COLLATERAL VALUE means, with respect to any Obligor and at any date of determination, an amount equal to the sum of (A) (i) to the extent that such Investments are comprised solely of U.S. Government Securities, 90% of the market value of Investments in the Custodial Account established in the name of such Obligor, or (ii) to the extent that such Investments are not comprised solely of U.S. Government Securities, 86.96% of the market value of Investments in the Custodial Account established in the name of such Obligor and (B) 100% of the amount of cash deposits in the Custodial Account established in the name of such Obligor. The Investments shall be "marked to market" by the Custodian on a daily basis but the Custodian shall provide only monthly reporting.
ALTERNATIVE means Alternative Re Limited, a Bermuda corporation.
APPLICABLE INSURANCE REGULATORY AUTHORITY means the insurance department or similar administrative authority or agency that has the principal regulatory jurisdiction over an Obligor.
ARCH COMPANY means Arch Reinsurance Company, a Nebraska corporation.
BENEFICIARY means any Person designated a beneficiary of a Letter of Credit issued pursuant to this Agreement.
BUSINESS DAY means any day other than a Saturday, Sunday or any other day on which commercial banks in Hartford, Connecticut are authorized or required to close.
CAPITAL LEASE means any lease which has been or should be capitalized on the books of the lessee in accordance with GAAP.
CAPITAL LEASE OBLIGATIONS means, for any Person, all obligations of such Person to pay rent or other amounts under a Capital Lease. For purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP.
CLOSING means the delivery of the executed Fundamental Documents by the parties thereto on the Closing Date.
CLOSING DATE means April 17, 2002.
COLLATERAL has the definition set forth in Section 2.8.
CONSTITUENT DOCUMENTS means, with respect to any Corporation, such Corporation's certificate of incorporation, memorandum of association or other similar document concerning the formation, organization and existence of such Corporation required under the laws of the jurisdiction of organization of such Corporation, and such Corporation's by-laws or other similar document required under the laws of such jurisdiction of organization.
CORPORATION includes companies, associations, corporations, partnerships, limited liability companies and other legal entities of all kinds.
CUSTODIAL ACCOUNT shall have, with respect to any Obligor, the meaning set forth in the Security Agreement executed and delivered by such Obligor.
CUSTODIAN shall have the meaning set forth in the Custodian Agreement.
CUSTODIAN AGREEMENT means, any of the Custody Agreements dated on or about the date hereof between Fleet National Bank, as Custodian, and each of Alternative, Reinsurance, Arch Company and First American, a copy of which has been or will be delivered to the Lender, as the same may be amended, supplemented, restated or otherwise modified from time to time.
DEFAULT means any event or condition specified in Section 6.1, which, upon the giving of notice, the lapse of time, or the happening of any further condition, would become an Event of Default.
ELIGIBLE ASSIGNEE means any commercial bank having total assets in excess of $3,000,000,000 as determined by the Lender based on the most recent publicly available financial statements of such bank.
EVENT OF DEFAULT has the definition set forth in Section 6.1.
EXPIRY DATE means the date set forth in a Letter of Credit as the expiration date of such Letter of Credit, which is up to one year from the date of issuance of such Letter of Credit; provided with respect to a Five-Year Letter of Credit, such date may be up to five years from the date of issuance of such Five-Year Letter of Credit.
FACILITY means the Letters of Credit that the Lender is willing to issue under this Agreement as determined in its sole and absolute discretion in an amount (including all Letter of
Credit Obligations and Reimbursement Obligations for each Obligor) not to exceed $200,000,000 in the aggregate.
FACILITY TERMINATION DATE means April 16, 2003.
FEES means, collectively, the fees set forth or referred to in Section 2.6.
FIRST AMERICAN means First American Insurance Company, a Missouri corporation.
FIVE-YEAR LETTER OF CREDIT means any Letter of Credit issued for the benefit of Lloyds of London or its affiliates under this Agreement having an expiry date five years from the date of issue.
FLEET means Fleet National Bank.
FUNDAMENTAL DOCUMENTS means and includes each of the following for the time being in force:
(a) this Agreement;
(b) the Letters of Credit;
(c) the Security Agreement;
(d) the Custodian Agreement; and
(e) any other Security Documents.
GAAP shall mean U.S. generally accepted accounting principles in effect from time to time.
GUARANTEE means a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning.
INDEBTEDNESS means, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the
deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business; (c) indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; (f) Guarantees by such Person of Indebtedness of others; (g) Rate Hedging Obligations of such Person; and (h) any other obligation for borrowed money or other financial accommodation which in accordance with GAAP or SAP, as applicable, would be shown as a liability on the consolidated balance sheet of such Person.
INTEREST RATE means the rate of interest per annum equal to two percentage points (2%) above the Prime Rate from time to time in effect, not to exceed the maximum rate of interest permitted by applicable law.
INVESTMENT means (i) U.S. Government Securities and (ii) debt securities of corporate issuers which (x) in the aggregate have an average weighted minimum rating of not less than AA- by S&P and Aa3 by Moody's and (y) individually have a minimum rating of not less than BBB by S&P and Baa2 by Moody's.
ISP means the International Standby Practices (ISP 1998), International Chamber of Commerce Publication No. 590.
LENDER means Fleet and each of its respective successors in title and permitted assigns.
LETTER(S) OF CREDIT means the irrevocable standby letters of credit issued under this Agreement.
LETTER OF CREDIT OBLIGATIONS means, with respect to any Obligor, as at any date of determination thereof, on an aggregate basis for all Letters of Credit issued at the request of such Obligor, the maximum amount that could be drawn by the Beneficiaries of such Letters of Credit (assuming, notwithstanding any provision of a Letter of Credit to the contrary, that such Beneficiary was then entitled to draw the full amount remaining available thereunder) but which has not been drawn as of that date.
LIEN means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any Property that 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 (other than an operating lease) relating to such Property.
MOODY'S means Moody's Investor Service, Inc. or any successor thereto.
NET WORTH means the excess of total assets over total liabilities of any Person which shall be determined on a consolidated basis in accordance with GAAP.
OBLIGOR means, individually, each of Alternative, Reinsurance, Arch Company and First American.
PARENT means Arch Capital Group Ltd., a Bermuda corporation.
PERSON means and includes an individual, a partnership, trust, estate, corporation, company, unincorporated organization, limited liability company and a government or any agency, instrumentality or political subdivision thereof.
PRIME RATE means the variable per annum rate of interest so designated from time to time by the Lender as its prime rate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. Changes in the rate of interest resulting from changes in the Prime Rate shall take place immediately without notice or demand of any kind.
PROPERTY means any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.
RATE HEDGING OBLIGATIONS means, for any Person, any and all net obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (a) any agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, or any similar derivative transactions, and (b) any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing.
REIMBURSEMENT OBLIGATIONS means, with respect to any Obligor, all obligations of such Obligor pursuant to Section 2.2 to reimburse the Lender for payments made by the Lender upon any drawings under any Letter of Credit issued at the request of such Obligor and to pay to the Lender all other amounts that are payable by such Obligor to the Lender pursuant to this Agreement and the other Fundamental Documents.
REINSURANCE means Arch Reinsurance Ltd., a Bermuda corporation.
RESPONSIBLE OFFICER means, with respect to the Lender, the Person or Persons to whom for the time being communications are required to be addressed pursuant to the provisions of any relevant document, and with respect to any Corporation other than a Lender, any director, chairman of the Board of Directors, the managing director, any deputy managing director, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer or any attorney-in-fact authorized to perform functions similar to those performed by any of the above-mentioned officers.
SAP means the accounting procedures and practices prescribed or permitted by the Applicable Insurance Regulatory Authority, applied on a basis consistent with those that are to be used in making the calculations for purposes of determining compliance with this Agreement.
SAP FINANCIAL STATEMENTS means the financial statements of an Obligor which have been submitted or are required to be submitted to the Applicable Insurance Regulatory Authority.
S&P shall mean Standard & Poor's Rating Services, a division of The McGraw Hill Companies, Inc. or any successor thereto.
SECURITY AGREEMENT means, collectively, each of the Security Agreements, substantially in the form of Exhibit B hereto, between the Lender and each Obligor, as the same may be amended, supplemented, restated or otherwise modified from time to time securing its obligations under this Agreement and the Letters of Credit.
SECURITY DOCUMENTS means, collectively, the Security Agreement and each other instrument or agreement that secures or guarantees the Reimbursement Obligations.
TAX means any present or future tax, rate, duty, impost, governmental charge or levy, including, without limitation thereto, any corporation, income (other than any taxes imposed on or measured by the gross income or profits of the Lender), value added, capital gains, sales, transfer, use, excise, occupation, franchise, property, stamp or other tax or duty and any license, registration and recording fee and all penalties, fines, interest imposed, assessed or otherwise payable in respect of any of the foregoing and all deductions or withholdings required to be made in respect of any of the foregoing levied, assessed, charged or required by any government or taxing authority in any country.
U.S. GOVERNMENT SECURITIES means securities that are direct obligations of, and obligations the timely payment of principal and interest on which is fully guaranteed by, the United States, or any agency or instrumentality of the United States the obligations of which are backed by the full faith and credit of the United States and in the form of conventional bills, bonds, and notes. In no event shall U.S. Government Securities include any security providing for the payment of interest only.
Section 1.2. INTERPRETATION.
(a) The terms "hereof," "hereunder" and "herein" refer to this Agreement as a whole.
(b) References by number to Sections, Schedules and Exhibits refer to the Sections, Schedules and Exhibits of this Agreement unless otherwise stated.
(c) The singular form of any word also refers to the plural form of such word, and VICE VERSA, and any word of any particular gender includes the correlative words of the other genders.
(d) Any references in this Agreement to one or more items preceded by the word "including" shall not be deemed limited to the stated items but shall be deemed without limitation.
ARTICLE II
TERMS OF THE LETTER OF CREDIT FACILITY
Section 2.1 THE LETTERS OF CREDIT.
(a) On the terms and subject to the further conditions hereinafter set forth and upon satisfaction of the conditions set forth in Article III, the Lender hereby agrees to issue on and after the Closing Date Letters of Credit, each dated the date of its issuance, substantially in the form of Exhibit A hereto and in the aggregate issued at any one time in a face amount not to exceed $200,000,000 (provided that the face amount of any Five-Year Letters of Credit issued at any one time in the aggregate shall not exceed $40,000,000) and so long as (after giving effect to the issuance of the requested Letter of Credit) the Adjusted Collateral Value for any Obligor is not less than the sum of all amounts then outstanding with respect to the Letter of Credit Obligations and Reimbursement Obligations for such Obligor, as more specifically set forth below in Section 2.1(b). Each such Letter of Credit shall be irrevocable and, unless its terms provide otherwise, shall expire on the Expiry Date. Each such Letter of Credit shall contain language substantially as follows: "This Letter of Credit shall be deemed automatically extended without amendment for one year from the expiration date or any future expiration date, unless thirty (30) days prior to any expiration date, we notify you by registered mail that this Letter of Credit will not be renewed for any such additional period." So long as any Letter of Credit (including any Five-Year Letter of Credit) is outstanding and has not expired, this Agreement shall continue to be in full force and effect.
(b) An Obligor may, from time to time, request that the Lender issue Letters of Credit during the period from the date hereof to but not including the Facility Termination Date in an aggregate face amount (together with the Letter of Credit Obligations and Reimbursement Obligations for such Obligor) at any time issued up to but not exceeding the Facility; provided however, (i) the aggregate amount of Letter of Credit Obligations and Reimbursement Obligations for such Obligor at any time issued shall not exceed the Adjusted Collateral Value for such Obligor and (ii) the aggregate face amount of all Letters of Credit issued under this Agreement at any time issued shall not exceed $200,000,000. The Obligor shall make such request by executing and delivering the Lender's then standard form standby letter of credit application and related documentation. The current standard form standby letter of credit application is attached as Exhibit C hereto. If there shall exist any inconsistency between the terms of this Agreement (and the Security Documents) and any such documentation relating to a Letter of Credit issued under this Section 2.1(b), the terms of this Agreement (and the Security Documents) shall control.
Section 2.2 REIMBURSEMENT; LENDER'S RESPONSIBILITY.
(a) The Lender shall notify the applicable Obligor of a drawing under any Letter of Credit issued at the request of such Obligor on or prior to the date of payment of such drawing. Reimbursement by such Obligor of the amount of each such drawing is due and payable in full (i) on the same day that the Lender honors such drawing, if the foregoing notice is received before 1:00 p.m. (Connecticut time) on the date of such drawing or (ii) on the Business Day immediately following the date of such drawing, if the foregoing notice is received after 1:00 p.m. (Connecticut time) on the date of such drawing, and each Obligor absolutely and unconditionally agrees to pay or cause to be paid to the Lender on such date, without demand, the amount of any drawing under a Letter of Credit issued at the request of such Obligor.
(b) Each Obligor, absolutely and unconditionally, agrees to pay, or cause to be paid, to the Lender, on demand, interest at the Interest Rate on any amount (including on overdue interest to the extent permitted by law) due by such Obligor hereunder that is not paid when due, for each day such amount is unpaid.
(c) Except as set forth in Section 2.6 and Section 8.5(a), each Obligor shall be liable to the Lender only for those amounts that are incurred by it hereunder or under the Security Agreement executed by such Obligor and shall have no liability for the obligations of any other Obligor, it being acknowledged and agreed by the Lender that the execution and delivery of this Agreement by more than one Obligor is for purposes of convenience only and that each Obligor is deemed to have entered into a completely separate reimbursement and security arrangement with the Lender and with no other parties.
Section 2.3 OBLIGATIONS OF LENDER.
Whenever the Lender receives a demand for payment under a Letter of Credit, it will promptly examine the demand to determine whether or not it is in conformity with such Letter of Credit under which it is presented.
Section 2.4 UNCONDITIONAL OBLIGATIONS OF THE OBLIGORS.
Each Obligor agrees with the Lender that the following provisions shall apply with respect to each Letter of Credit issued for its account:
(a) Except as otherwise expressly stated in any Letter of Credit, but without limiting any provision of this Agreement or any Letter of Credit, there may be accepted or honored as complying with such Letter of Credit any documents of any character that comply with the provisions and interpretations contained in the ISP.
(b) Neither the Lender nor any of its correspondents or agents shall be responsible for: (i) the truth or accuracy of any statement contained in any document received under the Letters of Credit; (ii) the validity, sufficiency or genuineness of any such document believed by the Lender in good faith and in the exercise of ordinary care to be valid, even if wholly fraudulent or forged; (iii) any breach of contract between an Obligor or any other Person and the beneficiary of any Letter
of Credit; (iv) interruptions or delays in the transmission or delivery of messages, by mail, courier service or electronic means, whether in cipher or not; (v) any errors or omissions in the translation of any document; (vi) failure or delay in giving any notice or in complying with any other formality; (vii) delay in arrival or failure to arrive of any property or required instrument or document; (viii) failure of any document to bear adequate reference to a Letter of Credit, or failure of any Person to note the amount of any payment on the reverse side of a Letter of Credit or to surrender or to take up a Letter of Credit or to send forward documents as required by the terms of a Letter of Credit, each of which provisions, if contained in a Letter of Credit itself, it is agreed may be waived by the Lender; (ix) the fact that any instructions, oral or written, given to the Lender purporting to have been given by or on behalf of any Obligor and believed by the Lender in good faith and in the exercise of ordinary care to be valid which pertain to the issuance of any Letter of Credit, any extension, increase or other modification of any Letter of Credit or other action to be taken or omitted with reference thereto, were wholly or partly insufficient, erroneous, unauthorized or fraudulent; or (x) any other act or omission as to which banks are relieved from responsibility under the terms of the ISP, PROVIDED that none of the contingencies referred to in subparagraphs (i) through (x) of this paragraph (b) is attributable to the gross negligence or willful misconduct of the Lender or any of its correspondents or agents; but the happening of any one or more of such contingencies shall not affect, impair or prevent the vesting of any of the rights or powers of the Lender hereunder.
(c) Each Obligor will, without expense to the Lender, procure or cause to be procured promptly all necessary licenses which are required with respect to the transaction(s) which is/are the subject of any Letter of Credit issued for such Obligor or to which any such Letter of Credit relates, will comply with or cause to be complied with all applicable governmental regulations in regard thereto, and will furnish or cause to be furnished to the Lender such documents and certificates in respect thereof as the Lender may reasonably require.
(d) Each Obligor hereby agrees to indemnify and hold harmless the Lender
from and against all liability, loss or expense (including reasonable
legal fees, court costs and other expenses which the Lender may incur
in enforcing its rights hereunder) incurred as a consequence of
(i) any failure on the part of such Obligor duly to perform its
agreements contained in this Section 2.4, (ii) any action taken or
omitted by the Lender or any of its correspondents in relation to any
Letter of Credit issued at the request of or on behalf of such
Obligor, or (iii) any claims asserted by any party to any transaction
in connection with which such Letters of Credit are issued, except
such liability, loss or expense, if any, as is incurred as a result of
the gross negligence or willful misconduct on the part of the Lender
or of any of its correspondents.
Section 2.5 REGULATORY REQUIREMENTS; ADDITIONAL COSTS.
Each Obligor shall pay to the Lender from time to time upon demand such amounts as the Lender determines in its sole discretion is necessary to compensate the Lender for any costs attributable to the Lender's issuing or having outstanding or making payment under any Letter of Credit issued at the request of such Obligor resulting from the application of any domestic or foreign law or regulation or the interpretation or administration thereof applicable to the Lender regarding any reserve, assessment, capitalization (including the cost of maintaining capital sufficient to permit issuance of the Letters of Credit, provided the cost attributed to the Letters of Credit is determined in good faith by any reasonable method) or similar requirement whether existing at the time of issuance of any such Letter of Credit or adopted thereafter, including, without limitation, any reduction in amounts receivable hereunder as a result of any change in applicable law, treaty, regulation, policy or directive, or the imposition of any Tax or increase in any existing Tax, applicable to the transactions contemplated hereunder or the commitments of the Lender hereunder.
Section 2.6 FEES.
(a) Each Obligor agrees to pay the following fees with respect to Letters of Credit issued at the request of such Obligor:
(i) a Letter of Credit issuance fee to be paid to the Lender upon the issuance of each Letter of Credit equal to .50% of the maximum face amount of such Letter of Credit, except that with respect to Alternative and First American such Letter of Credit issuance fee shall equal .30% of the maximum face amount of the Letter of Credit if the Collateral consists solely of U.S. Government Securities;
(ii) a Five-Year Letter of Credit issuance fee to be paid to the Lender upon the issuance of each Five-Year Letter of Credit equal to .65% of the maximum face amount of such Five-Year Letter of Credit;
(iii) if the entire amount of any Reimbursement Obligation or any Letter of Credit issuance fee is not paid in full within ten (10) days after the same is due, a late fee equal to five percent (5%) of the required payment; and
(iv) all other charges, costs and fees customarily imposed by the Lender in connection with the issuance of letters of credit.
(b) Reinsurance agrees to pay the following fees:
(i) a Letter of Credit unused fee to be paid to the Lender, payable quarterly in arrears (and calculated based upon a 360-day year and actual days elapsed) on the last Business Day of each March, June, September and December, commencing on June 30, 2002 equal to .15% per annum of an amount equal to $200,000,000 minus the total Letter of Credit Obligations from time to time outstanding; and
(ii) a Letter of Credit upfront fee to be paid to the Lender prior to or on the Closing Date equal to .075% of the Facility.
Section 2.7 PAYMENTS AND COMPUTATIONS.
(a) All payments to be made by or on behalf of an Obligor under this Agreement shall be made to the Lender, not later than 3:00 p.m. Connecticut time, on the date when due, in United States Dollars, in immediately available funds, without counterclaim or setoff and free and clear of, and without any deduction or withholding for, any taxes or other payments, by federal funds wire to the Lender at:
ABA No. 011900571
For Credit to Account No. 151035110055
Fleet Bank Connecticut
Commercial Loan Services
Bank/Obligor #: 20/0000274563
Reference: Arch Capital Group Ltd.
or to such other address or account, or to the attention of such other Person as the Lender shall notify the applicable Obligor.
(b) All payments made by or on behalf of an Obligor hereunder shall be applied first to the payment of all fees, expenses and other amounts due to the Lender (excluding principal and interest) by such Obligor, then to accrued interest with respect to the Reimbursement Obligations of such Obligor, and the balance on account of outstanding principal with respect to the Reimbursement Obligations of such Obligor; provided, however, that upon the occurrence and during the continuation of an Event of Default, payments will be applied to the obligations of such Obligor to the Lender as the Lender determines in its sole discretion (but not to the obligations of any other Obligor).
(c) All payments which shall be due hereunder on a day that is not a Business Day shall be extended to the next succeeding Business Day, and interest shall accrue during such extension.
(d) Computations of interest hereunder and computations of fees stated to be on an annual basis shall be made on the basis of a year of 360 days for the actual number of days elapsed (including the first day but excluding the last day).
Section 2.8 COLLATERAL SECURITY.
All of the obligations of each Obligor to the Lender under this Agreement and the other Fundamental Documents shall be secured by a security interest and pledge granted by such Obligor, as security for such Obligor's obligations under this Agreement and the Letters of Credit issued at the request of such Obligor, in favor of the Lender in the securities and other collateral described in the applicable Security Agreement (together with all property or interests therein and all income therefrom and proceeds thereof, collectively, the "Collateral").
ARTICLE III
CONDITIONS OF ISSUANCE OF LETTERS OF CREDIT
Section 3.1 CONDITIONS PRECEDENT TO CLOSING AND ISSUANCE OF INITIAL LETTERS OF CREDIT.
The obligations of the Lender (in its sole and absolute discretion) to issue any Letter of Credit under this Agreement on or after the Closing Date are subject to the satisfaction, prior to or concurrently with the issuance of any such Letter of Credit, of the following conditions precedent:
(a) FUNDAMENTAL DOCUMENTS. Each of the Obligors shall have executed and delivered to the Lender each Fundamental Document required hereunder, which shall be in full force and effect.
(b) PROOF OF CORPORATE ACTION. The Lender shall have received a certificate of the Secretary or an Assistant Secretary, or the equivalent thereof, of each Obligor, dated the date hereof, setting forth resolutions of the Board of Directors, or the equivalent thereof, of such Obligor approving the transactions contemplated by this Agreement and the other Fundamental Documents and authorizing the execution, delivery and performance by such Person of this Agreement and the other Fundamental Documents to which such Person is a party, which certificates shall state that such resolutions are in full force and effect without amendment.
(c) INCUMBENCY CERTIFICATES. The Lender shall have received a certificate of the Secretary or Assistant Secretary, or the equivalent thereof, of each Obligor, dated the date hereof, setting forth the names and containing a specimen signature of each officer and director of such Person authorized to sign this Agreement and the other Fundamental Documents to which such Person is a party and to give notices and to take other action on behalf of such Obligor hereunder and in relation to the Collateral.
(d) BERMUDA REQUIREMENTS. The Lender shall have received a certificate of compliance issued by the Bermuda Regulatory Authority (Registrar of Companies and the Bermuda Monetary Authority) for each of the Parent, Alternative and Reinsurance, in form and substance satisfactory to the Lender.
(e) LEGAL OPINIONS. The Lender shall have received signed legal opinions of counsel for each Obligor, each in form and substance satisfactory to the Lender.
(f) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings and all other matters in connection with the transactions contemplated by this Agreement (including, without limitation, all regulatory and third party approvals), the other Fundamental Documents and all other documents incidental hereto and thereto, including all opinions of counsel, shall be reasonably satisfactory in form and substance to the Lender.
Section 3.2 ADDITIONAL CONDITIONS PRECEDENT TO THE ISSUANCE OF LETTERS OF CREDIT.
The obligations of the Lender to issue any Letter of Credit under this Agreement on or after the Closing Date (including pursuant to Section 2.1(a)) are subject to the further conditions precedent that, both immediately prior to the issuance of such Letter of Credit and also after giving effect thereto:
(a) no Default shall have occurred and be continuing;
(b) the representations and warranties made by each Obligor in this Agreement and each of the Fundamental Documents shall be true and complete on and as of the date of the issuance of such Letter of Credit with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);
(c) there has been no material adverse change in the financial condition, operations, properties, business or prospects of the Parent or any Obligor since the date of this Agreement;
(d) the Lender shall have received a request for a Letter of Credit as provided in Section 2.1(b);
(e) the Lender shall have received evidence satisfactory to it (i) that the Adjusted Collateral Value of the Obligor requesting the issuance of the Letter of Credit is not less than the sum of all amounts then outstanding with respect to Letter of Credit Obligations and Reimbursement Obligations of such Obligor, taking into account the amount of the requested Letter of Credit, (ii) that each of the Investments utilized in the calculation of such Obligor's Adjusted Collateral Value has been deposited into the Custodial Account maintained by such Obligor, and (iii) that the aggregate face amount of all Letters of Credit issued under this Agreement (taking into account the requested Letter of Credit) does not exceed $200,000,000;
(f) the Net Worth of the Parent shall be no less than $750,000,000; and
(g) with respect to any Letter of Credit requested by First American, such Letter of Credit shall be used solely for reinsurance purposes.
Each request for a Letter of Credit by an Obligor hereunder shall constitute a certification by the Obligor to the effect set forth in the preceding sentence (both as of the date of such notice and, unless the Obligor otherwise notifies the Lender prior to the date of such Letter of Credit issuance, as of the date of such issuance).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to issue the Letters of Credit, each Obligor for itself hereby represents and warrants that:
Section 4.1 CORPORATE EXISTENCE AND POWER.
Such Obligor (a) is a company or corporation duly organized, validly existing without limitation of its corporate existence and in good standing under the laws of its jurisdiction of organization and (b) has adequate power and authority and legal right to own or hold under lease the properties it purports to own or to hold under lease and to carry on the business in which it is engaged or presently proposes to engage. Such Obligor has adequate power and authority to enter into this Agreement and each of the other Fundamental Documents to which it is a party, to borrow hereunder, to create the Collateral for the Reimbursement Obligations contemplated by this Agreement and the Security Documents and to perform its obligations under this Agreement and each of the other Fundamental Documents to which it is or is to become a party as contemplated by this Agreement.
Section 4.2. AUTHORITY.
The execution and delivery by such Obligor of this Agreement and each other Fundamental Document to which it is or is to become a party as contemplated hereby, the obtaining of Letters of Credit hereunder, the pledging of the Collateral for the Reimbursement Obligations contemplated by this Agreement and the Security Documents and the performance by such Obligor of its obligations in respect of this Agreement and the other Fundamental Documents in accordance with their respective terms, have been duly authorized by all necessary corporate action on the part of such Obligor and do not and will not (a) contravene any provision of the Constituent Documents of such Obligor, (b) conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under or, except as contemplated by this Agreement, result in the creation or imposition of any Lien pursuant to the terms of any, mortgage, indenture, deed of trust, security agreement, pledge agreement, charge or other instrument to which such Obligor or any of its respective property is bound, (c) violate any law, governmental rule, regulation, order or decree of any court or administrative agency or governmental officer applicable to and binding upon such Obligor, (d) require any waiver, consent or other action by any governmental or regulatory authority or by any trustee or holder of any Indebtedness or obligations of such Obligor or (e) require the approval of the shareholders of such Obligor.
Section 4.3 BINDING EFFECT OF AGREEMENT AND OTHER FUNDAMENTAL DOCUMENTS.
(a) This Agreement has been duly executed and delivered by such Obligor
and the agreements contained herein constitute, and the agreements contained in
each other Fundamental Document to which such Obligor is or is to become a party
will, when each such other Fundamental Document is executed and delivered,
constitute valid and legally binding obligations for such Obligor enforceable in
accordance with their respective terms, except as such enforceability may be
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, or
other similar laws affecting the enforcement of creditors' rights generally, and
(ii) general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(b) Each Security Document executed and delivered on or after the date hereof will effectively create the Liens purported to be created thereby and such liens will be first-priority liens on the Collateral covered thereby, subject to no other liens (except Liens in favor of the Custodian).
Section 4.4 FINANCIAL INFORMATION.
The Parent and such Obligor have heretofore furnished to the Lender accurate and complete financial data and other information based on its operations in previous years, and said financial data furnished to the Lender is accurate and complete and fairly presents the financial position and the results of operations for the period indicated therein.
Section 4.5 MATERIAL ADVERSE CHANGE; NO DEFAULT.
There has been no material adverse change in the condition, financial or otherwise, of the Parent or such Obligor since the date of the most recent financial statement and no Default or Event of Default exists with respect to such Obligor.
Section 4.6 LITIGATION.
There are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of such Obligor) threatened against the Parent or such Obligor that are reasonably likely (either individually or in the aggregate) to have a material adverse effect on the condition, financial or otherwise, of the Parent or such Obligor.
Section 4.7 COMPLIANCE WITH LAWS AND AGREEMENTS.
Such Obligor is in compliance with laws, regulations and orders of any governmental agency or authority applicable to it or its Properties and all indentures, agreements and other instruments binding upon it or its Property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on its condition, financial or otherwise.
ARTICLE V
COVENANTS
Section 5.1 AFFIRMATIVE COVENANTS.
Each Obligor for itself covenants and agrees that so long as any Letter of Credit is outstanding:
(a) MAINTENANCE OF CORPORATE EXISTENCE. Such Obligor shall maintain its corporate existence, rights and franchises.
(b) REPORTING REQUIREMENTS.(1) Such Obligor shall furnish to the Lender:
(i) ANNUAL GAAP FINANCIAL STATEMENTS. Within one hundred twenty
(120) days following the end of the Parent's and such Obligor's fiscal year (or,
if a registered company, such earlier date as the Parent's and such Obligor's
Form 10-K is filed with the Securities and Exchange Commission) copies of:
(x) the consolidated and consolidating balance sheet of the Parent as at the close of such fiscal year, and
(y) the consolidated and consolidating statements of income, changes in surplus and cash flows of the Parent for such fiscal year,
in each case setting forth in comparative form the figures for the preceding fiscal year and prepared in accordance with GAAP, all in reasonable detail and accompanied by an opinion thereon of PriceWaterhouseCoopers or other firm of independent public accountants of recognized national standing selected by the Parent and reasonably acceptable to the Lender, to the effect that the financial statements have been prepared in accordance with GAAP (except for changes in application in which such accountants concur) and present fairly in all material respects in accordance with GAAP the financial condition of the Parent as of the end of such fiscal year and the results of operations of the Parent for the fiscal year then ended and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary under the circumstances.
(ii) QUARTERLY GAAP FINANCIAL STATEMENTS. As soon as available, and in any event within sixty (60) days after the end of each quarterly fiscal period of the Parent and each Obligor (other than the fourth fiscal quarter of any fiscal year), copies of:
(x) the balance sheet of the Parent and each Obligor as at the end of such fiscal quarter, and
(y) the statements of income, changes in surplus and cash flows of the Parent and each Obligor for such fiscal quarter and the portion of such fiscal year ended with such fiscal quarter,
in each case setting forth in comparative form the figures for the preceding fiscal year and prepared in accordance with GAAP, all in reasonable detail and certified as presenting fairly in accordance with GAAP the financial condition of the Parent and each Obligor as of the end of such period and the results of operations for such period by a senior officer of the Parent or the Obligor, as applicable, subject only to normal year-end accruals and audit adjustments and the absence of footnotes.
(iii) ANNUAL/QUARTERLY REPORTS. Concurrently with the delivery of the financial statements required pursuant to subsections (i), (ii), (vi) and (vii) of this Section, copies of all reports required to be filed with any Applicable Insurance Regulatory Authority in connection with the filing of such financial statements.
(iv) MANAGEMENT LETTERS. Promptly upon receipt thereof, copies of any reports or management letters relating to the internal financial controls and procedures delivered to the Parent and such Obligor by any independent certified public accountant in connection with an examination of the financial statements of the Parent or such Obligor, as applicable.
(v) ADDITIONAL INFORMATION. Such additional information as the Lender, may reasonably request concerning the Parent or such Obligor and for that purpose all pertinent books and other documents relating to its business, affairs and Properties, including Investments as shall from time to time be designated by the Lender.
(vi) ANNUAL SAP FINANCIAL STATEMENTS. As soon as available, and in any event within fifteen (15) days following the filing of such with the Applicable Insurance Regulatory Authority, copies of the (if required to be filed with a regulatory authority) SAP Financial Statements for such Obligor, in each case setting forth in comparative form the figures for the preceding fiscal year and prepared in accordance with SAP, all in reasonable detail and certified as presenting fairly in accordance with SAP the financial condition of such Obligor by a senior officer of such Obligor. Such Annual SAP Financial Statements shall be accompanied by a summary of the applicable fiscal year prepared by the management of the Obligor.
(vii) QUARTERLY SAP STATEMENTS. As soon as available, and in any event within sixty (60) days after the end of each quarterly fiscal period, copies of the unaudited SAP Financial Statements for such quarterly period of such Obligor setting forth in comparative form the figures for the preceding fiscal year and prepared in accordance with SAP, all in reasonable detail and certified as presenting fairly in accordance with SAP the financial condition of such Obligor, as applicable, as of the end of such period and results of operations for such period by a senior officer of such Obligor, as applicable, subject to normal year-end accruals and audit adjustments.
(c) MAINTENANCE OF ADJUSTED COLLATERAL VALUE. Such Obligor shall at all times maintain Collateral in the Custodial Account maintained in its name in an amount such that the Adjusted Collateral Value is not less than the sum of all amounts then outstanding with respect to the sum of the Letter of Credit Obligations and Reimbursement Obligations of such Obligor. Each Obligor agrees that if the Adjusted Collateral Value of the Collateral in the applicable Custodial Account is less than the sum of the Letter of Credit Obligations and the Reimbursement Obligations of such Obligor, the Lender shall have the right to require such Obligor to pay to the Custodian the amount of any such deficiency, which amount shall be payable by no later than 3:00 p.m. (Connecticut time) (i) on the date of notice by the Lender, if such notice is received before 12:00 p.m. (Connecticut time) or (ii) on the Business Day immediately following the date of notice by the Lender, if such notice is received after 12:00
p.m. (Connecticut time), and which payment shall be deposited by the Custodian into the applicable Custodial Account in the form of cash or Investments. At any time, other than after the occurrence and during the continuation of a Default or an Event of Default, an Obligor may substitute Collateral to the extent such substitution arises from normal trade activities within the Custodial Account in accordance with the provisions of Section 1 of the Security Agreement between the Obligor and the Lender.
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
Section 6.1 EVENTS OF DEFAULT DEFINED.
With respect to each Obligor, each of the following is an "Event of Default:"
(a) failure by such Obligor to pay any amount payable by it hereunder on the date due;
(b) if the validity or enforceability of any Security Document to which such Obligor is a party shall be contested by any Person;
(c) if any representation or warranty made by or on behalf of such Obligor in this Agreement, in any other Fundamental Document or in any certificate, report or financial or other statement furnished to the Lender at any time under or in connection with this Agreement, any other Fundamental Document or any other such document or agreement shall have been untrue in any material respect when made or deemed to have been made;
(d) default by such Obligor in the observance or performance of its covenants set forth in (i) Article V; or (ii) default by such Obligor in the observance or performance of its obligation to maintain the value of the Custodial Account maintained in its name in accordance with Section 1 of the Security Agreement between it and the Lender;
(e) default by such Obligor in the observance or performance of any other covenant or agreement contained in this Agreement or any other Fundamental Document and the continuance thereof unremedied for 10 days after receipt by such Obligor of written notice of such default from the Lender;
(f) an order shall be made by a competent court or a resolution shall be passed for the winding up or dissolution or rehabilitation of the Parent or such Obligor save for the purposes of amalgamation, merger, consolidation, reorganization or other similar arrangement on terms approved by the Lender (not involving the insolvency of the Parent or such Obligor) and save that if any such order or resolution is sought in an involuntary proceeding against any such Person, such Person shall have thirty (30) days from the commencement of such proceeding to obtain an order staying, vacating or dismissing such proceedings, or a petition shall be presented to, or an order shall be made by a competent court for the appointment of, an administrator of the Parent or such Obligor and such petition or order shall not have been stayed, vacated or
dismissed within thirty (30) days after the presentation of such petition or the making of such order;
(g) the Parent or such Obligor shall cease to carry on the whole or substantially the whole of its business, save for the purposes of amalgamation, merger, consolidation, reorganization or other similar arrangement (not involving or arising out of the insolvency of the Parent or such Obligor) which is permitted hereunder, or the Parent or such Obligor shall suspend payment of its debts generally or shall be unable to, or shall admit inability to, pay its debts as they fall due, or shall be adjudicated or found bankrupt or insolvent by any competent court in a voluntary or involuntary bankruptcy or insolvency proceeding and, in the case of an involuntary proceeding, such adjudication or finding is not stayed, vacated or dismissed for thirty (30) days, or shall enter into any composition or other similar arrangement with its creditors generally;
(h) a receiver, administrator, liquidator or other similar official shall be appointed in relation to the Parent or such Obligor or in relation to the whole or a substantial part of its assets or to the Collateral or a distress, execution or other process shall be levied or enforced upon or out against, or any encumbrancer shall take possession of, the whole or a substantial part of its assets or the Collateral and in any of the foregoing cases, such action or person shall not be discharged, dismissed, vacated, stayed or bonded within thirty (30) days;
(i) any seizure, vesting or intervention by or under authority of a government occurs, by which the Parent's or such Obligor's management is displaced or its authority in the conduct of its business is curtailed;
(j) default by the Parent or such Obligor in (i) any payment of principal of or interest of any Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity, PROVIDED that the aggregate principal amount of all such Indebtedness which would then become due and payable would equal or exceed, in the case of the Parent, Arch Company, Alternative or Reinsurance, $15,000,000, or in the case of First American, $5,000,000; or
(k) One or more judgments or decrees shall be entered against the Parent or such Obligor involving in the aggregate a liability (to the extent not paid or covered by insurance) of, in the case of the Parent, Arch Company, Alternative or Reinsurance, $15,000,000 or more, and in the case of First American, $5,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days after the entry thereof.
(l) The Net Worth of the Parent shall be less than $750,000,000 as of the end of any fiscal quarter.
Section 6.2 REMEDIES.
(a) Without limiting any other rights or remedies of the Lender provided for elsewhere in this Agreement or any other Fundamental Document, or by applicable law, or in equity, or otherwise, (i) if any Event of Default shall occur and be continuing with respect to any Obligor, the Lender, may by notice to such Obligor, declare all amounts owing under this Agreement from such Obligor and any Letters of Credit (whether or not such Letter of Credit Obligations be contingent or unmatured) issued at the request of such Obligor to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by such Obligor, and (ii) if any Event of Default shall occur and be continuing with respect to the Parent, the Lender, may by notice to each Obligor, declare all amounts owing under this Agreement from each Obligor and any Letters of Credit (whether or not such Letter of Credit Obligations be contingent or unmatured) issued at the request of such Obligor to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by each Obligor. The Lender may immediately take any and all remedies with respect to the Collateral permitted by the Security Documents.
(b) Upon declaration as provided for above, the defaulting Obligor
shall, as specified in written notice by the Lender, either (i) immediately
deliver to the Lender, any amounts required to be paid in accordance with
Section 5.1(c) hereof (the "Letter of Credit Amount"), or (ii) with the consent
of the Beneficiary or Beneficiaries thereof, cause any Letters of Credit to be
canceled forthwith in a manner satisfactory to the Lender. In addition to
providing the Letter of Credit Amount, the defaulting Obligor shall provide the
Lender with any documentation as the Lender may from time to time request to
perfect its rights in the Letter of Credit Amount, including, without
limitation, pledge agreements and financing statements in form and substance
satisfactory to the Lender. The Lender shall hold the Letter of Credit Amount in
its own name for the exclusive purpose of applying such Letter of Credit Amount
toward the immediate payment of amounts which are thereafter drawn under any
Letter of Credit, and, to the extent of such payment, the Reimbursement
Obligations shall be deemed to be satisfied. Upon the expiry date of all Letters
of Credit, any Letter of Credit Amount remaining after satisfaction of all
Reimbursement Obligations shall be remitted to the order of the applicable
Obligor. Each Obligor shall remain liable for the relevant amount of any
deficiency in respect of its Letter of Credit Obligations and Reimbursement
Obligations.
(c) Upon the occurrence and during the continuation of any Default or Event of Default under this Agreement, no Letter of Credit shall be issued, renewed or extended under this Agreement except in the sole discretion of the Lender.
ARTICLE VII
Reserved.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 AMENDMENTS, ETC.
Neither this Agreement nor any other Fundamental Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. No amendment of, or supplement or modification to any provision of this Agreement or any other Fundamental Document to which any Obligor is a party shall in any event be effective unless the same shall be in writing and signed by such Obligor and the Lender.
Section 8.2 ADDRESSES FOR NOTICES.
All notices and other communications provided for hereunder shall be in writing unless otherwise stated herein and shall be delivered by fax, hand delivery, or recognized courier service that provides delivery within two Business Days:
if to Reinsurance, at
Wessex House
45 Reid Street
Hamilton HM12
Bermuda
Attn: Chief Financial Officer
Facsimile: (441) 278-9230
if to Arch Company, at
55 Madison Avenue
P.O. Box 1988
Morristown, New Jersey 07962
Attn: Chief Financial Officer
Facsimile: (973) 898-9570
if to First American, at
100 First Stamford Place
Suite 325
Stamford, Connecticut 06902
Attn: Chief Financial Officer Facsimile: (203) 975-5691
if to Alternative, at
Clarendon House
2 Church Street
Hamilton HM11
Bermuda
Attn: Chief Financial Officer
Facsimile: (441) 292-4720
if to Fleet, at
777 Main Street
Hartford, CT 06115
Attn: Lawrence Davis
Fax: (860) 986-1264
or to such other address as such party may specify to the other party, and shall be effective when delivered at the address specified in or pursuant to this Section.
Section 8.3 NO WAIVER; REMEDIES.
No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
Section 8.4 SUCCESSORS AND ASSIGNS.
(a) This Agreement is a continuing obligation of each Obligor and shall, until the date on which all amounts due and owing hereunder are paid in full (i) be binding upon each Obligor, its successors and assigns, and (ii) inure to the benefit of and be enforceable by the Lender and its successors and assigns, PROVIDED, that any assignment of this Agreement or any part hereof by any Obligor shall be void. The Lender may assign or transfer to one or more Eligible Assignees all or a portion of the interests, rights and obligations under this Agreement and the other Fundamental Documents. The Lender and any Eligible Assignee may sell participations in all or a portion of its interests, rights and obligations under this Agreement and the other Fundamental Documents, PROVIDED that the Lender or the Eligible Assignee shall remain solely responsible for the performance of its obligations under this Agreement.
(b) Anything in this Section 8.4 to the contrary notwithstanding, the Lender may at any time pledge or assign all or any portion of its interest and rights under this Agreement to any of the twelve Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or assignment or enforcement thereof shall release the Lender from its obligations hereunder or under any of the other Fundamental Documents.
Section 8.5 PAYMENT OF EXPENSES AND TAXES.
(a) Reinsurance hereby agrees to pay or reimburse the Lender for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and attention to the execution of the Fundamental Documents, and of documents embodying or relating to amendments, waivers or consents with respect to any of the foregoing, including the reasonable fees and out-of-pocket costs and expenses of counsel to the Lender, (b) Reinsurance agrees to pay and to save the Lender from all registration, recording and filing fees and all liabilities with respect to, or resulting from, any delay by any Obligor in paying stamp and other Taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, any of the Fundamental Documents or any amendment, waiver or consent with respect thereto or the consummation of any of the transactions contemplated thereby, (c) each Obligor agrees to pay or reimburse the Lender for all its out-of-pocket costs and expenses incurred in connection with the preparation and attention to the execution and issuance of Letters of Credit issued at the request of such Obligor and (d) each Obligor agrees to pay or reimburse the Lender for all out-of-pocket costs and expenses incurred by it in connection with the enforcement or preservation of any rights against such Obligor under or in respect of this Agreement and the other Fundamental Documents (including the fees and expenses of lawyers retained by the Lender, including the allocated costs of internal counsel, and remuneration paid to agents and experts not in the full-time employ of the Lender for services rendered on behalf of the Lender) on a full indemnity basis. All such amounts will be paid by Reinsurance or the Obligors, as applicable, on demand.
Section 8.6 RIGHT OF SET-OFF.
Each Obligor agrees that, in addition to (and without limitation of) any right of setoff, banker's lien or counterclaim the Lender may otherwise have, the Lender shall be entitled, at its option, to offset balances (general or special, time or demand, provisional or final, and regardless of whether such balances are then due to such Obligor) held by it for the account of such Obligor at any of the Lender' offices, in Dollars or in any other currency, against any amount payable by such Obligor under this Agreement or any Letter of Credit that is not paid when due, taking into account any applicable grace period, in which case it shall promptly notify such Obligors thereof, PROVIDED that the Lender's failure to give such notice shall not affect the validity thereof. In furtherance thereof, each Obligor hereby grants to the Lender, a continuing lien, security interest and right of setoff as security for all liabilities and obligations to the Lender, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property of such Obligor, now or hereafter in the possession, custody, safekeeping or control of the Lender or any entity under the control of FleetBoston Financial Corporation and its successors and assigns or in transit to any of them. At any time after the occurrence of an Event of Default, without demand or notice (any such notice being expressly waived by each Obligor), the Lender may setoff the
same or any part thereof and apply the same to any liability or obligation of such Obligor even though unmatured and regardless of the adequacy of any other collateral securing such Obligor's obligations hereunder. ANY AND ALL RIGHTS TO REQUIRE THE LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES AN OBLIGOR'S OBLIGATIONS HEREUNDER, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF SUCH OBLIGOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. At the option of the Lender, if there is a separate revolving line of credit, line of credit, or other credit facility existing between the Lender and such Obligor, the Lender is irrevocably authorized to satisfy such Obligor's reimbursement obligation to the Lender, in whole or in part, by making an advance under such facility.
Section 8.7 GOVERNING LAW.
This Agreement, and the rights and obligations of the parties hereunder, shall be governed by, and construed in accordance with the laws of the State of Connecticut without giving effect to the choice of law or conflicts of law principles thereof.
Section 8.8 CONSENT TO JURISDICTION.
Each Obligor hereby expressly submits to the non-exclusive jurisdiction of all federal and state courts sitting in the State of Connecticut, and agrees that any process or notice of motion or other application to any of said courts or a judge thereof may be served upon such Obligor within or without such court's jurisdiction by registered or certified mail, return receipt requested, or by personal service, at such Obligor's address (or at such other address as the Obligor shall specify by a prior notice in writing to the Lender), provided reasonable time for appearance is allowed. Each Obligor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue to any suit, action or proceeding arising out or relating to this Agreement brought in any federal or state courts sitting in the State of Connecticut and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Notwithstanding the foregoing, the Lender may sue any Obligor in any jurisdiction where such Obligor or any of its assets may be found and may serve legal process upon such Obligor in any other manner permitted by law.
Section 8.9 WAIVER OF JURY TRIAL.
EACH OBLIGOR AND THE LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER FUNDAMENTAL DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMINISTRATION OF THIS
AGREEMENT OR ENFORCEMENT OF THE FUNDAMENTAL DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OBLIGOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OBLIGOR CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT AND THE OTHER FUNDAMENTAL DOCUMENTS.
Section 8.10 INTEREST.
All agreements between the Lender and the Obligors are hereby expressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid to the Lender for the use or the forebearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Agreement shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of the Lender and the Obligors in the execution, delivery and acceptance of this Agreement to contract in strict compliance with the laws of the State of Connecticut from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof or of any of the agreements executed herewith at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from circumstances whatsoever the Lender should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between the Obligors and the Lender.
Section 8.11 TABLE OF CONTENTS AND CAPTIONS.
The Table of Contents hereof and captions herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.
Section 8.12 INTEGRATION.
This Agreement is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Letter of Credit and Reimbursement Agreement. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are
deemed to be superceded by this Agreement, and no party is relying on any promise, agreement or understanding not set forth in this Agreement.
Section 8.13 COUNTERPARTS.
This Agreement may be executed in multiple counterparts each of which shall be an original and all of which when taken together shall constitute but one and the same Agreement.
[Remainder of the Page Intentionally Left Blank]
In Witness Whereof, the parties have caused this Agreement to be duly executed and delivered by their respective officers, as an instrument under seal, as of the date first above written.
ARCH REINSURANCE LTD.
By: /s/ Dwight R.Evans
---------------------------------
Name: Dwight R. Evans
Title: President
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By: /s/ John F. Rathgeber
---------------------------------
Name: John F. Rathgeber
Title: Managing Director
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FIRST AMERICAN INSURANCE COMPANY
By: /s/ John M. Tetro
---------------------------------
Name: John M. Tetro
Title: SVP and CFO
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FLEET NATIONAL BANK
By: /s/ Lawrence Davis --------------------------------- Name: Lawrence Davis Title: Portfolio Manager |
ALTERNATIVE RE LIMITED
By: /s/ Graham B.R. Collis --------------------------------- Name: Graham B.R. Collis Title: Director |
EXHIBIT A
[FORM OF LETTERS OF CREDIT]
FLEET NATIONAL BANK
C/O FLEET PENNSYLVANIA SERVICES, INC.
1 FLEET WAY
SCRANTON, PA 18507-1999
DATE:
IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER_______________
BENEFICIARY: APPLICANT:
AMOUNT: USD
EXPIRY DATE:
EXPIRE PLACE: OUR COUNTERS
GENTLEMEN:
WE HEREBY ISSUE THIS IRREVOCABLE LETTER OF CREDIT NO. ___________ IN YOUR FAVOR, FOR THE ACCOUNT OF APPLICANT ,FOR UP TO AN AGGREGATE AMOUNT OF USD __________AVAILABLE BY YOUR DRAFT(S) DRAWN ON US AT SIGHT, ACCOMPANIED BY THE FOLLOWING:
1. BENEFICIARY'S WRITTEN, DATED STATEMENT ON BENEFICIARY LETTERHEAD SIGNED BY A
PURPORTED OFFICER READING:
QUOTE
UNQUOTE
2. THE ORIGINAL OF THIS LETTER OF CREDIT AND AMENDMENT(S), IF ANY.
DATA CONTENT OF ANY REQUIRED DOCUMENTS PRESENTED UNDER THIS LETTER OF CREDIT MUST BE CONSISTENT WITH THE DATA CONTENT OF ANY OTHER REQUIRED DOCUMENT(S) PRESENTED UNDER THIS LETTER OF CREDIT.
PARTIAL DRAWINGS ARE PERMITTED.
IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT SHALL BE AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FOR PERIOD(S) OF ONE YEAR EACH FROM THE CURRENT OR ANY FUTURE EXPIRATION DATE UNLESS AT LEAST THIRTY (30) DAYS PRIOR TO THE THEN CURRENT EXPIRATION DATE WE SHALL NOTIFY THE BENEFICIARY IN WRITING, VIA REGISTERED MAIL, AT THE ABOVE LISTED ADDRESS OF OUR INTENTION NOT TO RENEW THIS LETTER OF CREDIT.
ANY SUCH NOTICE SHALL BE EFFECTIVE WHEN SENT BY US AND UPON SUCH NOTICE TO YOU YOU MAY DRAW HEREUNDER, UP TO THE FULL AMOUNT THEN AVAILABLE, BY PRESENTATION OF YOUR SIGHT DRAFT DRAWN ON US ACCOMPANIED BY THE ORIGINAL OF THIS LETTER OF CREDIT, AND ALL AMENDMENTS THERETO, AND YOUR STATEMENT, ON YOUR LETTERHEAD PURPORTEDLY SIGNED BY AN AUTHORIZED REPRESENTATIVE, STATING THAT YOU ARE IN RECEIPT OF FLEET NATIONAL BANK'S NOTICE OF NONRENEWAL UNDER LETTER OF CREDIT NO. _____________ AND APPLICANT HAS FAILED TO EXTEND SAID LETTER OF CREDIT OR PROVIDE A REPLACEMENT LETTER OF CREDIT IN A FORM ACCEPTABLE TO YOU.
DRAFT(S) MUST STATE: "DRAWN UNDER FLEET NATIONAL BANK STANDBY L/C NO. ____________ DATED _____________________."
THIS LETTER OF CREDIT IS TRANSFERABLE IN FULL AND NOT IN PART. ANY TRANSFER MADE HEREUNDER MUST CONFORM STRICTLY TO THE TERMS HEREOF AND TO THE CONDITIONS OF RULE 6 OF THE INTERNATIONAL STANDBY PRACTICES (ISP98) FIXED BY THE INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 590.
SHOULD YOU WISH TO EFFECT A TRANSFER UNDER THIS CREDIT, SUCH TRANSFER WILL BE SUBJECT TO THE RETURN TO US OF THE ORIGINAL CREDIT INSTRUMENT, ACCOMPANIED BY OUR FORM OF TRANSFER, PROPERLY COMPLETED AND SIGNED BY AN AUTHORIZED SIGNATORY OF YOUR FIRM, BEARING YOUR BANKERS STAMP AND SIGNATURE AUTHENTICATION AND SUBJECT TO YOUR PAYMENT OF OUR CUSTOMARY TRANSFER CHARGES OF 1/4 OF 1% MINIMUM $ 200.00.
DRAFTS AND DOCUMENTS MUST BE PRESENTED AT OUR OFFICE ADDRESSED: FLEET NATIONAL BANK, C/O FLEET PENNSYLVANIA SERVICES INC., 1 FLEET WAY, SCRANTON, PA 18507-1999, ATTN: TRADE SERVICES DEPT. - STANDBY UNIT.
WE HEREBY AGREE WITH YOU THAT DRAFT(S) DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS LETTER OF CREDIT SHALL BE DULY HONORED UPON DUE PRESENTATION TO US.
THIS LETTER OF CREDIT IS SUBJECT TO THE INTERNATIONAL STANDBY PRACTICES (ISP98), THE INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 590.
FORM AND CONTENTS ACCEPTED BY:
(SIGNATURE -MUST BE THE SAME AS THAT ON LETTER OF CREDIT APPLICATION)
AUTHORIZED SIGNATURE FOR
EXHIBIT B
[FORM OF SECURITY AGREEMENT]
SECURITY AGREEMENT
Dated as of April 17, 2002
between
ARCH REINSURANCE COMPANY
and
FLEET NATIONAL BANK
TABLE OF CONTENTS
PAGE
SECTION 1. Grant of Security..............................................................................1
SECTION 2. Security for Obligations.......................................................................3
SECTION 3. Delivery of Collateral.........................................................................3
SECTION 4. Debtor Remains Liable..........................................................................3
SECTION 5. Representations and Warranties.................................................................3
SECTION 6. Further Assurances: Supplements................................................................4
SECTION 7. Additional Covenants...........................................................................5
SECTION 8. Lender Appointed Attorney-in-Fact..............................................................7
SECTION 9. Lender May Perform.............................................................................7
SECTION 10. The Lender.....................................................................................7
SECTION 11. Remedies Upon Default; Application of Collateral...............................................8
SECTION 12. Amendments, Etc................................................................................8
SECTION 13. Indemnity and Expenses.........................................................................8
SECTION 14. Reserved.......................................................................................9
SECTION 15. Addresses for Notices..........................................................................9
SECTION 16. No Waiver; Cumulative Remedies.................................................................9
SECTION 17. Continuing Security Interest...................................................................9
SECTION 18. Further Indemnification.......................................................................10
SECTION 19. Governing Law; Terms..........................................................................10
SECTION 20. No Petition in Bankruptcy.....................................................................10
SECTION 21. Waiver of Jury Trial..........................................................................10
SECTION 22. Jurisdiction; Consent to Service of Process...................................................11
SECTION 23. Headings......................................................................................11
SECTION 24. Severability..................................................................................11
SECTION 25. Counterparts..................................................................................12
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SCHEDULES
Schedule 1 Definitions
Schedule 2 Trade Names
SECURITY AGREEMENT
SECURITY AGREEMENT (the "Agreement") dated as of April 17, 2002 between ARCH REINSURANCE COMPANY, a corporation organized and existing under the laws of Nebraska, ("Arch Company" or "Debtor") and FLEET NATIONAL BANK, as the Lender under the below referenced Letter of Credit Agreement (the "Lender").
W I T N E S S E T H:
WHEREAS, the Lender as the issuer of Letters of Credit has entered into a Letter of Credit and Reimbursement Agreement dated as of April 17, 2002 (as such agreement may hereafter be amended or otherwise modified from time to time, being the "Letter of Credit Agreement") with Arch Reinsurance Ltd., Arch Company, Alternative Re Limited and First American Insurance Company;
WHEREAS, it is a condition precedent to the issuance of Letters of Credit by the Lender under the Letter of Credit Agreement that the Debtor shall have executed and delivered to the Lender this Agreement and pledged and granted a security interest in the Collateral, as such term is defined below, held by or on behalf of the Debtor from time to time and other rights and interests contemplated by this Agreement; and
WHEREAS, pursuant to the terms of the Custodian Agreement, the Custodian has established a Custodial Account, account #0010409270 (the "Custodial Account"), in the name of the Debtor and the Company hereby grants to the Lender a security interest in the Collateral, including the Custodial Account.
NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to issue Letters of Credit for the account of the Debtor under the Letter of Credit Agreement, Arch Company hereby agrees with the Lender as follows (all capitalized terms used herein shall have the meanings set forth in SCHEDULE 1 hereto or, if not defined therein, in the Letter of Credit Agreement):
1. GRANT OF SECURITY. The Debtor hereby pledges to the Lender and grants to the Lender for its benefit a security interest in and lien upon, all of the Debtor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which the Debtor now has or hereafter acquires an interest and wherever the same may be located (collectively, the "Collateral"):
(i) The Custodial Account, including all cash held therein or credited thereto from time to time, and all securities, instruments and investments, including Investments, and other "investment property" and "financial assets," as each such term is defined in the UCC, of any kind held therein or credited thereto from time to time) (the "Pledged Investments"); and
(ii) All proceeds of, accessions to, substitutions for, and earnings on, any and all of the foregoing Collateral (including, without limitation, proceeds that constitute property of the types described in clauses (i) and (ii) above) and, to the extent not otherwise included, all payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes hereof, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto.
Notwithstanding the foregoing, at any time, other than after the occurrence and during the continuation of a Default or an Event of Default, the Debtor may request that the Lender release its Lien on so much of the Collateral as equals the excess, if any, of the Adjusted Collateral Value of the Collateral over the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor; provided that such excess shall be released from the Custodial Account only with the consent of the Lender, which consent may be given or withheld by the Lender in its sole discretion. Should the Adjusted Collateral Value of the Collateral be less than the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, the Lender shall have the right to require the Debtor to pay to the Custodian by no later than 3:00 p.m. (Connecticut time) (i) on the date of such notice, if such notice is received before 12:00 p.m. (Connecticut time) or (ii) on the Business Day immediately following the date of notice by the Lender, if such notice is received after 12:00 p.m. (Connecticut time), the difference between (A) the then-current Adjusted Collateral Value of the Collateral and (B) the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, which payment shall be deposited by the Custodian into the Custodial Account in the form of cash or Investments. Any failure by the Debtor to make such payment shall constitute an Event of Default hereunder and under the Fundamental Documents.
In addition, the Debtor shall have the right, other than after the
occurrence and during the continuation of a Default or an Event of Default, to
substitute Collateral to the extent such substitution arises from normal trade
activities within the Custodial Account hereunder so long as (i) the Debtor
maintains the value of the Custodial Account in accordance with this Section 1,
(ii) such substituted Collateral shall be in the form of Investments, and (iii)
if requested by the Lender, the Debtor shall deliver to the Lender a Supplement
to Security Agreement in a form satisfactory to the Lender. The Collateral which
is removed from the Custodial Account in full compliance with this paragraph
shall no longer be subject to the Lien hereof without any further action on the
part of the Debtor or the Lender; the Collateral which is added to the Custodial
Account pursuant to such Supplement to Security Agreement shall immediately be
subject to the Lien hereof without any further action on the part of the Debtor
or the Lender. The Debtor agrees to pay any costs and expenses of the Lender
(and its counsel) in connection with any substitution of Collateral.
2. SECURITY FOR OBLIGATIONS. The grant in Section 1 secures and the Collateral is collateral security for the prompt payment or performance in full when due, whether at stated maturity, by acceleration or otherwise of all obligations of every nature now or hereafter existing of the Debtor under the Letter of Credit Agreement and any Letter of Credit application and reimbursement agreement or other document or instrument delivered pursuant thereto, and all amendments, extensions or renewals thereof or hereof, whether for principal, interest, fees, expenses or otherwise, whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred and all or any portion of such obligations that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly as a preference, fraudulent transfer or otherwise, and all obligations of every nature of the Debtor now or hereafter existing under this Agreement (all such obligations being the "Secured Obligations").
3. DELIVERY OF COLLATERAL. All certificates or instruments, if any, representing or evidencing the Collateral shall be delivered to and held by the Custodian for the benefit of the Lender. At any time at which an Event of Default has occurred and is continuing under the Letter of Credit Agreement, the Lender shall have the right, subject at all times to Section 11 hereof, in its discretion and without notice to the Debtor, to transfer to or to register in the name of any of its nominees any or all of the Collateral, and may receive the income and any distributions thereon and hold the same as Collateral for the Secured Obligations, or apply the same to any of the Secured Obligations.
4. DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (a) the Debtor shall remain liable under the contracts and agreements included or relating to the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any of the rights hereunder shall not release the Debtor from any of its duties or obligations under the contracts and agreements included in or relating to the Collateral, and (c) the Lender shall not have any obligation or liability under the contracts and agreements included in or relating to the Collateral by reason of this Agreement, nor shall the Lender be obligated to perform any of the obligations or duties of the Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.
5. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and warrants as follows:
(a) The Debtor is duly organized and validly exists under the laws of Nebraska.
(b) The Debtor is the legal and beneficial owner of the Collateral free and clear of any liens, security interest, option or other charge or encumbrance (except liens in favor of the Custodian). No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording
office, except such as may have been filed in favor of the Lender relating to this Agreement. Except as set forth on Schedule 2 attached hereto, the Debtor has no trade names and does not do business under any fictitious business name.
(c) The pledge and the grant of the security interest in the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, and all filings and other actions necessary to perfect and protect such security interest have been duly taken.
(d) No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than authorizations, consents, approvals already obtained, actions already taken, notices already provided and filings already made) is required (i) for the grant by the Debtor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Debtor, (ii) for the perfection of or the exercise by the Lender of its rights and remedies provided for in this Agreement or (iii) to ensure the legality, validity, enforceability or admissibility in evidence of this Agreement in any jurisdiction in which any of the Collateral is located.
(e) Each of this Agreement and the other Fundamental Documents to which the Debtor is a party constitutes the legal, valid and binding obligation of the Debtor, enforceable against the Debtor in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally, and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). To the knowledge of the Debtor, each Pledged Investment constitutes the legally valid and binding obligation of the party obligated to pay the same.
(f) The Debtor is deriving substantial direct and indirect benefits from the issuance of the Letters of Credit for its account under the Letter of Letter of Credit Agreement and has received good and adequate consideration for the pledge of the Collateral effected under this Agreement.
6. FURTHER ASSURANCES: SUPPLEMENTS. (a) The Debtor agrees that at any time and from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that may be reasonably necessary or desirable, or that the Lender may request, to perfect and protect the pledges and security interests granted or purported to be granted hereby or to enable the Lender to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Debtor will (i) if any Collateral shall be evidenced by a promissory note or other instrument, or if any of the Collateral shall constitute chattel paper, deliver to the Lender (or to the Custodian to hold on behalf of the Lender) such note, instrument and all original counterparts of chattel paper duly endorsed and accompanied by duly executed instruments of transfer, all in form satisfactory to the Lender and (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or
desirable, or that the Lender may reasonably request, to protect and preserve the pledges and security interests granted or purported to be granted hereby.
(b) The Debtor hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. The Lender will promptly send the Debtor any financing or continuation statements thereto which it files without the signature of the Debtor and, except in the case of filings of copies of this Agreement as financing statements, the Lender will promptly send the Debtor the filing or recordation information with respect thereto.
(c) The Debtor will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender may reasonably request, all in reasonable detail.
(d) The Debtor agrees that it will not create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral except in favor of the Lender hereunder or the Custodian.
7. ADDITIONAL COVENANTS. (a) The Debtor shall maintain its organization and existence in the jurisdiction specified in Section 5(a) and shall not reincorporate or otherwise reorganize in any other jurisdiction without the prior written consent of the Lender. The Debtor shall, from the date on which each Pledged Investment was purchased, maintain (i) complete records of each Pledged Investment, including records of all payments received, interest or fees accruing or credits granted and (ii) all documentation relating thereto. In connection therewith, the Lender may (subject to the confidentiality restrictions contained in any agreement) institute procedures to permit it to confirm the balances owing in respect of any Pledged Investment. The Debtor agrees to render to the Lender such clerical and other assistance as may be reasonably requested with regard to the foregoing. If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, promptly upon request therefor, the Debtor shall (subject to the confidentiality restrictions contained in any agreement) deliver to the Lender complete and correct copies of all documentation relating to the Pledged Investments.
(b) The Debtor shall duly fulfill in all material respects all obligations on its part to be fulfilled under or in connection with the Pledged Investments and shall do nothing to impair in any material respect the rights of the Lender therein.
(c) Following an Event of Default under the Letter of Credit Agreement (subject to Section 11 hereof), any proceeds of Collateral when first received by or on behalf of the Debtor shall be deposited by or on behalf of the Debtor in the form so received in the Custodial Account, and until so deposited shall be held in trust for and
as the Lender's property and shall not be commingled with the Debtor's or any other Person's other funds or properties.
(d) The Debtor, at its own cost and expense, will, and will cause the Custodian to, maintain satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received with respect to the Collateral and all other dealings with the Collateral. Upon the occurrence and during the continuation of an Event of Default under the Letter of Credit Agreement, the Debtor will (subject to the confidentiality restrictions contained in any agreement and any applicable law) deliver and turn over to the Lender or to its representatives, or at the option of the Lender shall (subject to the confidentiality restrictions contained in any agreement) provide the Lender or its representatives with access to, at any time on demand of the Lender, copies of all the Debtor's books and records pertaining to the Collateral including, without limitation, all credit files and computer software, programs, tapes or disks relating to Pledged Investments or otherwise necessary to the collection thereof.
(e) The Debtor will comply in all material respects with all applicable statutes, rules, and regulations with respect to the Collateral or any part thereof.
(f) The Debtor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom and all claims of any kind (including, without limitation, claims for labor, materials and supplies), except that no such amount need be paid if (i) such non-payment does not involve any danger of the sale, forfeiture or loss of any of the Collateral or any interest therein, (ii) the charge or levy is being contested in good faith and by proper proceedings, and (iii) the obligation to pay such amount is adequately reserved against in accordance with and to the extent required by GAAP.
(g) The Debtor will in all material respects perform and observe all the terms and provisions of the documentation relating to the Pledged Investments to be performed or observed by it, maintain the documentation relating to the Pledged Investments in full force and effect in accordance with their terms, and take all action to such end as may be from time reasonably requested by the Lender.
(h) The Debtor will advise the Lender promptly, in reasonable detail, (i) of any lien, security interest, encumbrance or claim made or asserted against any of the Collateral by any Person, other than the Custodian, and (ii) of the occurrence of any event which would have a material adverse effect on the aggregate value of the Collateral or on the pledges and security interests granted hereby.
(i) The Debtor will not sell, assign (by operation of law or otherwise), or otherwise dispose of, or grant any option with respect to, any of the Collateral, except sales not restricted by the terms of the Letter of Credit Agreement or this Agreement.
(j) The Debtor shall at all times retain Fleet National Bank as the Custodian pursuant to the Custodian Agreement.
8. LENDER APPOINTED ATTORNEY-IN-FACT. The Debtor appoints the
Lender its attorney-in-fact with full authority in the place and stead of the
Debtor and in the name of the Debtor or otherwise, from time to time in the
Lender's discretion, after an Event of Default under the Letter of Credit
Agreement has occurred and is continuing (but in all instances subject to
Section 11 hereof), to take any action and to execute any instrument that the
Lender may deem necessary or advisable to accomplish the purposes of this
Agreement (subject to the provisions of any applicable law), including, without
limitation, to (i) ask, demand, collect, sue for, recover, compromise, receive
and give acquittances and receipts for moneys due and to become due under or in
connection with the Collateral, (ii) receive, endorse and collect all drafts or
other instruments and documents made payable to the Debtor in connection
therewith or representing any payment, dividend or other distribution in respect
of the Collateral or any part thereof and to give full discharge for the same,
(iii) file any claims or take any action or institute any proceedings which the
Lender may deem to be necessary or desirable for the collection of any of the
Collateral, (iv) enforce the rights of the Lender with respect to any of the
Collateral and compliance with the terms and conditions of this Agreement, the
Letter of Credit Agreement and the other Fundamental Documents, (v) pay or
discharge taxes or Liens levied or placed upon or threatened against the
Collateral, the legality or validity thereof and the amounts necessary to
discharge the same to be determined by the Lender in its sole discretion, and
such payments made by the Lender to become obligations of the Debtor to the
Lender, due and payable in accordance with the Letter of Credit Agreement, (vi)
generally sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though the
Lender were the absolute owner thereof for all purposes, and (vii) do, at the
Lender's option and the Debtor's expense, at any time, or from time to time, all
acts and things that the Lender deems necessary to protect, preserve or realize
upon the Collateral and the Lender's security interest therein, in order to
effect the intent of this Agreement, all as fully and effectively as the Debtor
might do.
9. LENDER MAY PERFORM. If the Debtor fails to perform any agreement contained herein or if a Default or an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, the Lender may at any time (but in all instances subject to Section 11 hereof) itself perform, or cause performance of, such agreement.
10. THE LENDER. (a) Neither the Lender nor any of its respective affiliates, directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or for errors in judgment, except for its or their own gross negligence, willful misconduct or bad faith.
(b) The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for the exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral or as to any rights pertaining thereto.
(c) The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Lender accords its own property.
11. REMEDIES UPON DEFAULT; APPLICATION OF COLLATERAL. (a) If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, then any cash held by the Lender and all cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied to the obligations of the Debtor to the Lender as the Lender determines in its sole discretion. Any surplus of such cash or cash proceeds held by the Lender and remaining after the payment in full of all the Secured Obligations shall be paid over to the Debtor or to whomsoever may be lawfully entitled thereto.
(a) Any foreclosure upon, sale of, or exercise of rights with respect to the Collateral shall be conducted in compliance with all contractual provisions applicable to such Collateral, including but not limited to any provisions of any agreement pursuant to which any Investment arises that govern the sale or assignment thereof.
(b) Any sale of the Collateral or any part thereof shall be made in a commercially reasonable manner and in accordance with applicable law and may be made in one or more lots at public or private sale, for cash, on credit or for future delivery. The Lender and/or any of its affiliates may be a purchaser at any such sale. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Debtor shall cooperate with the Lender in all reasonable ways in order to assist the Lender in the sale and other disposition of the Collateral.
12. AMENDMENTS, ETC. No amendment of any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by the Debtor and the Lender, no waiver of any provision of this Agreement, nor consent to any departure by the Debtor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure to exercise nor any delay in exercising on the part of the Lender of any right, power or privilege under this Agreement, shall operate as a waiver thereof; further, no single or partial exercise of any right, power or privilege under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
13. INDEMNITY AND EXPENSES. (a) The Debtor agrees to indemnify the Lender and each of its directors, officers, employees and agents (each an "Indemnified Person") from and against any and all claims, damages, losses, liabilities and expenses (excluding any present or future taxes, now or hereafter imposed, levied, collected, withheld or assessed), arising out of or in connection with or resulting from the Debtor's performance under this Agreement (including, without limitation, enforcement
of this Agreement against the Debtor), unless and to the extent such claim, damage, loss, liability or expense was attributable to the gross negligence, willful misconduct or bad faith of any of the Indemnified Persons.
(b) The Debtor agrees to pay to the Lender from time to time, upon
demand, the amount of any and all costs and expenses (excluding any present or
future taxes, now or hereafter imposed, levied, collected, withheld or
assessed), including the reasonable fees and expenses of its counsel and of any
experts and agents, that the Lender may incur in connection with (i) the
administration of this Agreement, (ii) the custody (including custody by a
third-party on behalf of the Lender) or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, (iii) the
exercise or enforcement of any of the rights of the Lender against the Debtor,
(iv) the failure by the Debtor to perform or observe any of the provisions
hereof or (v) any action taken by the Lender pursuant to Section 6 or 9 hereof.
(c) The foregoing provisions of this Section 13 are in furtherance and not in limitation of the Debtor's obligations under the Letter of Credit Agreement.
14. RESERVED.
15. ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be in writing (including telecopier) and, if to the Debtor, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it, addressed to it at the address of such party specified in the Letter of Credit Agreement, if to the Lender, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it at Fleet National Bank, Attention: Lawrence Davis, 777 Main Street, Hartford, Connecticut 06115, Telephone No. (860) 986-3443, Telecopier No. (860) 986-1264, or as to any party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall be effective when mailed, telecopied (with telephone confirmation of receipt received), or delivered to the courier service, addressed as aforesaid.
16. NO WAIVER; CUMULATIVE REMEDIES. The Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing and signed by the Lender. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion.
17. CONTINUING SECURITY INTEREST. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until the payment in full of the other Secured Obligations,
(ii) be binding upon the Debtor and its successors and assigns, including but
not limited to any trustee or examiner for the Debtor under the Bankruptcy Code
or receiver for the assets of the Debtor under any rehabilitation or insolvency
law, and (iii) inure, together with the rights and remedies of the Lender
hereunder, to the benefit of the Lender and its respective successors,
transferees and assigns. Upon the payment in full of the Secured Obligations, the Debtor shall be entitled to the return, upon its request and at its expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof, at which time the Lender shall, at the expense and request of the Debtor, reassign and deliver to the Debtor, or to such Person or Persons as may be lawfully entitled thereto, against receipt, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Lender pursuant to the terms hereof, together with appropriate instruments of reassignment and release.
18. FURTHER INDEMNIFICATION. Without limiting the obligations of the Debtor under Section 13 above, the Debtor agrees to pay, and to save the Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.
19. GOVERNING LAW: TERMS. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are mandatorily governed by the law of a jurisdiction other than the State of Connecticut. Unless otherwise defined herein or in the Letter of Credit Agreement, terms used in Article 8 and/or 9 of the Uniform Commercial Code in the State of Connecticut are used herein as therein defined.
20. NO PETITION IN BANKRUPTCY. Each of the parties to this Agreement severally and not jointly, hereby covenants and agrees that, prior to the date which is one year and one day after the payment or expiration in full of all outstanding Letters of Credit, it will not institute against, or join any other Person in instituting against, the Debtor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding.
21. WAIVER OF JURY TRIAL. THE DEBTOR AND THE LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER FUNDAMENTAL DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMINISTRATION OF THIS AGREEMENT OR ENFORCEMENT OF THE FUNDAMENTAL DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OBLIGOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OBLIGOR CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT AND THE OTHER FUNDAMENTAL DOCUMENTS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
22. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) The Debtor hereby irrevocably and unconditionally submits, for itself and its property, to the non-exclusive jurisdiction of any Connecticut State court or Federal court of the United States of America sitting in Connecticut; and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement, the other Fundamental Documents, or for recognition of enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Connecticut State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents against the Debtor or its properties in the courts of any jurisdiction.
(b) The Debtor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents in any Connecticut State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(c) Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
23. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect.
24. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
25. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized, as of the date first above written.
ARCH REINSURANCE COMPANY,
as the Debtor
FLEET NATIONAL BANK, as the Lender
[SECURITY AGREEMENT]
SCHEDULE 1
DEFINITIONS
"ADJUSTED COLLATERAL VALUE" shall have the meaning set forth in the Letter of Credit Agreement.
"AFFILIATE" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Debtor. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), PROVIDED that, in any event, any Person that owns directly or indirectly securities having 20% or more of the voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of being, nor considered to have the power to direct or cause the direction of management or policies solely by reason of being or actions taken as, a director, officer or employee of the Debtor or any of its Subsidiaries and (b) none of the Subsidiaries of the Debtor shall be Affiliates.
"AGREEMENT" shall have the meaning set forth in the preamble.
"BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as in effect from time to time, and any successor statute.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in Hartford, Connecticut are authorized or required to close.
"COLLATERAL" shall have the meaning set forth in Section 1.
"CUSTODIAL ACCOUNT" shall have the meaning set forth in the third "Whereas" clause.
"CUSTODIAN" shall mean Fleet National Bank, as custodian under the Custodian Agreement.
"DEBTOR" shall have the meaning set forth in the preamble.
"EVENT OF DEFAULT" shall have the meaning set forth in the Letter of Credit Agreement.
"FUNDAMENTAL DOCUMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"GAAP" shall mean generally accepted accounting principles in the United States from time to time.
"INDEMNIFIED PERSON" shall have the meaning set forth in Section 13(a).
"INVESTMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"LENDER" shall have the meaning set forth in the preamble.
"LETTER OF CREDIT AGREEMENT" shall have the meaning set forth in the first "Whereas" clause.
"LETTER(S) OF CREDIT" shall have the meaning set forth in the Letter of Credit Agreement.
"PERSON" shall mean an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.
"PLEDGED INVESTMENTS" shall have the meaning set forth in Section 1(i).
"SECURED OBLIGATIONS" shall have the meaning set forth in Section 2.
"UCC" shall mean the Uniform Commercial Code as in effect from time to time in the State of Connecticut.
SCHEDULE 2
TRADE NAMES
SECURITY AGREEMENT
Dated as of April 17, 2002
between
FIRST AMERICAN INSURANCE COMPANY
and
FLEET NATIONAL BANK
TABLE OF CONTENTS
PAGE
SECTION 1. Grant of Security..............................................................................1
SECTION 2. Security for Obligations.......................................................................3
SECTION 3. Delivery of Collateral.........................................................................3
SECTION 4. Debtor Remains Liable..........................................................................3
SECTION 5. Representations and Warranties.................................................................3
SECTION 6. Further Assurances: Supplements................................................................4
SECTION 7. Additional Covenants...........................................................................5
SECTION 8. Lender Appointed Attorney-in-Fact..............................................................7
SECTION 9. Lender May Perform.............................................................................7
SECTION 10. The Lender.....................................................................................7
SECTION 11. Remedies Upon Default; Application of Collateral...............................................8
SECTION 12. Amendments, Etc................................................................................8
SECTION 13. Indemnity and Expenses.........................................................................8
SECTION 14. Reserved.......................................................................................9
SECTION 15. Addresses for Notices..........................................................................9
SECTION 16. No Waiver; Cumulative Remedies.................................................................9
SECTION 17. Continuing Security Interest...................................................................9
SECTION 18. Further Indemnification.......................................................................10
SECTION 19. Governing Law; Terms..........................................................................10
SECTION 20. No Petition in Bankruptcy.....................................................................10
SECTION 21. Waiver of Jury Trial..........................................................................10
SECTION 22. Jurisdiction; Consent to Service of Process...................................................11
SECTION 23. Headings......................................................................................11
SECTION 24. Severability..................................................................................11
SECTION 25. Counterparts..................................................................................12
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SCHEDULES
Schedule 1 Definitions
Schedule 2 Trade Names
SECURITY AGREEMENT
SECURITY AGREEMENT (the "Agreement") dated as of April 17, 2002 between FIRST AMERICAN INSURANCE COMPANY, a corporation organized and existing under the laws of Missouri, ("First American" or "Debtor") and FLEET NATIONAL BANK, as the Lender under the below referenced Letter of Credit Agreement (the "Lender").
W I T N E S S E T H:
WHEREAS, the Lender as the issuer of Letters of Credit has entered into a Letter of Credit and Reimbursement Agreement dated as of April 17, 2002 (as such agreement may hereafter be amended or otherwise modified from time to time, being the "Letter of Credit Agreement") with Arch Reinsurance Ltd., Arch Reinsurance Company, Alternative Re Limited and First American;
WHEREAS, it is a condition precedent to the issuance of Letters of Credit by the Lender under the Letter of Credit Agreement that the Debtor shall have executed and delivered to the Lender this Agreement and pledged and granted a security interest in the Collateral, as such term is defined below, held by or on behalf of the Debtor from time to time and other rights and interests contemplated by this Agreement; and
WHEREAS, pursuant to the terms of the Custodian Agreement, the Custodian has established a Custodial Account, account #0010407670 (the "Custodial Account"), in the name of the Debtor and the Company hereby grants to the Lender a security interest in the Collateral, including the Custodial Account.
NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to issue Letters of Credit for the account of the Debtor under the Letter of Credit Agreement, First American hereby agrees with the Lender as follows (all capitalized terms used herein shall have the meanings set forth in SCHEDULE 1 hereto or, if not defined therein, in the Letter of Credit Agreement):
1. GRANT OF SECURITY. The Debtor hereby pledges to the Lender and grants to the Lender for its benefit a security interest in and lien upon, all of the Debtor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which the Debtor now has or hereafter acquires an interest and wherever the same may be located (collectively, the "Collateral"):
(i) The Custodial Account, including all cash held therein or credited thereto from time to time, and all securities, instruments and investments, including Investments, and other "investment property" and "financial assets," as each such term is defined in the UCC, of any kind held therein or credited thereto from time to time) (the "Pledged Investments"); and
(ii) All proceeds of, accessions to, substitutions for, and earnings on, any and all of the foregoing Collateral (including, without limitation, proceeds that constitute property of the types described in clauses (i) and (ii) above) and, to the extent not otherwise included, all payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes hereof, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto.
Notwithstanding the foregoing, at any time, other than after the occurrence and during the continuation of a Default or an Event of Default, the Debtor may request that the Lender release its Lien on so much of the Collateral as equals the excess, if any, of the Adjusted Collateral Value of the Collateral over the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor; provided that such excess shall be released from the Custodial Account only with the consent of the Lender, which consent may be given or withheld by the Lender in its sole discretion. Should the Adjusted Collateral Value of the Collateral be less than the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, the Lender shall have the right to require the Debtor to pay to the Custodian by no later than 3:00 p.m. (Connecticut time) (i) on the date of such notice, if such notice is received before 12:00 p.m. (Connecticut time) or (ii) on the Business Day immediately following notice by the Lender, if such notice is received after 12:00 p.m. (Connecticut time), the difference between the then-current Adjusted Collateral Value of the Collateral and (B) the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, which payment shall be deposited by the Custodian into the Custodial Account in the form of cash or Investments. Any failure by the Debtor to make such payment shall constitute an Event of Default hereunder and under the Fundamental Documents.
In addition, the Debtor shall have the right, other than after the
occurrence and during the continuation of a Default or an Event of Default, to
substitute Collateral to the extent such substitution arises from normal trade
activities within the Custodial Account hereunder so long as (i) the Debtor
maintains the value of the Custodial Account in accordance with this Section 1,
(ii) such substituted Collateral shall be in the form of Investments, and (iii)
if requested by the Lender, the Debtor shall deliver to the Lender a Supplement
to Security Agreement in a form satisfactory to the Lender. The Collateral which
is removed from the Custodial Account in full compliance with this paragraph
shall no longer be subject to the Lien hereof without any further action on the
part of the Debtor or the Lender; the Collateral which is added to the Custodial
Account pursuant to such Supplement to Security Agreement shall immediately be
subject to the Lien hereof without any further action on the part of the Debtor
or the Lender. The Debtor agrees to pay any costs and expenses of Lender (and
its counsel) in connection with any substitution of Collateral.
2. SECURITY FOR OBLIGATIONS. The grant in Section 1 secures and the Collateral is collateral security for the prompt payment or performance in full when due, whether at stated maturity, by acceleration or otherwise of all obligations of every nature now or hereafter existing of the Debtor under the Letter of Credit Agreement and any Letter of Credit application and reimbursement agreement or other document or instrument delivered pursuant thereto, and all amendments, extensions or renewals thereof or hereof, whether for principal, interest, fees, expenses or otherwise, whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred and all or any portion of such obligations that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly as a preference, fraudulent transfer or otherwise, and all obligations of every nature of the Debtor now or hereafter existing under this Agreement (all such obligations being the "Secured Obligations").
3. DELIVERY OF COLLATERAL. All certificates or instruments, if any, representing or evidencing the Collateral shall be delivered to and held by the Custodian for the benefit of the Lender. At any time at which an Event of Default has occurred and is continuing under the Letter of Credit Agreement, the Lender shall have the right, subject at all times to Section 11 hereof, in its discretion and without notice to the Debtor, to transfer to or to register in the name of any of its nominees any or all of the Collateral, and may receive the income and any distributions thereon and hold the same as Collateral for the Secured Obligations, or apply the same to any of the Secured Obligations.
4. DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (a) the Debtor shall remain liable under the contracts and agreements included or relating to the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any of the rights hereunder shall not release the Debtor from any of its duties or obligations under the contracts and agreements included in or relating to the Collateral, and (c) the Lender shall not have any obligation or liability under the contracts and agreements included in or relating to the Collateral by reason of this Agreement, nor shall the Lender be obligated to perform any of the obligations or duties of the Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.
5. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and warrants as follows:
(a) The Debtor is duly organized and validly exists under the laws of Missouri.
(b) The Debtor is the legal and beneficial owner of the Collateral free and clear of any liens, security interest, option or other charge or encumbrance (except liens in favor of the Custodian). No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except
such as may have been filed in favor of the Lender relating to this Agreement. Except as set forth on Schedule 2 attached hereto, the Debtor has no trade names and does not do business under any fictitious business name.
(c) The pledge and the grant of the security interest in the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, and all filings and other actions necessary to perfect and protect such security interest have been duly taken.
(d) No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than authorizations, consents, approvals already obtained, actions already taken, notices already provided and filings already made) is required (i) for the grant by the Debtor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Debtor, (ii) for the perfection of or the exercise by the Lender of its rights and remedies provided for in this Agreement or (iii) to ensure the legality, validity, enforceability or admissibility in evidence of this Agreement in any jurisdiction in which any of the Collateral is located.
(e) Each of this Agreement and the other Fundamental Documents to which the Debtor is a party constitutes the legal, valid and binding obligation of the Debtor, enforceable against the Debtor in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally, and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). To the knowledge of the Debtor, each Pledged Investment constitutes the legally valid and binding obligation of the party obligated to pay the same.
(f) The Debtor is deriving substantial direct and indirect benefits from the issuance of the Letters of Credit for its account under the Letter of Letter of Credit Agreement and has received good and adequate consideration for the pledge of the Collateral effected under this Agreement.
6. FURTHER ASSURANCES: SUPPLEMENTS. (a) The Debtor agrees that at any time and from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that may be reasonably necessary or desirable, or that the Lender may request, to perfect and protect the pledges and security interests granted or purported to be granted hereby or to enable the Lender to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Debtor will (i) if any Collateral shall be evidenced by a promissory note or other instrument, or if any of the Collateral shall constitute chattel paper, deliver to the Lender (or to the Custodian to hold on behalf of the Lender) such note, instrument and all original counterparts of chattel paper duly endorsed and accompanied by duly executed instruments of transfer, all in form satisfactory to the Lender and (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or
desirable, or that the Lender may reasonably request, to protect and preserve the pledges and security interests granted or purported to be granted hereby.
(a) The Debtor hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. The Lender will promptly send the Debtor any financing or continuation statements thereto which it files without the signature of the Debtor and, except in the case of filings of copies of this Agreement as financing statements, the Lender will promptly send the Debtor the filing or recordation information with respect thereto.
(b) The Debtor will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender may reasonably request, all in reasonable detail.
(c) The Debtor agrees that it will not create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral except in favor of the Lender hereunder or the Custodian.
7. ADDITIONAL COVENANTS. (a) The Debtor shall maintain its organization and existence in the jurisdiction specified in Section 5(a) and shall not reincorporate or otherwise reorganize in any other jurisdiction without the prior written consent of the Lender. The Debtor shall, from the date on which each Pledged Investment was purchased, maintain (i) complete records of each Pledged Investment, including records of all payments received, interest or fees accruing or credits granted and (ii) all documentation relating thereto. In connection therewith, the Lender may (subject to the confidentiality restrictions contained in any agreement) institute procedures to permit it to confirm the balances owing in respect of any Pledged Investment. The Debtor agrees to render to the Lender such clerical and other assistance as may be reasonably requested with regard to the foregoing. If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, promptly upon request therefor, the Debtor shall (subject to the confidentiality restrictions contained in any agreement) deliver to the Lender complete and correct copies of all documentation relating to the Pledged Investments.
(a) The Debtor shall duly fulfill in all material respects all obligations on its part to be fulfilled under or in connection with the Pledged Investments and shall do nothing to impair in any material respect the rights of the Lender therein.
(b) Following an Event of Default under the Letter of Credit Agreement (subject to Section 11 hereof), any proceeds of Collateral when first received by or on behalf of the Debtor shall be deposited by or on behalf of the Debtor in the form so received in the Custodial Account, and until so deposited shall be held in trust for and as
the Lender's property and shall not be commingled with the Debtor's or any other Person's other funds or properties.
(c) The Debtor, at its own cost and expense, will, and will cause the Custodian to, maintain satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received with respect to the Collateral and all other dealings with the Collateral. Upon the occurrence and during the continuation of an Event of Default under the Letter of Credit Agreement, the Debtor will (subject to the confidentiality restrictions contained in any agreement and any applicable law) deliver and turn over to the Lender or to its representatives, or at the option of the Lender shall (subject to the confidentiality restrictions contained in any agreement) provide the Lender or its representatives with access to, at any time on demand of the Lender, copies of all the Debtor's books and records pertaining to the Collateral including, without limitation, all credit files and computer software, programs, tapes or disks relating to Pledged Investments or otherwise necessary to the collection thereof.
(d) The Debtor will comply in all material respects with all applicable statutes, rules, and regulations with respect to the Collateral or any part thereof.
(e) The Debtor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom and all claims of any kind (including, without limitation, claims for labor, materials and supplies), except that no such amount need be paid if (i) such non-payment does not involve any danger of the sale, forfeiture or loss of any of the Collateral or any interest therein, (ii) the charge or levy is being contested in good faith and by proper proceedings, and (iii) the obligation to pay such amount is adequately reserved against in accordance with and to the extent required by GAAP.
(f) The Debtor will in all material respects perform and observe all the terms and provisions of the documentation relating to the Pledged Investments to be performed or observed by it, maintain the documentation relating to the Pledged Investments in full force and effect in accordance with their terms, and take all action to such end as may be from time reasonably requested by the Lender.
(g) The Debtor will advise the Lender promptly, in reasonable detail, (i) of any lien, security interest, encumbrance or claim made or asserted against any of the Collateral by any Person, other than the Custodian, and (ii) of the occurrence of any event which would have a material adverse effect on the aggregate value of the Collateral or on the pledges and security interests granted hereby.
(h) The Debtor will not sell, assign (by operation of law or otherwise), or otherwise dispose of, or grant any option with respect to, any of the Collateral, except sales not restricted by the terms of the Letter of Credit Agreement or this Agreement.
(i) The Debtor shall at all times retain Fleet National Bank as the Custodian pursuant to the Custodian Agreement.
8. LENDER APPOINTED ATTORNEY-IN-FACT. The Debtor appoints the
Lender its attorney-in-fact with full authority in the place and stead of the
Debtor and in the name of the Debtor or otherwise, from time to time in the
Lender's discretion, after an Event of Default under the Letter of Credit
Agreement has occurred and is continuing (but in all instances subject to
Section 11 hereof), to take any action and to execute any instrument that the
Lender may deem necessary or advisable to accomplish the purposes of this
Agreement (subject to the provisions of any applicable law), including, without
limitation, to (i) ask, demand, collect, sue for, recover, compromise, receive
and give acquittances and receipts for moneys due and to become due under or in
connection with the Collateral, (ii) receive, endorse and collect all drafts or
other instruments and documents made payable to the Debtor in connection
therewith or representing any payment, dividend or other distribution in respect
of the Collateral or any part thereof and to give full discharge for the same,
(iii) file any claims or take any action or institute any proceedings which the
Lender may deem to be necessary or desirable for the collection of any of the
Collateral, (iv) enforce the rights of the Lender with respect to any of the
Collateral and compliance with the terms and conditions of this Agreement, the
Letter of Credit Agreement and the other Fundamental Documents, (v) pay or
discharge taxes or Liens levied or placed upon or threatened against the
Collateral, the legality or validity thereof and the amounts necessary to
discharge the same to be determined by the Lender in its sole discretion, and
such payments made by the Lender to become obligations of the Debtor to the
Lender, due and payable in accordance with the Letter of Credit Agreement, (vi)
generally sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though the
Lender were the absolute owner thereof for all purposes, and (vii) do, at the
Lender's option and the Debtor's expense, at any time, or from time to time, all
acts and things that the Lender deems necessary to protect, preserve or realize
upon the Collateral and the Lender's security interest therein, in order to
effect the intent of this Agreement, all as fully and effectively as the Debtor
might do.
9. LENDER MAY PERFORM. If the Debtor fails to perform any agreement contained herein or if a Default or an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, the Lender may at any time (but in all instances subject to Section 11 hereof) itself perform, or cause performance of, such agreement.
10. THE LENDER. (a) Neither the Lender nor any of its respective affiliates, directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or for errors in judgment, except for its or their own gross negligence, willful misconduct or bad faith.
(b) The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for the exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral or as to any rights pertaining thereto.
(c) The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Lender accords its own property.
11. REMEDIES UPON DEFAULT; APPLICATION OF COLLATERAL. (a) If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, then any cash held by the Lender and all cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied to the obligations of the Debtor to the Lender as the Lender determines in its sole discretion. Any surplus of such cash or cash proceeds held by the Lender and remaining after the payment in full of all the Secured Obligations shall be paid over to the Debtor or to whomsoever may be lawfully entitled thereto.
(a) Any foreclosure upon, sale of, or exercise of rights with respect to the Collateral shall be conducted in compliance with all contractual provisions applicable to such Collateral, including but not limited to any provisions of any agreement pursuant to which any Investment arises that govern the sale or assignment thereof.
(b) Any sale of the Collateral or any part thereof shall be made in a commercially reasonable manner and in accordance with applicable law and may be made in one or more lots at public or private sale, for cash, on credit or for future delivery. The Lender and/or any of its affiliates may be a purchaser at any such sale. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Debtor shall cooperate with the Lender in all reasonable ways in order to assist the Lender in the sale and other disposition of the Collateral.
12. AMENDMENTS, ETC. No amendment of any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by the Debtor and the Lender, no waiver of any provision of this Agreement, nor consent to any departure by the Debtor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure to exercise nor any delay in exercising on the part of the Lender of any right, power or privilege under this Agreement, shall operate as a waiver thereof; further, no single or partial exercise of any right, power or privilege under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
13. INDEMNITY AND EXPENSES. (a) The Debtor agrees to indemnify the Lender and each of its directors, officers, employees and agents (each an "Indemnified Person") from and against any and all claims, damages, losses, liabilities and expenses (excluding any present or future taxes, now or hereafter imposed, levied, collected, withheld or assessed), arising out of or in connection with or resulting from the Debtor's performance under this Agreement (including, without limitation, enforcement
of this Agreement against the Debtor), unless and to the extent such claim, damage, loss, liability or expense was attributable to the gross negligence, willful misconduct or bad faith of any of the Indemnified Persons.
(a) The Debtor agrees to pay to the Lender from time to time, upon
demand, the amount of any and all costs and expenses (excluding any present or
future taxes, now or hereafter imposed, levied, collected, withheld or
assessed), including the reasonable fees and expenses of its counsel and of any
experts and agents, that the Lender may incur in connection with (i) the
administration of this Agreement, (ii) the custody (including custody by a
third-party on behalf of the Lender) or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, (iii) the
exercise or enforcement of any of the rights of the Lender against the Debtor,
(iv) the failure by the Debtor to perform or observe any of the provisions
hereof or (v) any action taken by the Lender pursuant to Section 6 or 9 hereof.
(b) The foregoing provisions of this Section 13 are in furtherance and not in limitation of the Debtor's obligations under the Letter of Credit Agreement.
14. RESERVED.
15. ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be in writing (including telecopier) and, if to the Debtor, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it, addressed to it at the address of such party specified in the Letter of Credit Agreement, if to the Lender, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it at Fleet National Bank, Attention: Lawrence Davis, 777 Main Street, Hartford, Connecticut 06115, Telephone No. (860) 986-3443, Telecopier No. (860) 986-1264, or as to any party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall be effective when mailed, telecopied (with telephone confirmation of receipt received), or delivered to the courier service, addressed as aforesaid.
16. NO WAIVER; CUMULATIVE REMEDIES. The Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing and signed by the Lender. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion.
17. CONTINUING SECURITY INTEREST. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until the payment in full of the other Secured Obligations,
(ii) be binding upon the Debtor and its successors and assigns, including but
not limited to any trustee or examiner for the Debtor under the Bankruptcy Code
or receiver for the assets of the Debtor under any rehabilitation or insolvency
law, and (iii) inure, together with the rights and remedies of the Lender
hereunder, to the benefit of the Lender and its respective successors,
transferees and assigns. Upon the payment in full of the Secured Obligations, the Debtor shall be entitled to the return, upon its request and at its expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof, at which time the Lender shall, at the expense and request of the Debtor, reassign and deliver to the Debtor, or to such Person or Persons as may be lawfully entitled thereto, against receipt, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Lender pursuant to the terms hereof, together with appropriate instruments of reassignment and release.
18. FURTHER INDEMNIFICATION. Without limiting the obligations of the Debtor under Section 13 above, the Debtor agrees to pay, and to save the Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.
19. GOVERNING LAW; TERMS. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are mandatorily governed by the law of a jurisdiction other than the State of Connecticut. Unless otherwise defined herein or in the Letter of Credit Agreement, terms used in Article 8 and/or 9 of the Uniform Commercial Code in the State of Connecticut are used herein as therein defined.
20. NO PETITION IN BANKRUPTCY. Each of the parties to this Agreement severally and not jointly, hereby covenants and agrees that, prior to the date which is one year and one day after the payment or expiration in full of all outstanding Letters of Credit, it will not institute against, or join any other Person in instituting against, the Debtor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding.
21. WAIVER OF JURY TRIAL. THE DEBTOR AND THE LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER FUNDAMENTAL DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMINISTRATION OF THIS AGREEMENT OR ENFORCEMENT OF THE FUNDAMENTAL DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OBLIGOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OBLIGOR CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT AND THE OTHER FUNDAMENTAL DOCUMENTS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
22. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) The Debtor hereby irrevocably and unconditionally submits, for itself and its property, to the non-exclusive jurisdiction of any Connecticut State court or Federal court of the United States of America sitting in Connecticut; and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement, the other Fundamental Documents, or for recognition of enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Connecticut State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents against the Debtor or its properties in the courts of any jurisdiction.
(a) The Debtor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents in any Connecticut State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(b) Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
23. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect.
24. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
25. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized, as of the date first above written.
FIRST AMERICAN INSURANCE COMPANY,
as the Debtor
FLEET NATIONAL BANK, as the Lender
[SECURITY AGREEMENT]
SCHEDULE 1
DEFINITIONS
"ADJUSTED COLLATERAL VALUE" shall have the meaning set forth in the Letter of Credit Agreement.
"AFFILIATE" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Debtor. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), PROVIDED that, in any event, any Person that owns directly or indirectly securities having 20% or more of the voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of being, nor considered to have the power to direct or cause the direction of management or policies solely by reason of being or actions taken as, a director, officer or employee of the Debtor or any of its Subsidiaries and (b) none of the Subsidiaries of the Debtor shall be Affiliates.
"AGREEMENT" shall have the meaning set forth in the preamble.
"BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as in effect from time to time, and any successor statute.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in Hartford, Connecticut are authorized or required to close.
"COLLATERAL" shall have the meaning set forth in Section 1.
"CUSTODIAL ACCOUNT" shall have the meaning set forth in the third "Whereas" clause.
"CUSTODIAN" shall mean Fleet National Bank, as custodian under the Custodian Agreement.
"DEBTOR" shall have the meaning set forth in the preamble.
"EVENT OF DEFAULT" shall have the meaning set forth in the Letter of Credit Agreement.
"FUNDAMENTAL DOCUMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"GAAP" shall mean generally accepted accounting principles in the United States from time to time.
"INDEMNIFIED PERSON" shall have the meaning set forth in Section 13(a).
"INVESTMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"LENDER" shall have the meaning set forth in the preamble.
"LETTER OF CREDIT AGREEMENT" shall have the meaning set forth in the first "Whereas" clause.
"LETTER(S) OF CREDIT" shall have the meaning set forth in the Letter of Credit Agreement.
"PERSON" shall mean an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.
"PLEDGED INVESTMENTS" shall have the meaning set forth in Section 1(i).
"SECURED OBLIGATIONS" shall have the meaning set forth in Section 2.
"UCC" shall mean the Uniform Commercial Code as in effect from time to time in the State of Connecticut.
SCHEDULE 2
TRADE NAMES
SECURITY AGREEMENT
Dated as of April 17, 2002
between
ARCH REINSURANCE LTD.
and
FLEET NATIONAL BANK
TABLE OF CONTENTS
PAGE
SECTION 1. Grant of Security..............................................................................1
SECTION 2. Security for Obligations.......................................................................3
SECTION 3. Delivery of Collateral.........................................................................3
SECTION 4. Debtor Remains Liable..........................................................................3
SECTION 5. Representations and Warranties.................................................................3
SECTION 6. Further Assurances: Supplements................................................................4
SECTION 7. Additional Covenants...........................................................................5
SECTION 8. Lender Appointed Attorney-in-Fact..............................................................7
SECTION 9. Lender May Perform.............................................................................7
SECTION 10. The Lender.....................................................................................7
SECTION 11. Remedies Upon Default; Application of Collateral...............................................8
SECTION 12. Amendments, Etc................................................................................8
SECTION 13. Indemnity and Expenses.........................................................................8
SECTION 14. Reserved.......................................................................................9
SECTION 15. Addresses for Notices..........................................................................9
SECTION 16. No Waiver; Cumulative Remedies.................................................................9
SECTION 17. Continuing Security Interest...................................................................9
SECTION 18. Further Indemnification.......................................................................10
SECTION 19. Governing Law; Terms..........................................................................10
SECTION 20. No Petition in Bankruptcy.....................................................................10
SECTION 21. Waiver of Jury Trial..........................................................................10
SECTION 22. Jurisdiction; Consent to Service of Process...................................................11
SECTION 23. Headings......................................................................................11
SECTION 24. Severability..................................................................................11
SECTION 25. Counterparts..................................................................................12
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SCHEDULES
Schedule 1 Definitions
Schedule 2 Trade Names
SECURITY AGREEMENT
SECURITY AGREEMENT (the "Agreement") dated as of April 17, 2002 between ARCH REINSURANCE LTD., a corporation organized and existing under the laws of Bermuda, ("Reinsurance" or "Debtor") and FLEET NATIONAL BANK, as the Lender under the below referenced Letter of Credit Agreement (the "Lender").
W I T N E S S E T H:
WHEREAS, the Lender as the issuer of Letters of Credit has entered into a Letter of Credit and Reimbursement Agreement dated as of April 17, 2002 (as such agreement may hereafter be amended or otherwise modified from time to time, being the "Letter of Credit Agreement") with Alternative Re Limited, Reinsurance, Arch Reinsurance Company and First American Insurance Company;
WHEREAS, it is a condition precedent to the issuance of Letters of Credit by the Lender under the Letter of Credit Agreement that the Debtor shall have executed and delivered to the Lender this Agreement and pledged and granted a security interest in the Collateral, as such term is defined below, held by or on behalf of the Debtor from time to time and other rights and interests contemplated by this Agreement; and
WHEREAS, pursuant to the terms of the Custodian Agreement, the Custodian has established a Custodial Account, account #0010406870 (the "Custodial Account"), in the name of the Debtor and the Company hereby grants to the Lender a security interest in the Collateral, including the Custodial Account.
NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to issue Letters of Credit for the account of the Debtor under the Letter of Credit Agreement, Reinsurance hereby agrees with the Lender as follows (all capitalized terms used herein shall have the meanings set forth in SCHEDULE 1 hereto or, if not defined therein, in the Letter of Credit Agreement):
1. GRANT OF SECURITY. The Debtor hereby pledges and charges to the Lender and grants to the Lender for its benefit a security interest in and lien upon, all of the Debtor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which the Debtor now has or hereafter acquires an interest and wherever the same may be located (collectively, the "Collateral"):
(i) The Custodial Account, including all cash held therein or credited thereto from time to time, and all securities, instruments and investments, including Investments, and other "investment property" and "financial assets," as each such term is defined in the UCC, of any kind held therein or credited thereto from time to time) (the "Pledged Investments");
(ii) All proceeds of, accessions to, substitutions for, and earnings on, any and all of the foregoing Collateral (including, without limitation, proceeds that constitute property of the types described in clauses (i) and (ii) above) and, to
the extent not otherwise included, all payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes hereof, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto.
Notwithstanding the foregoing, at any time, other than after the occurrence and during the continuation of a Default or an Event of Default, the Debtor may request that the Lender release its Lien on so much of the Collateral as equals the excess, if any, of the Adjusted Collateral Value of the Collateral over the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor; provided that such excess shall be released from the Custodial Account only with the consent of the Lender, which consent may be given or withheld by the Lender in its sole discretion. Should the Adjusted Collateral Value of the Collateral be less than the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, the Lender shall have the right to require the Debtor to pay to the Custodian by no later than 3:00 p.m. (Connecticut time) (i) on the date of such notice, if such notice is received before 12:00 p.m. (Connecticut time) or (ii) on the Business Day immediately following notice by the Lender, if such notice is received after 12:00 p.m. (Connecticut time), the difference between the then-current Adjusted Collateral Value of the Collateral and (B) the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, which payment shall be deposited by the Custodian into the Custodial Account in the form of cash or Investments. Any failure by the Debtor to make such payment shall constitute an Event of Default hereunder and under the Fundamental Documents.
In addition, the Debtor shall have the right, other than after the
occurrence and during the continuation of a Default or an Event of Default, to
substitute Collateral to the extent such substitution arises from normal trade
activities within the Custodial Account hereunder so long as (i) the Debtor
maintains the value of the Custodial Account in accordance with this Section 1,
(ii) such substituted Collateral shall be in the form of Investments, and (iii)
if requested by the Lender, the Debtor shall deliver to the Lender a Supplement
to Security Agreement in a form satisfactory to the Lender. The Collateral which
is removed from the Custodial Account in full compliance with this paragraph
shall no longer be subject to the Lien hereof without any further action on the
part of the Debtor or the Lender; the Collateral which is added to the Custodial
Account pursuant to such Supplement to Security Agreement shall immediately be
subject to the Lien hereof without any further action on the part of the Debtor
or the Lender. The Debtor agrees to pay any costs and expenses of the Lender
(and its counsel) in connection with any substitution of Collateral.
2. SECURITY FOR OBLIGATIONS. The grant in Section 1 secures and the Collateral is collateral security for the prompt payment or performance in full when
due, whether at stated maturity, by acceleration or otherwise of all obligations of every nature now or hereafter existing of the Debtor under the Letter of Credit Agreement and any Letter of Credit application and reimbursement agreement or other document or instrument delivered pursuant thereto, and all amendments, extensions or renewals thereof or hereof, whether for principal, interest, fees, expenses or otherwise, whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred and all or any portion of such obligations that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly as a preference, fraudulent transfer or otherwise, and all obligations of every nature of the Debtor now or hereafter existing under this Agreement (all such obligations being the "Secured Obligations").
3. DELIVERY OF COLLATERAL. All certificates or instruments, if any, representing or evidencing the Collateral shall be delivered to and held by the Custodian for the benefit of the Lender. At any time at which an Event of Default has occurred and is continuing under the Letter of Credit Agreement, the Lender shall have the right, subject at all times to Section 11 hereof, in its discretion and without notice to the Debtor, to transfer to or to register in the name of any of its nominees any or all of the Collateral, and may receive the income and any distributions thereon and hold the same as Collateral for the Secured Obligations, or apply the same to any of the Secured Obligations.
4. DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (a) the Debtor shall remain liable under the contracts and agreements included or relating to the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any of the rights hereunder shall not release the Debtor from any of its duties or obligations under the contracts and agreements included in or relating to the Collateral, and (c) the Lender shall not have any obligation or liability under the contracts and agreements included in or relating to the Collateral by reason of this Agreement, nor shall the Lender be obligated to perform any of the obligations or duties of the Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.
5. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and warrants as follows:
(a) The Debtor is duly organized and validly exists under the laws of Bermuda.
(b) The Debtor is the legal and beneficial owner of the Collateral free and clear of any liens, security interest, option or other charge or encumbrance (except liens in favor of the Custodian). No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Lender relating to this
Agreement. Except as set forth on Schedule 2 attached hereto, the Debtor has no trade names and does not do business under any fictitious business name.
(c) The pledge and the grant of the security interest in the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, and all filings and other actions necessary to perfect and protect such security interest have been duly taken.
(d) No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than authorizations, consents, approvals already obtained, actions already taken, notices already provided and filings already made) is required (i) for the grant by the Debtor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Debtor, (ii) for the perfection of or the exercise by the Lender of its rights and remedies provided for in this Agreement or (iii) to ensure the legality, validity, enforceability or admissibility in evidence of this Agreement in any jurisdiction in which any of the Collateral is located.
(e) Each of this Agreement and the other Fundamental Documents to which the Debtor is a party constitutes the legal, valid and binding obligation of the Debtor, enforceable against the Debtor in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally, and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). To the knowledge of the Debtor, each Pledged Investment constitutes the legally valid and binding obligation of the party obligated to pay the same.
(f) The Debtor is deriving substantial direct and indirect benefits from the issuance of the Letters of Credit for its account under the Letter of Letter of Credit Agreement and has received good and adequate consideration for the pledge of the Collateral effected under this Agreement.
6. FURTHER ASSURANCES: SUPPLEMENTS. (a) The Debtor agrees that at
any time and from time to time, at its expense, it will promptly execute and
deliver all further instruments and documents, and take all further action that
may be reasonably necessary or desirable, or that the Lender may request, to
perfect and protect the pledges and charges and security interests granted or
purported to be granted hereby or to enable the Lender to exercise and enforce
its rights and remedies hereunder with respect to any Collateral. Without
limiting the generality of the foregoing, the Debtor will (i) if any Collateral
shall be evidenced by a promissory note or other instrument, or if any of the
Collateral shall constitute chattel paper, deliver to the Lender (or to the
Custodian to hold on behalf of the Lender) such note, instrument and all
original counterparts of chattel paper duly endorsed and accompanied by duly
executed instruments of transfer, all in form satisfactory to the Lender and
(ii) execute and file such financing or continuation statements, or amendments
thereto, and such other instruments or notices, as may be
necessary or desirable, or that the Lender may reasonably request, to protect and preserve the pledges and charges and security interests granted or purported to be granted hereby.
(a) The Debtor hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. The Lender will promptly send the Debtor any financing or continuation statements thereto which it files without the signature of the Debtor and, except in the case of filings of copies of this Agreement as financing statements, the Lender will promptly send the Debtor the filing or recordation information with respect thereto.
(b) The Debtor will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender may reasonably request, all in reasonable detail.
(c) The Debtor agrees that it will not create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral except in favor of the Lender hereunder or the Custodian.
7. ADDITIONAL COVENANTS. (a) The Debtor shall maintain its organization and existence in the jurisdiction specified in Section 5(a) and shall not reincorporate or otherwise reorganize in any other jurisdiction without the prior written consent of the Lender. The Debtor shall, from the date on which each Pledged Investment was purchased, maintain (i) complete records of each Pledged Investment, including records of all payments received, interest or fees accruing or credits granted and (ii) all documentation relating thereto. In connection therewith, the Lender may (subject to the confidentiality restrictions contained in any agreement) institute procedures to permit it to confirm the balances owing in respect of any Pledged Investment. The Debtor agrees to render to the Lender such clerical and other assistance as may be reasonably requested with regard to the foregoing. If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, promptly upon request therefor, the Debtor shall (subject to the confidentiality restrictions contained in any agreement) deliver to the Lender complete and correct copies of all documentation relating to the Pledged Investments.
(a) The Debtor shall duly fulfill in all material respects all obligations on its part to be fulfilled under or in connection with the Pledged Investments and shall do nothing to impair in any material respect the rights of the Lender therein.
(b) Following an Event of Default under the Letter of Credit Agreement (subject to Section 11 hereof), any proceeds of Collateral when first received by or on behalf of the Debtor shall be deposited by or on behalf of the Debtor in the form so received in the Custodial Account, and until so deposited shall be held in trust for and
as the Lender's property and shall not be commingled with the Debtor's or any other Person's other funds or properties.
(c) The Debtor, at its own cost and expense, will, and will cause the Custodian to, maintain satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received with respect to the Collateral and all other dealings with the Collateral. Upon the occurrence and during the continuation of an Event of Default under the Letter of Credit Agreement, the Debtor will (subject to the confidentiality restrictions contained in any agreement and any applicable law) deliver and turn over to the Lender or to its representatives, or at the option of the Lender shall (subject to the confidentiality restrictions contained in any agreement) provide the Lender or its representatives with access to, at any time on demand of the Lender, copies of all the Debtor's books and records pertaining to the Collateral including, without limitation, all credit files and computer software, programs, tapes or disks relating to Pledged Investments or otherwise necessary to the collection thereof.
(d) The Debtor will comply in all material respects with all applicable statutes, rules, and regulations with respect to the Collateral or any part thereof.
(e) The Debtor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom and all claims of any kind (including, without limitation, claims for labor, materials and supplies), except that no such amount need be paid if (i) such non-payment does not involve any danger of the sale, forfeiture or loss of any of the Collateral or any interest therein, (ii) the charge or levy is being contested in good faith and by proper proceedings, and (iii) the obligation to pay such amount is adequately reserved against in accordance with and to the extent required by GAAP.
(f) The Debtor will in all material respects perform and observe all the terms and provisions of the documentation relating to the Pledged Investments to be performed or observed by it, maintain the documentation relating to the Pledged Investments in full force and effect in accordance with their terms, and take all action to such end as may be from time reasonably requested by the Lender.
(g) The Debtor will advise the Lender promptly, in reasonable detail, (i) of any lien, security interest, encumbrance or claim made or asserted against any of the Collateral by any Person, other than the Custodian, and (ii) of the occurrence of any event which would have a material adverse effect on the aggregate value of the Collateral or on the pledges and security interests granted hereby.
(h) The Debtor will not sell, assign (by operation of law or otherwise), or otherwise dispose of, or grant any option with respect to, any of the Collateral, except sales not restricted by the terms of the Letter of Credit Agreement or this Agreement.
(i) The Debtor shall at all times retain Fleet National Bank as the Custodian pursuant to the Custodian Agreement.
8. LENDER APPOINTED ATTORNEY-IN-FACT. The Debtor appoints the
Lender its attorney-in-fact with full authority in the place and stead of the
Debtor and in the name of the Debtor or otherwise, from time to time in the
Lender's discretion, after an Event of Default under the Letter of Credit
Agreement has occurred and is continuing (but in all instances subject to
Section 11 hereof), to take any action and to execute any instrument that the
Lender may deem necessary or advisable to accomplish the purposes of this
Agreement (subject to the provisions of any applicable law), including, without
limitation, to (i) ask, demand, collect, sue for, recover, compromise, receive
and give acquittances and receipts for moneys due and to become due under or in
connection with the Collateral, (ii) receive, endorse and collect all drafts or
other instruments and documents made payable to the Debtor in connection
therewith or representing any payment, dividend or other distribution in respect
of the Collateral or any part thereof and to give full discharge for the same,
(iii) file any claims or take any action or institute any proceedings which the
Lender may deem to be necessary or desirable for the collection of any of the
Collateral, (iv) enforce the rights of the Lender with respect to any of the
Collateral and compliance with the terms and conditions of this Agreement, the
Letter of Credit Agreement and the other Fundamental Documents, (v) pay or
discharge taxes or Liens levied or placed upon or threatened against the
Collateral, the legality or validity thereof and the amounts necessary to
discharge the same to be determined by the Lender in its sole discretion, and
such payments made by the Lender to become obligations of the Debtor to the
Lender, due and payable in accordance with the Letter of Credit Agreement, (vi)
generally sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though the
Lender were the absolute owner thereof for all purposes, and (vii) do, at the
Lender's option and the Debtor's expense, at any time, or from time to time, all
acts and things that the Lender deems necessary to protect, preserve or realize
upon the Collateral and the Lender's security interest therein, in order to
effect the intent of this Agreement, all as fully and effectively as the Debtor
might do.
9. LENDER MAY PERFORM. If the Debtor fails to perform any agreement contained herein or if a Default or an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, the Lender may at any time (but in all instances subject to Section 11 hereof) itself perform, or cause performance of, such agreement.
10. THE LENDER. (a) Neither the Lender nor any of its respective affiliates, directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or for errors in judgment, except for its or their own gross negligence, willful misconduct or bad faith.
(b) The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for the exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral or as to any rights pertaining thereto.
(c) The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Lender accords its own property.
11. REMEDIES UPON DEFAULT; APPLICATION OF COLLATERAL. (a) If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, then any cash held by the Lender and all cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied to the obligations of the Debtor to the Lender as the Lender determines in its sole discretion. Any surplus of such cash or cash proceeds held by the Lender and remaining after the payment in full of all the Secured Obligations shall be paid over to the Debtor or to whomsoever may be lawfully entitled thereto.
(a) Any foreclosure upon, sale of, or exercise of rights with respect to the Collateral shall be conducted in compliance with all contractual provisions applicable to such Collateral, including but not limited to any provisions of any agreement pursuant to which any Investment arises that govern the sale or assignment thereof.
(b) Any sale of the Collateral or any part thereof shall be made in a commercially reasonable manner and in accordance with applicable law and may be made in one or more lots at public or private sale, for cash, on credit or for future delivery. The Lender and/or any of its affiliates may be a purchaser at any such sale. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Debtor shall cooperate with the Lender in all reasonable ways in order to assist the Lender in the sale and other disposition of the Collateral.
12. AMENDMENTS, ETC. No amendment of any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by the Debtor and the Lender, no waiver of any provision of this Agreement, nor consent to any departure by the Debtor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure to exercise nor any delay in exercising on the part of the Lender of any right, power or privilege under this Agreement, shall operate as a waiver thereof; further, no single or partial exercise of any right, power or privilege under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
13. INDEMNITY AND EXPENSES. (a) The Debtor agrees to indemnify the Lender and each of its directors, officers, employees and agents (each an "Indemnified Person") from and against any and all claims, damages, losses, liabilities and expenses (excluding any present or future taxes, now or hereafter imposed, levied, collected, withheld or assessed), arising out of or in connection with or resulting from the Debtor's performance under this Agreement (including, without limitation, enforcement
of this Agreement against the Debtor), unless and to the extent such claim, damage, loss, liability or expense was attributable to the gross negligence, willful misconduct or bad faith of any of the Indemnified Persons.
(a) The Debtor agrees to pay to the Lender from time to time, upon
demand, the amount of any and all costs and expenses (excluding any present or
future taxes, now or hereafter imposed, levied, collected, withheld or
assessed), including the reasonable fees and expenses of its counsel and of any
experts and agents, that the Lender may incur in connection with (i) the
administration of this Agreement, (ii) the custody (including custody by a
third-party on behalf of the Lender) or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, (iii) the
exercise or enforcement of any of the rights of the Lender against the Debtor,
(iv) the failure by the Debtor to perform or observe any of the provisions
hereof or (v) any action taken by the Lender pursuant to Section 6 or 9 hereof.
(b) The foregoing provisions of this Section 13 are in furtherance and not in limitation of the Debtor's obligations under the Letter of Credit Agreement.
14. RESERVED.
15. ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be in writing (including telecopier) and, if to the Debtor, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it, addressed to it at the address of such party specified in the Letter of Credit Agreement, if to the Lender, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it at Fleet National Bank, Attention: Lawrence Davis, 777 Main Street, Hartford, Connecticut 06115, Telephone No. (860) 986-3443, Telecopier No. (860) 986-1264, or as to any party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall be effective when mailed, telecopied (with telephone confirmation of receipt received), or delivered to the courier service, addressed as aforesaid.
16. NO WAIVER; CUMULATIVE REMEDIES. The Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing and signed by the Lender. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion.
17. CONTINUING SECURITY INTEREST. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until the payment in full of the other Secured Obligations,
(ii) be binding upon the Debtor and its successors and assigns, including but
not limited to any trustee or examiner for the Debtor under the Bankruptcy Code
or receiver for the assets of the Debtor under any rehabilitation or insolvency
law, and (iii) inure, together with the rights and remedies of the Lender
hereunder, to the benefit of the Lender and its respective successors,
transferees and assigns. Upon the payment in full of the Secured Obligations, the Debtor shall be entitled to the return, upon its request and at its expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof, at which time the Lender shall, at the expense and request of the Debtor, reassign and deliver to the Debtor, or to such Person or Persons as may be lawfully entitled thereto, against receipt, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Lender pursuant to the terms hereof, together with appropriate instruments of reassignment and release.
18. FURTHER INDEMNIFICATION. Without limiting the obligations of the Debtor under Section 13 above, the Debtor agrees to pay, and to save the Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.
19. GOVERNING LAW; TERMS. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are mandatorily governed by the law of a jurisdiction other than the State of Connecticut. Unless otherwise defined herein or in the Letter of Credit Agreement, terms used in Article 8 and/or 9 of the Uniform Commercial Code in the State of Connecticut are used herein as therein defined.
20. NO PETITION IN BANKRUPTCY. Each of the parties to this Agreement severally and not jointly, hereby covenants and agrees that, prior to the date which is one year and one day after the payment or expiration in full of all outstanding Letters of Credit, it will not institute against, or join any other Person in instituting against, the Debtor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding.
21. WAIVER OF JURY TRIAL. THE DEBTOR AND THE LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER FUNDAMENTAL DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMINISTRATION OF THIS AGREEMENT OR ENFORCEMENT OF THE FUNDAMENTAL DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OBLIGOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OBLIGOR CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT AND THE OTHER FUNDAMENTAL DOCUMENTS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
22. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) The Debtor hereby irrevocably and unconditionally submits, for itself and its property, to the non-exclusive jurisdiction of any Connecticut State court or Federal court of the United States of America sitting in Connecticut; and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement, the other Fundamental Documents, or for recognition of enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Connecticut State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents against the Debtor or its properties in the courts of any jurisdiction.
(a) The Debtor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents in any Connecticut State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(b) Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
23. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect.
24. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
25. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered under seal by their respective officers thereunto duly authorized, as of the date first above written.
ARCH REINSURANCE LTD.,
as the Debtor
FLEET NATIONAL BANK, as the Lender
[SECURITY AGREEMENT]
SCHEDULE 1
DEFINITIONS
"ADJUSTED COLLATERAL VALUE" shall have the meaning set forth in the Letter of Credit Agreement.
"AFFILIATE" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Debtor. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), PROVIDED that, in any event, any Person that owns directly or indirectly securities having 20% or more of the voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of being, nor considered to have the power to direct or cause the direction of management or policies solely by reason of being or actions taken as, a director, officer or employee of the Debtor or any of its Subsidiaries and (b) none of the Subsidiaries of the Debtor shall be Affiliates.
"AGREEMENT" shall have the meaning set forth in the preamble.
"BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as in effect from time to time, and any successor statute.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in Hartford, Connecticut are authorized or required to close.
"COLLATERAL" shall have the meaning set forth in Section 1.
"CUSTODIAL ACCOUNT" shall have the meaning set forth in the third "Whereas" clause.
"CUSTODIAN" shall mean Fleet National Bank, as custodian under the Custodian Agreement.
"DEBTOR" shall have the meaning set forth in the preamble.
"EVENT OF DEFAULT" shall have the meaning set forth in the Letter of Credit Agreement.
"FUNDAMENTAL DOCUMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"GAAP" shall mean generally accepted accounting principles in the United States from time to time.
"INDEMNIFIED PERSON" shall have the meaning set forth in Section 13(a).
"INVESTMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"LENDER" shall have the meaning set forth in the preamble.
"LETTER OF CREDIT AGREEMENT" shall have the meaning set forth in the first "Whereas" clause.
"LETTER(S) OF CREDIT" shall have the meaning set forth in the Letter of Credit Agreement.
"PERSON" shall mean an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.
"PLEDGED INVESTMENTS" shall have the meaning set forth in Section 1(i).
"SECURED OBLIGATIONS" shall have the meaning set forth in Section 2.
"UCC" shall mean the Uniform Commercial Code as in effect from time to time in the State of Connecticut.
SCHEDULE 2
TRADE NAMES
SECURITY AGREEMENT
Dated as of April 17, 2002
between
ALTERNATIVE RE LIMITED
and
FLEET NATIONAL BANK
TABLE OF CONTENTS
PAGE
SECTION 1. Grant of Security..............................................................................1
SECTION 2. Security for Obligations.......................................................................3
SECTION 3. Delivery of Collateral.........................................................................3
SECTION 4. Debtor Remains Liable..........................................................................3
SECTION 5. Representations and Warranties.................................................................3
SECTION 6. Further Assurances: Supplements................................................................4
SECTION 7. Additional Covenants...........................................................................5
SECTION 8. Lender Appointed Attorney-in-Fact..............................................................7
SECTION 9. Lender May Perform.............................................................................7
SECTION 10. The Lender....................................................................................7
SECTION 11. Remedies Upon Default; Application of Collateral...............................................8
SECTION 12. Amendments, Etc................................................................................8
SECTION 13. Indemnity and Expenses.........................................................................8
SECTION 14. Reserved ......................................................................................9
SECTION 15. Addresses for Notices..........................................................................9
SECTION 16. No Waiver; Cumulative Remedies.................................................................9
SECTION 17. Continuing Security Interest...................................................................9
SECTION 18. Further Indemnification.......................................................................10
SECTION 19. Governing Law; Terms..........................................................................10
SECTION 20. No Petition in Bankruptcy.....................................................................10
SECTION 21. Waiver of Jury Trial..........................................................................10
SECTION 22. Jurisdiction; Consent to Service of Process...................................................11
SECTION 23. Headings......................................................................................11
SECTION 24. Severability..................................................................................11
SECTION 25. Counterparts..................................................................................12
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SCHEDULES
Schedule 1 Definitions
Schedule 2 Trade Names
SECURITY AGREEMENT
SECURITY AGREEMENT (the "Agreement") dated as of April 17, 2002 between ALTERNATIVE RE LIMITED, a corporation organized and existing under the laws of Bermuda, ("Alternative" or "Debtor") and FLEET NATIONAL BANK, as the Lender under the below referenced Letter of Credit Agreement (the "Lender").
W I T N E S S E T H:
WHEREAS, the Lender as the issuer of Letters of Credit has entered into a Letter of Credit and Reimbursement Agreement dated as of April 17, 2002 (as such agreement may hereafter be amended or otherwise modified from time to time, being the "Letter of Credit Agreement") with Arch Reinsurance, Ltd., Arch Reinsurance Company, Alternative and First American Insurance Company;
WHEREAS, it is a condition precedent to the issuance of Letters of Credit by the Lender under the Letter of Credit Agreement that the Debtor shall have executed and delivered to the Lender this Agreement and pledged and granted a security interest in the Collateral, as such term is defined below, held by or on behalf of the Debtor from time to time and other rights and interests contemplated by this Agreement; and
WHEREAS, pursuant to the terms of the Custodian Agreement, the Custodian has established a Custodial Account, account #0010405070 (the "Custodial Account"), in the name of the Debtor and the Company hereby grants to the Lender a security interest in the Collateral, including the Custodial Account.
NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to issue Letters of Credit for the account of the Debtor under the Letter of Credit Agreement, Reinsurance hereby agrees with the Lender as follows (all capitalized terms used herein shall have the meanings set forth in SCHEDULE 1 hereto or, if not defined therein, in the Letter of Credit Agreement):
1. GRANT OF SECURITY. The Debtor hereby pledges and charges to the Lender and grants to the Lender for its benefit a security interest in and lien upon, all of the Debtor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which the Debtor now has or hereafter acquires an interest and wherever the same may be located (collectively, the "Collateral"):
(i) The Custodial Account, including all cash held therein or credited thereto from time to time, and all securities, instruments and investments, including Investments, and other "investment property" and "financial assets," as each such term is defined in the UCC, of any kind held therein or credited thereto from time to time) (the "Pledged Investments");
(ii) All proceeds of, accessions to, substitutions for, and earnings on, any and all of the foregoing Collateral (including, without limitation, proceeds
that constitute property of the types described in clauses (i) and (ii) above) and, to the extent not otherwise included, all payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes hereof, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto.
Notwithstanding the foregoing, at any time, other than after the occurrence and during the continuation of a Default or an Event of Default, the Debtor may request that the Lender release its Lien on so much of the Collateral as equals the excess, if any, of the Adjusted Collateral Value of the Collateral over the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor; provided that such excess shall be released from the Custodial Account only with the consent of the Lender, which consent may be given or withheld by the Lender in its sole discretion. Should the Adjusted Collateral Value of the Collateral be less than the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, the Lender shall have the right to require the Debtor to pay to the Custodian by no later than 3:00 p.m. (Connecticut time) (i) on the date of such notice, if such notice is received before 12:00 p.m. (Connecticut time) or (ii) on the Business Day immediately following notice by the Lender, if such notice is received after 12:00 p.m. (Connecticut time), the difference between the then-current Adjusted Collateral Value of the Collateral and (B) the sum of all amounts then outstanding with respect to (x) Letter of Credit Obligations of the Debtor and (y) Reimbursement Obligations of the Debtor, which payment shall be deposited by the Custodian into the Custodial Account in the form of cash or Investments. Any failure by the Debtor to make such payment shall constitute an Event of Default hereunder and under the Fundamental Documents.
In addition, the Debtor shall have the right, other than after the
occurrence and during the continuation of a Default or an Event of Default, to
substitute Collateral to the extent such substitution arises from normal trade
activities within the Custodial Account hereunder so long as (i) the Debtor
maintains the value of the Custodial Account in accordance with this Section 1,
(ii) such substituted Collateral shall be in the form of Investments, and (iii)
if requested by the Lender, the Debtor shall deliver to the Lender a Supplement
to Security Agreement in a form satisfactory to the Lender. The Collateral which
is removed from the Custodial Account in full compliance with this paragraph
shall no longer be subject to the Lien hereof without any further action on the
part of the Debtor or the Lender; the Collateral which is added to the Custodial
Account pursuant to such Supplement to Security Agreement shall immediately be
subject to the Lien hereof without any further action on the part of the Debtor
or the Lender. The Debtor agrees to pay any costs and expenses of the Lender
(and its counsel) in connection with any substitution of Collateral.
2. SECURITY FOR OBLIGATIONS. The grant in Section 1 secures and the Collateral is collateral security for the prompt payment or performance in full when due, whether at stated maturity, by acceleration or otherwise of all obligations of every nature now or hereafter existing of the Debtor under the Letter of Credit Agreement and any Letter of Credit application and reimbursement agreement or other document or instrument delivered pursuant thereto, and all amendments, extensions or renewals thereof or hereof, whether for principal, interest, fees, expenses or otherwise, whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred and all or any portion of such obligations that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly as a preference, fraudulent transfer or otherwise, and all obligations of every nature of the Debtor now or hereafter existing under this Agreement (all such obligations being the "Secured Obligations").
3. DELIVERY OF COLLATERAL. All certificates or instruments, if any, representing or evidencing the Collateral shall be delivered to and held by the Custodian for the benefit of the Lender. At any time at which an Event of Default has occurred and is continuing under the Letter of Credit Agreement, the Lender shall have the right, subject at all times to Section 11 hereof, in its discretion and without notice to the Debtor, to transfer to or to register in the name of any of its nominees any or all of the Collateral, and may receive the income and any distributions thereon and hold the same as Collateral for the Secured Obligations, or apply the same to any of the Secured Obligations.
4. DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (a) the Debtor shall remain liable under the contracts and agreements included or relating to the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any of the rights hereunder shall not release the Debtor from any of its duties or obligations under the contracts and agreements included in or relating to the Collateral, and (c) the Lender shall not have any obligation or liability under the contracts and agreements included in or relating to the Collateral by reason of this Agreement, nor shall the Lender be obligated to perform any of the obligations or duties of the Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.
5. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and warrants as follows:
(a) The Debtor is duly organized and validly exists under the laws of Bermuda.
(b) The Debtor is the legal and beneficial owner of the Collateral free and clear of any liens, security interest, option or other charge or encumbrance (except liens in favor of the Custodian). No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording
office, except such as may have been filed in favor of the Lender relating to this Agreement. Except as set forth on Schedule 2 attached hereto, the Debtor has no trade names and does not do business under any fictitious business name.
(c) The pledge and the grant of the security interest in the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, and all filings and other actions necessary to perfect and protect such security interest have been duly taken.
(d) No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than authorizations, consents, approvals already obtained, actions already taken, notices already provided and filings already made) is required (i) for the grant by the Debtor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Debtor, (ii) for the perfection of or the exercise by the Lender of its rights and remedies provided for in this Agreement or (iii) to ensure the legality, validity, enforceability or admissibility in evidence of this Agreement in any jurisdiction in which any of the Collateral is located.
(e) Each of this Agreement and the other Fundamental Documents to which the Debtor is a party constitutes the legal, valid and binding obligation of the Debtor, enforceable against the Debtor in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally, and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). To the knowledge of the Debtor, each Pledged Investment constitutes the legally valid and binding obligation of the party obligated to pay the same.
(f) The Debtor is deriving substantial direct and indirect benefits from the issuance of the Letters of Credit for its account under the Letter of Letter of Credit Agreement and has received good and adequate consideration for the pledge of the Collateral effected under this Agreement.
6. FURTHER ASSURANCES: SUPPLEMENTS. (a) The Debtor agrees that at
any time and from time to time, at its expense, it will promptly execute and
deliver all further instruments and documents, and take all further action that
may be reasonably necessary or desirable, or that the Lender may request, to
perfect and protect the pledges and charges and security interests granted or
purported to be granted hereby or to enable the Lender to exercise and enforce
its rights and remedies hereunder with respect to any Collateral. Without
limiting the generality of the foregoing, the Debtor will (i) if any Collateral
shall be evidenced by a promissory note or other instrument, or if any of the
Collateral shall constitute chattel paper, deliver to the Lender (or to the
Custodian to hold on behalf of the Lender) such note, instrument and all
original counterparts of chattel paper duly endorsed and accompanied by duly
executed instruments of transfer, all in form satisfactory to the Lender and
(ii) execute and file such financing or continuation statements, or amendments
thereto, and such other instruments or notices, as may be
necessary or desirable, or that the Lender may reasonably request, to protect and preserve the pledges and charges and security interests granted or purported to be granted hereby.
(a) The Debtor hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. The Lender will promptly send the Debtor any financing or continuation statements thereto which it files without the signature of the Debtor and, except in the case of filings of copies of this Agreement as financing statements, the Lender will promptly send the Debtor the filing or recordation information with respect thereto.
(b) The Debtor will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender may reasonably request, all in reasonable detail.
(c) The Debtor agrees that it will not create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral except in favor of the Lender hereunder or the Custodian.
7. ADDITIONAL COVENANTS. (a) The Debtor shall maintain its organization and existence in the jurisdiction specified in Section 5(a) and shall not reincorporate or otherwise reorganize in any other jurisdiction without the prior written consent of the Lender. The Debtor shall, from the date on which each Pledged Investment was purchased, maintain (i) complete records of each Pledged Investment, including records of all payments received, interest or fees accruing or credits granted and (ii) all documentation relating thereto. In connection therewith, the Lender may (subject to the confidentiality restrictions contained in any agreement) institute procedures to permit it to confirm the balances owing in respect of any Pledged Investment. The Debtor agrees to render to the Lender such clerical and other assistance as may be reasonably requested with regard to the foregoing. If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, promptly upon request therefor, the Debtor shall (subject to the confidentiality restrictions contained in any agreement) deliver to the Lender complete and correct copies of all documentation relating to the Pledged Investments.
(a) The Debtor shall duly fulfill in all material respects all obligations on its part to be fulfilled under or in connection with the Pledged Investments and shall do nothing to impair in any material respect the rights of the Lender therein.
(b) Following an Event of Default under the Letter of Credit Agreement (subject to Section 11 hereof), any proceeds of Collateral when first received by or on behalf of the Debtor shall be deposited by or on behalf of the Debtor in the form so received in the Custodial Account, and until so deposited shall be held in trust for and
as the Lender's property and shall not be commingled with the Debtor's or any other Person's other funds or properties.
(c) The Debtor, at its own cost and expense, will, and will cause the Custodian to, maintain satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received with respect to the Collateral and all other dealings with the Collateral. Upon the occurrence and during the continuation of an Event of Default under the Letter of Credit Agreement, the Debtor will (subject to the confidentiality restrictions contained in any agreement and any applicable law) deliver and turn over to the Lender or to its representatives, or at the option of the Lender shall (subject to the confidentiality restrictions contained in any agreement) provide the Lender or its representatives with access to, at any time on demand of the Lender, copies of all the Debtor's books and records pertaining to the Collateral including, without limitation, all credit files and computer software, programs, tapes or disks relating to Pledged Investments or otherwise necessary to the collection thereof.
(d) The Debtor will comply in all material respects with all applicable statutes, rules, and regulations with respect to the Collateral or any part thereof.
(e) The Debtor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom and all claims of any kind (including, without limitation, claims for labor, materials and supplies), except that no such amount need be paid if (i) such non-payment does not involve any danger of the sale, forfeiture or loss of any of the Collateral or any interest therein, (ii) the charge or levy is being contested in good faith and by proper proceedings, and (iii) the obligation to pay such amount is adequately reserved against in accordance with and to the extent required by GAAP.
(f) The Debtor will in all material respects perform and observe all the terms and provisions of the documentation relating to the Pledged Investments to be performed or observed by it, maintain the documentation relating to the Pledged Investments in full force and effect in accordance with their terms, and take all action to such end as may be from time reasonably requested by the Lender.
(g) The Debtor will advise the Lender promptly, in reasonable detail, (i) of any lien, security interest, encumbrance or claim made or asserted against any of the Collateral by any Person, other than the Custodian, and (ii) of the occurrence of any event which would have a material adverse effect on the aggregate value of the Collateral or on the pledges and security interests granted hereby.
(h) The Debtor will not sell, assign (by operation of law or otherwise), or otherwise dispose of, or grant any option with respect to, any of the Collateral, except sales not restricted by the terms of the Letter of Credit Agreement or this Agreement.
(i) The Debtor shall at all times retain Fleet National Bank as the Custodian pursuant to the Custodian Agreement.
8. LENDER APPOINTED ATTORNEY-IN-FACT. The Debtor appoints the
Lender its attorney-in-fact with full authority in the place and stead of the
Debtor and in the name of the Debtor or otherwise, from time to time in the
Lender's discretion, after an Event of Default under the Letter of Credit
Agreement has occurred and is continuing (but in all instances subject to
Section 11 hereof), to take any action and to execute any instrument that the
Lender may deem necessary or advisable to accomplish the purposes of this
Agreement (subject to the provisions of any applicable law), including, without
limitation, to (i) ask, demand, collect, sue for, recover, compromise, receive
and give acquittances and receipts for moneys due and to become due under or in
connection with the Collateral, (ii) receive, endorse and collect all drafts or
other instruments and documents made payable to the Debtor in connection
therewith or representing any payment, dividend or other distribution in respect
of the Collateral or any part thereof and to give full discharge for the same,
(iii) file any claims or take any action or institute any proceedings which the
Lender may deem to be necessary or desirable for the collection of any of the
Collateral, (iv) enforce the rights of the Lender with respect to any of the
Collateral and compliance with the terms and conditions of this Agreement, the
Letter of Credit Agreement and the other Fundamental Documents, (v) pay or
discharge taxes or Liens levied or placed upon or threatened against the
Collateral, the legality or validity thereof and the amounts necessary to
discharge the same to be determined by the Lender in its sole discretion, and
such payments made by the Lender to become obligations of the Debtor to the
Lender, due and payable in accordance with the Letter of Credit Agreement, (vi)
generally sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though the
Lender were the absolute owner thereof for all purposes, and (vii) do, at the
Lender's option and the Debtor's expense, at any time, or from time to time, all
acts and things that the Lender deems necessary to protect, preserve or realize
upon the Collateral and the Lender's security interest therein, in order to
effect the intent of this Agreement, all as fully and effectively as the Debtor
might do.
9. LENDER MAY PERFORM. If the Debtor fails to perform any agreement contained herein or if a Default or an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, the Lender may at any time (but in all instances subject to Section 11 hereof) itself perform, or cause performance of, such agreement.
10. THE LENDER. (a) Neither the Lender nor any of its respective affiliates, directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or for errors in judgment, except for its or their own gross negligence, willful misconduct or bad faith.
(b) The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for the exercise of reasonable care in the custody and preservation of any Collateral in its possession and accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral or as to any rights pertaining thereto.
(c) The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Lender accords its own property.
11. REMEDIES UPON DEFAULT; APPLICATION OF COLLATERAL. (a) If an Event of Default under the Letter of Credit Agreement shall have occurred and be continuing, then any cash held by the Lender and all cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied to the obligations of the Debtor to the Lender as the Lender determines in its sole discretion. Any surplus of such cash or cash proceeds held by the Lender and remaining after the payment in full of all the Secured Obligations shall be paid over to the Debtor or to whomsoever may be lawfully entitled thereto.
(a) Any foreclosure upon, sale of, or exercise of rights with respect to the Collateral shall be conducted in compliance with all contractual provisions applicable to such Collateral, including but not limited to any provisions of any agreement pursuant to which any Investment arises that govern the sale or assignment thereof.
(b) Any sale of the Collateral or any part thereof shall be made in a commercially reasonable manner and in accordance with applicable law and may be made in one or more lots at public or private sale, for cash, on credit or for future delivery. The Lender and/or any of its affiliates may be a purchaser at any such sale. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Debtor shall cooperate with the Lender in all reasonable ways in order to assist the Lender in the sale and other disposition of the Collateral.
12. AMENDMENTS, ETC. No amendment of any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by the Debtor and the Lender, no waiver of any provision of this Agreement, nor consent to any departure by the Debtor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure to exercise nor any delay in exercising on the part of the Lender of any right, power or privilege under this Agreement, shall operate as a waiver thereof; further, no single or partial exercise of any right, power or privilege under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
13. INDEMNITY AND EXPENSES. (a) The Debtor agrees to indemnify the Lender and each of its directors, officers, employees and agents (each an "Indemnified Person") from and against any and all claims, damages, losses, liabilities and expenses (excluding any present or future taxes, now or hereafter imposed, levied, collected, withheld or assessed), arising out of or in connection with or resulting from the Debtor's performance under this Agreement (including, without limitation, enforcement
of this Agreement against the Debtor), unless and to the extent such claim, damage, loss, liability or expense was attributable to the gross negligence, willful misconduct or bad faith of any of the Indemnified Persons.
(a) The Debtor agrees to pay to the Lender from time to time, upon
demand, the amount of any and all costs and expenses (excluding any present or
future taxes, now or hereafter imposed, levied, collected, withheld or
assessed), including the reasonable fees and expenses of its counsel and of any
experts and agents, that the Lender may incur in connection with (i) the
administration of this Agreement, (ii) the custody (including custody by a
third-party on behalf of the Lender) or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, (iii) the
exercise or enforcement of any of the rights of the Lender against the Debtor,
(iv) the failure by the Debtor to perform or observe any of the provisions
hereof or (v) any action taken by the Lender pursuant to Section 6 or 9 hereof.
(b) The foregoing provisions of this Section 13 are in furtherance and not in limitation of the Debtor's obligations under the Letter of Credit Agreement.
14. RESERVED.
15. ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be in writing (including telecopier) and, if to the Debtor, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it, addressed to it at the address of such party specified in the Letter of Credit Agreement, if to the Lender, mailed, telecopied, delivered by nationally recognized overnight courier or hand delivered to it at Fleet National Bank, Attention: Lawrence Davis, 777 Main Street, Hartford, Connecticut 06115, Telephone No. (860) 986-3443, Telecopier No. (860) 986-1264, or as to any party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall be effective when mailed, telecopied (with telephone confirmation of receipt received), or delivered to the courier service, addressed as aforesaid.
16. NO WAIVER; CUMULATIVE REMEDIES. The Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing and signed by the Lender. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion.
17. CONTINUING SECURITY INTEREST. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until the payment in full of the other Secured Obligations,
(ii) be binding upon the Debtor and its successors and assigns, including but
not limited to any trustee or examiner for the Debtor under the Bankruptcy Code
or receiver for the assets of the Debtor under any rehabilitation or insolvency
law, and (iii) inure, together with the rights and remedies of the Lender
hereunder, to the benefit of the Lender and its respective successors,
transferees and assigns. Upon the payment in full of the Secured Obligations, the Debtor shall be entitled to the return, upon its request and at its expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof, at which time the Lender shall, at the expense and request of the Debtor, reassign and deliver to the Debtor, or to such Person or Persons as may be lawfully entitled thereto, against receipt, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Lender pursuant to the terms hereof, together with appropriate instruments of reassignment and release.
18. FURTHER INDEMNIFICATION. Without limiting the obligations of the Debtor under Section 13 above, the Debtor agrees to pay, and to save the Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.
19. GOVERNING LAW; TERMS. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are mandatorily governed by the law of a jurisdiction other than the State of Connecticut. Unless otherwise defined herein or in the Letter of Credit Agreement, terms used in Article 8 and/or 9 of the Uniform Commercial Code in the State of Connecticut are used herein as therein defined.
20. NO PETITION IN BANKRUPTCY. Each of the parties to this Agreement severally and not jointly, hereby covenants and agrees that, prior to the date which is one year and one day after the payment or expiration in full of all outstanding Letters of Credit, it will not institute against, or join any other Person in instituting against, the Debtor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding.
21. WAIVER OF JURY TRIAL. THE DEBTOR AND THE LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER FUNDAMENTAL DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMINISTRATION OF THIS AGREEMENT OR ENFORCEMENT OF THE FUNDAMENTAL DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OBLIGOR HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OBLIGOR CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT AND THE OTHER FUNDAMENTAL DOCUMENTS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
22. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) The Debtor hereby irrevocably and unconditionally submits, for itself and its property, to the non-exclusive jurisdiction of any Connecticut State court or Federal court of the United States of America sitting in Connecticut; and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement, the other Fundamental Documents, or for recognition of enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Connecticut State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents against the Debtor or its properties in the courts of any jurisdiction.
(a) The Debtor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, the Letter of Credit Agreement or the other Fundamental Documents in any Connecticut State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(b) Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
23. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect.
24. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
25 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered under seal by their respective officers thereunto duly authorized, as of the date first above written.
ALTERNATIVE RE LIMITED,
as the Debtor
FLEET NATIONAL BANK, as the Lender
[SECURITY AGREEMENT]
SCHEDULE 1
DEFINITIONS
"ADJUSTED COLLATERAL VALUE" shall have the meaning set forth in the Letter of Credit Agreement.
"AFFILIATE" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Debtor. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), PROVIDED that, in any event, any Person that owns directly or indirectly securities having 20% or more of the voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of being, nor considered to have the power to direct or cause the direction of management or policies solely by reason of being or actions taken as, a director, officer or employee of the Debtor or any of its Subsidiaries and (b) none of the Subsidiaries of the Debtor shall be Affiliates.
"AGREEMENT" shall have the meaning set forth in the preamble.
"BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as in effect from time to time, and any successor statute.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in Hartford, Connecticut are authorized or required to close.
"COLLATERAL" shall have the meaning set forth in Section 1.
"CUSTODIAL ACCOUNT" shall have the meaning set forth in the third "Whereas" clause.
"CUSTODIAN" shall mean Fleet National Bank, as custodian under the Custodian Agreement.
"DEBTOR" shall have the meaning set forth in the preamble.
"EVENT OF DEFAULT" shall have the meaning set forth in the Letter of Credit Agreement.
"FUNDAMENTAL DOCUMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"GAAP" shall mean generally accepted accounting principles in the United States from time to time.
"INDEMNIFIED PERSON" shall have the meaning set forth in Section 13(a).
"INVESTMENTS" shall have the meaning set forth in the Letter of Credit Agreement.
"LENDER" shall have the meaning set forth in the preamble.
"LETTER OF CREDIT AGREEMENT" shall have the meaning set forth in the first "Whereas" clause.
"LETTER(S) OF CREDIT" shall have the meaning set forth in the Letter of Credit Agreement.
"PERSON" shall mean an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.
"PLEDGED INVESTMENTS" shall have the meaning set forth in Section 1(i).
"SECURED OBLIGATIONS" shall have the meaning set forth in Section 2.
"UCC" shall mean the Uniform Commercial Code as in effect from time to time in the State of Connecticut.
SCHEDULE 2
TRADE NAMES
EXHIBIT C
[FORM OF STANDBY LETTER OF CREDIT APPLICATION]
[FLEET LOGO]
INSTRUCTIONS FOR COMPLETING THE APPLICATION AND AGREEMENT FOR STANDBY LETTER OF CREDIT
GENERAL Please type and provide any additional instructions in the space
INSTRUCTIONS provided.
If you have any questions, please phone the Letter of Credit
Department: (570) 330-4214 or 1-800-370-7519, ext. 4214.
HOW TO Follow the instructions below to complete the application form,
COMPLETE THE for issuance subject to Uniform Customs and
FORM Practice for Documentary Credits (UCP). IMPORTANT: Should you
wish the LC issued subject to the International
Standby Practices (ISP), you must also complete the attached
rider to Application and Agreement for Standby LC.
|
WHERE DO THIS
To: Check the box for the Fleet Bank where you will submit this application.
Deliver the letter Select how you wish Fleet to deliver the letter of credit (LC).
of credit:
Advising Bank - If the beneficiary has specified the name and address of their bank,
enter it here (please include the city and country).
- Otherwise, leave the box blank
Applicant Enter the complete legal name and address of the company or individual
applying for the LC.
Beneficiary - Enter the beneficiary's complete legal name and full address (P.O. Box
is not acceptable).
- If available, provide the name of a contact.
Amount Enter the currency of the LC and the amount in both figures and words.
This letter of credit If you have agreed to allow the LC to be transferred in party as
is transferable. beneficiary, check this box; otherwise, leave it blank.
Partial Drawings If you have agreed to allow for partial drawings, check
PERMITTED; otherwise check PROHIBITED.
All bank charges Check this box unless you agree to pay charges assessed by banks other
other than Fleet than fleet.
Bank's ...
Expiry Date: Enter the last date on which this LC will be available for payment.
This must be a valid business day.
Statement Enter the wording of a quoted statement which the beneficiary must present
when drawing on the LC.
Attached is a format Check this box if you are attaching a sample format for the LC.
Special Instructions: Use this space to indicate additional instructions regarding the LC.
Signature - Enter the complete legal name of the company or individual applying for
the LC.
- The application must be signed by an individual who is authorized
to request the bank to issue the LC.
|
UPON Once you have completed the application, please submit it to your COMPLETION Relationship Manager or Branch Manager for approval. |
[FLEET LOGO]
APPLICATION AND AGREEMENT FOR STANDBY LETTER OF CREDIT
To: (Please Check One) Issuing "Bank".
/ / Fleet National Bank / / Fleet Bank, N.A. / / Fleet Bank of Maine / / Fleet Bank - NH
Please issue an irrevocable Standby Letter of Credit substantially in accordance with this application.
-------------------------------------------------------------------------------- Deliver the Letter of Credit: (For Bank use only) / / Directly to the beneficiary by courier, Attn:______________________________ L/C No.____________________ / / Through your correspondent by / / courier, / / Swift/Telex for delivery to the beneficiary. D/T No.____________________ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Advising Bank (Name and Address) Applicant (Name and Address) -------------------------------------------------------------------------------- Beneficiary (Name and Address) |
Amount______________________________
INCLUDE CURRENCY IF NOT U.S. DOLLARS
Amount in Words:____________________
____________________________________
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/ / This Letter of Credit is Partial drawings are / / Permitted
transferable. / / Prohibited
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Expiry Date:
/ / All bank charges, other than Fleet
Bank's, are for beneficiary's account.
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/ / Attached is a format which is an integral part of this application.
We hereby certify that the transactions covered by this Application and Agreement are not prohibited under any existing Laws and regulations of the United States, including the foreign Assets control Regulations of the United States Treasury Department and that any transaction covered by this Application and Agreement complies in every respect with all existing United States Government Laws and Regulations.
Reference to any document, instrument oragreement is for identification purposes only and such document, instrument or agreement will not be incorporated into the terms of the Letter of Credit.
This credit will be subject to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce currently in effect.
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(FOR BANK USE ONLY) WE AGREE TO ALL THE TERMS AND
Relationship Manager approval CONDITIONS OF THE FACE
(also indicates approval AND REVERSE HEREOF.
of applicant's authority)
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AUTHORIZED SIGNATURE BANK NAME:_____________________________
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DATE
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Internal Form #13429 "Standby LC BY:
Set-Up/Change" is required with each --------------------------- -------
application. AUTHORIZED SIGNATURE - TITLE DATE
AGREEMENT FOR STANDBY LETTER OF CREDIT
For good and valuable consideration, the receipt and adequacy of which is hereby acknowl-edged, the Bank and the Customer agree as follows:
1. Each reference hereinafter contained to: (a) "Bank", "Bank's Address", "Customer", "Customer's Address", and "Expiry Date" shall be deemed to refer to the defined terms on Page 1 of this Agreement; (b) "Agreement" shall be deemed to refer to this Application and Agreement for Standby Letter of Credit, including without limitation the application portion on Page 1 hereof; (c) "Business Day" shall be deemed to refer to any day on which commercial banks located in the state of the Bank's Address are not required or authorized to remain closed and which is not a Saturday, Sunday or legal holiday; (d) "Credit" shall be deemed to refer to the letter of credit to be issued by the Bank substantially in the form set forth in the application portion of this Agreement, all amendements thereto, and any substitutions or replacements thereof; (e) "Events of Default" shall be deemed to refer to one or more of the events of default or defaults specified in Paragraph 6 of this Agreement; (f) "Prime Rate" shall be deemed to refer to the rate of interest designated by the Bank from time to time as being its prime rate of interest.
2.As to instruments payable in U.S. Dollars, the Customer will: (a) pay the Bank in U.S. Dollars the amount paid on any sight draft on demand or, at the Bank's option, pay the Bank in advance the amount required to pay such draft; and (b) pay the Bank in U.S. Dollars the amount of each acceptance on demand, but in any event not later than one Business Day prior to maturity.
3. As to instruments payable in a foreign currency, the Customer will: (a) pay the Bank in U.S. Dollars, the equivalent of the amount paid on any sight draft, immediately upon such payment being made, at the Bank's then selling rate for cable transfers to the place of payment in the currency in which the draft is drawn; and (b) in the case of each acceptance pay the Bank in U.S. Dollars, on demand, but in any event in time to reach the place of payment by mail not later than one Business Day prior to maturity, the equivalent thereof at the Bank's then selling rate for the currency in which the acceptance is payable, or at the Bank's option pay the Bank on demand the equivalent of the acceptance in U.S. Dollars at the Bank's then selling rate for cable transfers to the place of payment in such currency. If for any reason there should exist at the time in question no rate of exchange generally current in the state of the Bank's Address for effective cable transfers of the sort provided for, the Customer will pay the Bank on demand an amount in U.S. Dollars equivalent to the actual cost to the Bank of settlement of the Bank's obligations to the payor of the draft or acceptance or any holder thereof, as the case may be, however and whenever such settlement is made by the Bank.
4. The Customer will pay the Bank on demand a commission at such rate as the Bank may determine, plus interest where chargeable, and all fees, charges and expenses, including reason-able counsel fees, incurred or paid by the Bank in protecting or enforcing its rights under this Agreement, or in connection with the Credit issued pursuant hereto and any confirmation thereof, or arising or caused in any manner whatsoever in connection therewith, including without limitation reasonable counsel fees and expenses incurred in connection with the defense of all actions seeking to restrain or enjoin payment of the Credit or any draft accepted under the Credit or attachment or garnishment proceedings involving any of the proceeds of the Credit or any such draft. In addition to commissions, fees, charges, expenses and amounts otherwise payable with respect to the issuance of the Credit, the Customer shall pay to the Bank on demand such amounts as the Bank in its sole discretion determines are necessary to compensate the Bank for any costs attributable to the Bank's issuing or having outstanding or making payment under the Credit resulting from the application of any domestic or foreign law or regulation or the interpretation or administration thereof applicable to the Bank regarding any reserve, assessment, capitalization (including the cost of maintaining capital sufficient to permit issuance of the Credit, provided the cost attributed to the Credit is determined in good faith by any reasonable method) or similar requirement whether existing at the time of issuance of the Credit or adopted thereafter. All amounts not paid when due in accordance with this Agreement (including without limitation those set forth in paragraph 2, 3 and 4 hereof) shall bear interest until paid in full at a rate per annum equal to six percent (6%) above the Prime Rate, not to exceed the maximum rate of interest permitted by applicable law. Each change in such interest rate shall take effect simultaneously with the corresponding change in the Prime Rate. The Bank is hereby irrevocably authorized to charge any one or more of the Customer's accounts with the Bank for payment in full or in part of any of the Customer's obligations to the Bank under this Agreement. At the option of the Bank, if there is a separate revolving line of credit, line of credit, or other credit facility existing between the Bank and the Customer, the Bank is irrevocably authorized to satisfy the Customer's reimbursement obligation to the Bank, in whole or in part, by making an advance under such facility.
5. The users of the Credit shall be deemed the Customer's agents, and the Customer assumes all risks of their acts or omissions. The Customer's obligation to pay the Bank for all amounts due under this Agreement is absolute and unconditional. Such obligation of the Customer shall not be affected by, and the Bank shall not be responsible for, the validity, sufficiency, correctness or genuineness of documents, even if such documents should in fact prove to be in any or all respects incorrect, defective, invalid, insufficient, fradulent or forged; any breach of contract or disputes between any beneificiary of the Credit and the Customer; the existence of any claim, setoff, defense or other right which the Customer may have at any time against the beneficiary or any other person or entity, whether in connection with this Agreement, the transaction contemplated herein or any unrelated transaction; the failure of any draft or certificate to bear reference or adequate reference to the Credit; errors, omissions, interruptions or delays in transmission or delivery of any messages by mail, telex, telecopy, or otherwise; the exchange, release or non-perfection of any collateral or the release of any guarantor; or any consequences arising from causes beyond the Bank's control; and none of the above shall affect, impair or prevent the fixing of any of the Bank's rights or powers hereunder. Any provision with respect to any of the foregoing matters which is contained in the Credit itself may be waived by the Bank. The Customer will hold the Bank harmless from all loss or damage in respect of any of the foregoing matters, and from any and all damage and loss whatsoever suffered by the Bank by reason of any and all action taken by the Bank in good faith.
6. The Customer will deliver to the Bank on demand such additional security (including cash) as the Bank may from time to time require, to be held as general collateral for all the Customer's liabilities to the Bank hereunder and for all other liabilities, absolute or contingent due or to become due, which may be at any time owing to Bank by the Customer. All property belonging to the Customer, including any collection items, now or hereafter handed to the Bank or for any purpose left in the Bank's possession by the Customer or for the Customer's account, or in transit to or from the Bank, by mail or carriers, and all balances of any deposit accounts the Customer may have with the Bank, are hereby made security, and the Bank is hereby granted a security interest therein, for all such liabilities and may be held or disposed of as the Bank may see fit, and applied toward any payment of any and all such liabilities, all of which shall become immediately due and payable upon an Event of Default. Each of the following events or actions by or affecting the Customer shall constitute an Event of Default; default in the performance of any undertaking to the Bank under this Agreement, any trust receipt, or under any other obligation to the Bank or agreement with the Bank; insolvency, or the filing by or against the Customer of any petition under the Bankruptcy Code or any similar Federal or state statute; the filing by or against the Customer of a petition for the appointment of a receiver; the making of an assignment for the benefit of creditors; the Customer's death, failure in business, dissolution, suspension or termination of existence; any seizure, vesting or intervention by or under authority of a government, by which the Customer's management is displaced or its authority in the conduct of its business is curtailed; or the attachment or distraint of any of the Customer's funds or other property which may be in, or come into, the Bank's possession or under the Bank's control, or that of any third party acting for the Bank, or of the same becoming subject at any time to any mandatory order of court or other legal process. The Bank may at any time transfer into the Bank's or its nominee's name all or any part of such security, before or after maturity of any of the Customer's obligations and without any notice to the Customer or any other person. Whenever the Bank deems it necessary for the Bank's or the Customer's protection, or after an Event of Default specified herein, or other default, the Bank shall have the right to accelerate and make immediately due and payable all of the Customer's obligations to the Bank under the Credit and this Agreement and under any other document or agreement (including without limitation the obligations evidenced by the outstanding (but undrawn upon) Credit and/or by accpetances which have not matured). The Bank shall have, in addition to all other rights and remedies under applicable law, the rights and remedies of a secured party under the Uniform Commercial Code, and the Bank may, without regard to such maturity, realize upon (by sale, assignment, setoff, application or otherwise) all or any part of such security, in each case without advertisement, notice to, tender, deamnd or call of any kind upon the Customer or any other person, except that, unless such security is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Bank shall give the Customer three Business Days' prior written notice of the time and place of any public sale thereof or of the time after which any private sale or other intended disposition thereof is to be made. Any such sale or assignment may be public, private or upon any broker's board or exchange, for cash, on credit or for future delivery, and at such price and upon such terms and conditions, as the Bank deems appropriate. For this purpose, the Bank may, so far as the Customer can give authority therefor, enter upon any premises on which such security or any proceeds thereof may be situated and remove the same therefrom, or require that such security or proceeds be made available to the bank at a place or places reasonably convenient to both the Bank and the Customer. The Bank may acquire all or any part of such security and any purchaser shall hold same free from any equity of redemption or other claim or right on the Customer's part, which are hereby specifically waived and released. The Bank may discount, settle, comprise, or extend any obligations constituting such security, and sue thereon in the Bank's or the Customer's name. However, the Bank shall not be liable for failure to collect or demand payment of, or protest or give notice of non-payment of, any obligation included in such security or part thereof, or for any delay in so doing, nor shall the Bank be under any obligation to take any action whatever in respect to such security or any part thereof. No advertising, notice, tender, demand, or call at any time given or made shall be a waiver of the Bank's right to proceed in the same or other instances without any further action.
7. The receipt by the Bank at any time of other collateral shall not be deemed a waiver of any of the Bank's rights or powers relating to any collateral which the Bank may hold at the time of such receipt.
8. No failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other further exercise thereof or the exercise of any right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. No amendment or waiver of any provision of this Agreement nor consent to any departure by the parties hereto shall in any event be effective unless the same shall be in writing and signed by such party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
9. This Agreement shall continue in force notwithstanding any change in the composition of firm or firms parties hereto, or drawers of drafts hereunder, or in the incorporation of any such firm.
10. The Customer authorizes the Bank, without reference to or approval by the Customer, to set forth the terms of this Agreement in the Credit in such language as the Bank may deem appropriate with such variations from such terms as the Bank may in its discretion determine (which determination shall be conclusive and binding upon the Customer) are necessary and are not materially inconsistent with this Agreement.
11. All rights under the Credit and this Agreement (whether or not the Credit is documentary or non-documentary in nature) shall be determined by the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce in effect (International Chamber of Commerce Publication No. 500 or the most recent revision or successor thereto which shall be in effect from time to time), the terms of which are known to the Customer and which are incorporated by reference herein, and all rights under the Credit and this Agreement, to the extent not inconsistent with said Uniform Customs and Practices, shall be construed in accordance with the local laws of the State of the Bank's Address.
12. The Customer represents, warrants and covenants to the Bank that (a) if a partnership or a corporation, it is duly organized, validly existing and in good standing; (b) it has the power to execute, deliver and perform this Agreement; (c) the execution, delivery and performance of this Agreement have been duly authorized by all requisite action; (d) the execution, delivery and performance of this Agreement and the issuance of the Credit will not violate any provision of law, any order of any court or other agency of government, the Articles of Incorporation or By-Laws of a corporate Customer or the Partnership Agreement of a partnership Customer, or any indenture, agreement or other instrument to which it is a party, or by which it is bound, or be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the Customer (other than in favor of the Bank) or the acceleration of any of the Customer's outstanding indebtedness; (e) the Customer has heretofore furnished to the Bank accurate and complete financial data and other information based on its operations in previous years, and said financial data furnished to the Bank is accurate and complete and fairly presents the financial position and the results of operations for the periods indicated therein; (f) there has been no material adverse change in the condition, financial or otherwise, of the Customer since the date of the most recent financial statement; and (g) the Customer shall furnish to the Bank periodically such financial statements, balance sheets and profit and loss statements, together with supporting schedules, tax returns, and such other information regarding the operations, assets, business, affairs and financial condition of the Customer, as the Bank shall from time to time request.
13. If this Agreement is signed by two or more Customers, it shall be the joint and several agreement and obligation of such Customers.
14. The Customer agrees that in the event of any extension of the maturity or time for presentation of drafts, acceptances or documents, or any other amendments or modification of the terms of the Credit, at the request of any single Customer, with or without notification to the others, or in the event of any increase in the amount of the Credit at any single Customer's request, with or without notification to the others, this amount shall be binding upon the Customer with regard to the Credit so increased or otherwise amended or modified, to drafts, documents and property covered thereby, and to any action taken by the Bank or any of its correspondents in accordance with such extension, increase or other modification.
15. The Bank is authorized to interpret the Credit in accordance with rules, regulations, and customs prevailing at the place and time during which the Credit is available or the drafts are drawn or negotiated.
16. The Bank is authorized to pay conforming drawings submitted by an administrator, trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other legal representative of the party who is authorized to draw.
17. The available amount of the Credit shall be reduced by the amount of any conforming drawing made thereunder.
18. All notices and other communications provided for hereunder shall be in writing and shall be personally delivered or sent by certified first class mail, return receipt requested, or by telex or telecopy. Unless otherwise specified in this Agreement, all such notices and other communications to the Bank shall be mailed, telexed, telecopied or delivered to it, addressed to the Bank, c/o Fleet Services, One Fleet Way, Scranton, PA 18507, Attn: Trader Services Dept., Standby Unit. Notices and other communications to the Customer shall be mailed, telexed, telecopied or delivered to the Customer, at the Customer's Address. The Bank and the Customer reserve the right to change such address, telex number and/or telecopy number in a written notice to the other party. All such notices and other communications shall, when mailed certified or registered mail, be effective three days after the date of deposit in the mails, addressed as aforesaid; when personally delivered, when received at the address as aforesaid; and, when sent by telex or telecopy, when received at the then current telex or telecopy number.
19. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction.
20. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but both or all of which, when taken together, shall constitute but one instrument, and shall become effective when copies hereof which, when taken together, bear the signatures of each of the parties, hereto shall be delivered to the Bank.
21. The Customer hereby expressly submits to the non-exclusive jurisdiction of all federal and state courts sitting in the state of the Bank's Address, and agrees that any process or notice of motion or other application to any of said courts or a judge thereof may be served upon the Customer within or without such court's jurisdiction by registered or certified mail, return receipt requested, or by personal service, at the Customer's Address (or at such other address as the Customer shall specify by a prior notice in writing to the Bank), provided reasonable time for appearance is allowed. The Customer hereby irrevocably waives any objection in which it may now or hereafter have to the laying of venue to any suit, action or proceeding arising out of or relating to this Agreement brought in any federal or state courts sitting in the Bank's location and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Notwithstanding the foregoing, the Bank may sue the Customer in any jurisdiction where the Customer or any of its assets may be found and may serve legal process upon the Customer in any other manner permitted by law.
22. THE CUSTOMER HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS AGREEMENT OR THE CREDIT, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
23. The Bank reserves the right to sell or assign all or any portion of the Bank's right, title and interest in and to the Agreement and all related documents, and to participate all or any portion of the aforesaid. In connection therewith, the Customer authorizes the Bank to deliver to any such purchaser or participant and any prospective purchaser or participant the originals and/or copies of the Agreement, financial statements relative to the Customer and any guarantors, and any and all other credit or other information from time to time in the Bank's possession.
24. The issuance of the Credit by the Bank constitutes the Bank's adoption, authentication, signature, and agreement to be bound by the terms and provisions of this Agreement.
25. This Agreement shall be binding upon the Customer's respective executors, administrators, successors and assigns and shall inure to the benefit of the Bank and its successors and assigns.
RIDER TO APPLICATION AND AGREEMENT FOR STANDBY LETTER OF CREDIT
This rider to Application and Agreement for Standby Letter of Credit is made this _______day of ___________, _____, and is incorporated into and shall be deemed to amend that certain Application and Agreement for Standby Letter of Credit, dated __________ ____, ____ by and between __________________________________, a ___________________, with an address at _______________________________ (the "Customer") and Fleet National Bank., a national banking association created and existing under the laws of the United States of America with usual place of business located at_______________________ ______________________.
1. The Customer and the Bank agree that the Application is hereby amended as follows:
The last sentence of the Application is deleted in its entirety and the following sentence is substituted therefor:
"This credit will be subject to the International Standby Practices 1998 currently in effect."
2. The Customer and the bank agree that the Agreement for Standby Letter of Credit (the "Agreement") is hereby amended as follows:
Paragraph 11 of the Agreement is deleted in its entirety and the following is substituted therefor:
"11. All rights under the Credit and this Agreement (whether or not the credit is documentary or non-documentary in nature) shall be subject to the International Standby Practices 1998, in effect, or the most recent revision or successor thereto which shall be in effect from time to time ("ISP98"), the terms of which are known to the Customer and which are incorporated by reference herein, and all rights under the Credit and this Agreement, to the extent not inconsistent with said ISP98 shall be construed in accordance with the local laws of the State of the Bank's Address."
This rider shall amend the Application and Agreement. The bank and the customer agree that this Rider shall be annexed to the Application and Agreement to evidence the modification of its terms as set forth herein. The Customer further acknowledges and agrees that all of the terms and conditions of the Application and Agreement shall remain in full force and effect, except as expressly modified herein.
IN WITNESS WHEREOF, this rider is executed as of the date and year first above written.
By:
By:
Exhibit 15
[PRICEWATERHOUSECOOPERS LOGO]
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York NY 10036
Telephone (646) 471 4000
Facsimile (646) 471 4100
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated August 2, 2002 on our review of interim financial information of Arch Capital Group Ltd. (issued pursuant to the provisions of Statement of Auditing Standards No. 71) for the period ended June 30, 2002 and included in this quarterly report on Form 10-Q is incorporated by reference in the Registration Statement on Forms S-3 (Registration No. 33-34499 and Registration No. 333-82612) and in the Registration Statements on Forms S-8 (Registration No. 33-99974, Registration No. 333-86145, Registration No. 333-72182 and Registration No. 333-82772).
Very truly yours,
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York August 9, 2002 |